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Industrials and basic materials divide UK growth fund managers, says S&P

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Fund managers in the UK growth sector are divided in their outlook for industrials and basic materials, according to Standard & Poor’s Fund Services in its latest update on the sector.

“During our review, the two sectors that divided opinion the most were industrials and basic materials, two of the best performing areas of the UK market in the final quarter of 2010.  We found significant variation based on differing outlooks on the global economy,” says Daniel Vaughan, fund analyst at S&P Fund Services.

In industrials, the bulls included Edward Legget at Standard Life, with 30% of assets in the sector in his UK Equity Unconstrained Fund. Legget discounts the possibility of macroeconomic shocks and has positioned the fund for global growth. Tom Dobell’s M&G Recovery Fund and Richard Plackett’s BlackRock UK Special Situations Fund also had significant exposure to the sector.

At the other end of the spectrum, Ignis Cartesian UK Equity Constrained Fund, which is able to go short in stock the managers don’t like, was 9.2% net short the sector. Although each short is highly specific, the managers found the industrials sector particularly fruitful for companies with opaque accounts and managers who are value destroyers. Chris Murphy at Aviva was another sceptic, who believes that cashflows appear vulnerable in economically sensitive sectors, highlighting industrials as an area where businesses are already operating at peak margins and company managements are in danger of getting ahead of themselves.

“Interestingly, both the Ignis and Standard Life funds were able to outperform in Q4 2010, suggesting that stockpicking was the key in the sector,” says Vaughan. “Dobell’s and Plackett’s emphasis on high-quality, well-financed companies with overseas earnings capabilities, seems to support the stockpicking story.

“In basic materials, the peer group underweight to index reflects concern over valuations that kept managers such as Andrew Green at GAM and Ben Whitmore at Jupiter out of the mining sector completely."

Both Green and Whitmore see potential hiccoughs in Chinese growth that could have a big impact on market sentiment in the most exposed sectors, such as mining.

“Some managers see the emerging Asia growth story as having run too far in the near term, and prefer to be exposed to the more developed economies,” says Vaughan. On the other hand, Simon Murphy at Old Mutual added to Rio Tinto and BHP based on the assumption that growth in the global economy will continue to drive demands. Similarly, Dobell at M&G saw his faith in “non-major” resources stocks such as First Quantum Minerals, Kenmare Resources and Zhaikmunai, rewarded when they caught up with the returns enjoyed by the rest of the sector earlier in the year.

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