Cashing in on investment opportunities

Research from the Association of Investment Companies (AIC) suggests that investment company fund managers have been taking advantage of buying opportunities created by the market turmoil, with over half (56%) of AIC Members with exposure to cash and fixed interest reducing their exposure in the first five months of 2009. The AIC compared Members' exposure to cash and fixed interest at the end of December 2008 with their exposure five months later at the end of May 2009.

Sectors with the greatest decrease in their exposure to cash and fixed interest included some which have been hardest hit by the financial crisis - namely Property Securities, Sector Specialist: Financials and Global Emerging Markets. However, the Global Growth, the Global Growth and Income sectors, and the UK Growth sector have also, on average, reduced their exposure to cash and fixed interest.

These figures are a useful market indicator of sentiment within the industry, although it is also worth noting that some 32% of investment companies have increased their exposure to cash and fixed interest, whilst 14% have maintained their current levels, reflecting the diversity of views across the sector. It's also worth noting that some managers use cash and fixed interest to offset (reduce) their gearing levels.

The investment company which most decreased its exposure to cash and fixed interest was Director's Dealing Investment Trust followed by Blue Planet Financials Growth & Income Investment Trust, Blue Planet European Financials Investment Trust, Asset Management Investment Company, Blue Planet Worldwide Financials Investment Trust, Global Special Opportunities, Cayenne Trust, and Jupiter Second Enhanced Income Trust.

Commenting on the reduced exposure to cash and fixed interest, Shaun Miskell, Investment Analyst at Blue Planet Investment Advises Ltd said: "Given that the credit cycle is now entering an expansionary phase, we see clear opportunities in financial stocks going forward, and have therefore allocated more into these financial stocks in recent months. It is clear that the market has failed to distinguish between bad banks that have run up huge losses, and quality, well managed banks with positive earnings growth, and it is these quality, yet grossly oversold, stocks that we have invested in. We remain wary of the UK and the USA, given the indebtedness of the consumer, leverage within the banking system, and worrying fiscal positions, and instead we seek out opportunities within economies with positive real GDP growth, less leverage, and a banking system with scope to increase profits in the coming years."

Nik Shah Investment Analyst at Knox D'Arcy, managers of Directors Dealing said: "Knox D'Arcy monitors director trades within the UK market, paying particular attention to trades motivated by an investment decision (i.e. when a director purchases shares for cash, as opposed for example to a director acquiring shares as a result of an issue of bonus shares). We define such trades as "investment driven" trades.

"In the second quarter of 2009 the number of investment driven purchases and the aggregate level of investment driven expenditure by directors in the UK market was lower than any other quarter since 2006. This indicates that directors do not expect an imminent market recovery and that now is not a good time to invest in the stock market in general.

"Our analysis indicates however that there are some sectors where directors' investment driven purchases have increased, indicating that these sectors could be well placed for a recovery. These include the Food Products, Integrated Oil & Gas and Building Materials & Fixtures sectors.

"Examples of purchases within these sectors include those in Associated British Foods Plc, Maple Energy Plc and Prosperity Minerals Plc. The shares of these companies have since out-performed the relevant indices by 7%, 12% and 47% respectively. The Directors' Dealing Investment Trust has therefore been investing in the market selectively in order to take advantage of these types of investment driven director trades and has out-performed the market since it began to follow this strategy."

Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC) said: "It's interesting to see over half our Member companies have reduced their exposure to cash and fixed interest. There's also a clear sector bias, with the sector most affected by the market turmoil, financials leading the way.

"But it's also interesting to see some of the more traditional investment company sectors like Global Growth and UK Growth taking advantage of long-term buying opportunities. Some of these have been funds of funds which invest predominantly in the investment company sector itself - namely, Advance UK and Cayenne. Certainly discounts have narrowed dramatically in the investment company sector from 18% at the beginning of the year to 7% at the end of May."

For information on cash and fixed interest, gearing and discounts, as well as performance statistics investors can use the AIC's interactive online statistics available on aicstats.co.uk