Santander UK Growth Fund investment outlook

Richard Moore assumed management of the Santander UK Growth Fund (formerly Abbey UK Growth Fund) in July. Over three and six months, the fund is placed in the upper quartile in its sector.

Says Moore: “We remain cautious on the market overall. In 2008, we expect growth to slow, but there will be interest rate cuts. These won’t have a noticeable effect on the economy until 2009 however.

Overweight – food retailers and producers, telecoms, oils

“We remain overweight in food retailers as we continue to be mindful of food price inflation. Higher food prices are not just a cyclical phenomenon and will be ongoing. Over the longer term, inflation in the food price will benefit supermarkets as well as food processing companies. The fund has benefited from its exposure to Scottish & Newcastle, which rose following the takeover bid for the company by Carlsberg and Heineken. Exposure to Unilever has also proved beneficial, where the shares have performed well on absolute and relative terms.

“We also stay positive about the telecoms sector and are especially keen on Vodafone. The company has strong opportunity to increase its sales growth due to its exposure to the Eastern European markets and as the overall usage of mobile data increases.

“We also remain keen on the oil sector. A major success for the fund in this sector has been Tullow Oil, which has had recent drilling breakthroughs in the UK Southern North Sea, Uganda and Gabon. We have been positioned overweight in Rio Tinto and underweight Billiton, who have made a takeover bid for the former and this has supported performance.

“Despite a slowdown in the US economy we are maintaining our overweight exposure to mining stocks but are beginning to take profits from recent rallies.

“We were previously keen on British Energy as a stock as it was expected to benefit from higher electricity prices but with stable production costs. This has however not been as beneficial as we had expected due to some difficult production problems.

“While not yet buying into the sector, UK property stocks are now trading on big discounts to their net asset values and I am looking at the area closely.

Underweight – mid caps, financials, retailers

“I am currently reducing weighting around mid cap stocks as we are near the end of a long bull market in these companies and many of them look over-owned in terms of our peer group. They are also very much domestically focused and I have been positioning the fund towards companies with a wider exposure. They also don’t look particularly good value from a ratings point of view and I am expecting downgrades across the mid cap spectrum.

“We are still not ready to buy back into the housebuilding sector, as prices and volumes continue to move downwards.

“The biggest upheaval in the markets we have seen since I took over the fund in July is the sell-off in financial stocks. Going forward I am less concerned about UK banks in share price terms.

“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. We have recently seen three profit warnings in the retail sector and would want to see how the Christmas season pans out before we make any bets on the retail sector. One company we do like is Halfords, however, which has good earnings and a strong management team.”