Abbey UK growth fund: investment outlook

Richard Moore assumed management of the Abbey UK Growth fund in July. Over three months, the fund is placed in the upper quartile in its sector.

Says Moore, in August: “Part of the positioning taken as soon as I took over management of the fund was to reposition the portfolio away from housebuilders and financials including mortgage banks and into more defensive areas, overweighting oil and mining. This means that the fund was well positioned to weather the volatility that came
“We remain cautious on the market overall, with the continuing problems in the US and tighter lending criteria in the UK keeping the consumer under pressure.

Overweight – food and beverage producers, telecoms, oils

“We are increasing our positions in food retailers. A theme we have been exploring in the fund is food price inflation. Higher food prices are not just a cyclical phenomenon and will be ongoing - as the global population increases and incomes rise, so will the demand for food. Over the longer term, food price inflation will benefit supermarkets as well as food processing companies and we have recently increased exposure to Tesco.

“We also like Dairy Crest, which will benefit from higher milk prices. The company, which owns brands such as Clover and Cathedral City cheese is currently trading on 12 times its prospective earnings and with a yield of 3.7 per cent, has an attractive valuation.

“We are also remain positive about the telecoms sector and are especially keen on Vodafone. There is an opportunity for increased profits for telecoms as the company moves into the Eastern European markets and the overall usage of mobile data increases.

“We expect oil stocks to continue to perform favourably and remain overweight in the sector. Despite a slowdown in the US economy we are maintaining our overweight exposure to mining stocks. The rest of the world seems to be facing a basic materials demand boom, reflected in current commodity prices such as iron ore and copper. We also like British Energy as a stock, as the electricity price is linked to the oil price. The building of more nuclear power stations in the longer term will also be beneficial to British Energy due to the increased volumes they will be able to supply to the market.

Underweight – housebuilders, financials, retailers

“We are still not ready to buy back into the housebuilding sector, as prices and volumes move downwards. We are beginning however to up our positions in the mainstream banks rather than the mortgage banks as they are starting to appear as if they have discounted a lot of bad news, leaving valuations more attractive and with good yields. We also feel that the liquidity crunch is starting to ease and it would not surprise us if there is a rally in banks in the final quarter as some stocks are now looking very oversold.

“We are still cautious on retailers as consumer confidence has suffered a blow as a result of the recent market volatility and we expect a subdued Christmas spending season.”