UK growth managers predict significant increase in M&A

Fund managers in the UK growth sector believe that global corporates will take advantage of the weak pound to fund acquisitions in 2010, according to Standard & Poor's Fund Services in its latest update of the sector published at fundsinsights.com.

"Given the weakness in sterling, all the fund managers we spoke to agreed that it is highly likely that companies with good balance sheets and who are market leaders in their sector will be targeted this year," said S&P fund analyst Daniel Vaughan. Richard Wilmott, manager of the Newton Growth Fund, believes this will be particularly supportive in the mid-cap range, while Richard Power of the Octopus Partner Fund (UK Smaller Companies) believes that there is good potential at the micro-cap level.

Fund managers are also looking towards the potential effect of the UK general election, likely to be held in May 2010. "Everyone we spoke to expects a cut in public spending after the election, regardless of the result," said Vaughan, "but there is uncertainty around where the impact will be felt." Richard Smith at Invesco Perpetual maintained that the cuts may not be as deep as many expect.

Managers have been reviewing their portfolios in this light, and Sanjeev Shah and James Griifin, both from Fidelity, and Richard Wilmott all continue to hold Serco and Capita, potential beneficiaries of government outsourcing. Conversely, the sell-off of companies in danger of losing government business in the wake of funding cuts has created opportunities, with Karen Robertson at Standard Life, for example, adding to a number of names that had recently sold off, such as Balfour Beatty.

With macro concerns receding, managers also see a return to a stockpickers market. "Karen Robertson and GAM's Andrew Green both predict a return to fundamentals-driven stockpicking," said Vaughan. "Newton's Richard Wilmott and M&G's Tom Dobell are finding value in the mid-cap range of the market, with Wilmott wary of cheap-looking stable growth companies," he added.