Market places premium on ‘real' growth stocks

The deteriorating macro-economic backdrop of slowing growth and rising inflation means that those companies which "can offer genuine growth and visibility of earnings" are starting to justify premium ratings, according to Catherine Stanley, co-manager of the F&C UK Dynamic Fund, a focused portfolio of UK stocks.

Stanley, who is F&C's Head of UK Smaller Companies, and co-manager Peter Lees, Head of UK Equities, have been targeting quality companies in areas benefiting from structural growth since taking over the management of the portfolio in January this year. Over this period the Fund, which has a list of top ten holdings that differs considerably from the make up of the FTSE All Share Index, has been propelled into the top-decile of the IMA UK All Companies sector.

"Last year many investors were talking in terms of larger companies out performing small caps. However, right now we believe that sustainable growth is the place to be and this is true across the market cap spectrum. Our top holdings range from the FTSE 100 to AIM," said Stanley.

F&C argues that in recent years bid-speculation has propped up weaker names but the switch to a more challenging environments means that the market is becoming more discerning with a greater range in valuations opening up.

Unlike a typical UK equities funds, the F&C UK Dynamic Fund, currently has no banks in its top ten holdings. Its biggest financials position is a 3.2% holding in Man Group, the hedge fund giant which recently reported record earnings.

In contrast, the Fund has an overweight to support services which includes stocks such as AIM traded Spice plc, a provider of outsourced infrastructure services to the utilities sector. Founded in 1996 through an MBO from Yorkshire electricity, Spice has grown from a single contract worth £3 million per annum to a £300 million annual turnover.

"In a period verging on recession we like companies which can demonstrate contractual revenues that should deliver ongoing earnings growth," said Stanley.

Technology is another ‘growth' theme in the Fund including a top ten position in Aveva, an engineering software provider to the plant, power and marine industries which are seeing structural growth. Over the last decade it is estimated that over 80% of the largest production facilities in the North Sea and Gulf of Mexico were designed using Aveva technology.

Stanley concluded: "We also see attractions in the aerospace and defence sector where ongoing government spending commitments should generate non-cyclical growth. Here we have a position in Ultra Electronics which specialises in tactical and sonar systems, aircraft and vehicle systems - including unmanned aircraft - and power systems."