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Profit from sensitive mid caps with with Old Mutual UK Mid Cap

If you're bullish on the UK economy's prospects and prepared to take on risk, then the Old Mutual UK Mid Cap Fund could be an interesting prospect
August 22, 2013

If you've have a good feeling about the UK economy, then you should ramp up the risk, according to Richard Watts, manager of Old Mutual UK Mid Cap Fund (GB00B1XG7999). Economic data suggesting the UK will storm ahead of emerging markets has inspired him to increase exposure to companies sensitive to economic cycles so he can capitalise on their reactive profits. On the surface the strategy appears highly risky, but Mr Watts disagrees. "It depends how you define risk," he says. "There's no point going defensive in a rising market, only to lag it."

IC TIP: Buy at 237.35p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Strong track record
  • Manager invested in fund
  • Flexible strategy
Bear points
  • Potential volatility

Easyjet (EZJ) has become his darling stock after managing to triple its per-seat-profit from £2.50 to £7.50 in the last three years. Rising demand has seen the budget airline's planes rise from 80 per cent capacity to 90 per cent, giving it more bargaining power on last-minute tickets and driving the price upwards. As a result, easyJet has flown into third position in the fund's biggest holdings with a chunky 3.5 per cent allocation.

Sensitive stocks such as this, which dance along with the rhythms of the economy, are firmly on one side of a two-pronged approach he adopts: they profit immediately from economic change. They're usually consumer cyclical companies such as high street chains, travel companies and restaurants.

Another of his pet stocks in this area is Restaurant Group (RTN), which owns restaurants such as family diner Frankie & Benny's. This cheap and cheerful eatery has cashed in on its accessibility - rather than fattening profit margins. The average spend is a modest £14 per head and it works with a 13 per cent profit margin - which is nothing out of the ordinary, according to Mr Watts. What has set it apart recently, though, is its prime location in retail parks all over the country, making it an easy place for families to drive to if they want to eat out without breaking the bank.

 

IC TIP RATING
Tip style:GROWTH
Risk rating:HIGH
Timescale:LONG TERM

 

Mr Watts' other area of interest are companies that are equally sensitive to spending patterns but have a delayed reaction of three to 12 months. Examples include engineering and chemical companies which feel the direct impact of demand, but have to wait for the takings to roll in. Using these to maintain a competitive edge, Mr Watts buys these up before the profits are being realised, and then sells them when he believes they are peaking.

The strategy, which he describes as top-down analysis combined with bottom-up stockpicking, appears to be working well overall, although the fund has been volatile. It is a first quartile performer over one and three years, and has beaten its benchmark, the UK FTSE 250 (ex-investment trust) index over one, three and five years. However, in 2008 it lost more than 30 per cent, and more recently in 2011 it lost almost 10 per cent.

But Mr Watts is himself invested in the fund, as a thick slab of his remuneration is funnelled into it every year. This is a comfort to some investors taking a punt on something this risky.

The UK economy is an unpredictable beast so what if interest rates rise and mortgage payers lose a slice of their disposable income? Mr Watts claims he's not concerned because "people would still have money to spend".

So, with an outstanding track record to date, positive signs on the UK economy and a reasonable total expense ratio (TER) of 1.66 per cent, this fund looks like a good bet. Buy.

1-year cumulative total return (%)3-year cumulative total return (%)5-year cumulative total return (%)
Old Mutual UK Mid Cap Acc40.0382.68105.23
FTSE 250 Ex Investment Trust TR GBP34.170.35104.02

Sector breakdownPercentage
Energy4.83
Materials 4.75
Industrials 20.52
Consumer discreptionary 36.00
Consumer staples1.29
Healthcare 1.85
Financials 23.59
Information technology 5.45
Telecommnication services 1.72

PRICE:237.35pMEAN RETURN: 24.38%
IMA SECTOR:UK All CompaniesSHARPE RATIO:1.26
FUND TYPE:Open-ended investment companiesSTANDARD DEVIATION: 16.96%
FUND SIZE:£1.09bnYIELD:0.40%
No OF HOLDINGS:63*MINIMUM INVESTMENT:£1,000 lump sum or £250 monthly plan
SET UP DATE:11 February 2002TOTAL EXPENSE RATIO:1.66%*
MANAGER START DATE:1 December 2008MORE DETAILS:omglobalinvestors.com/uk-retail
Source: Morningstar as at 20/08/13 & *Old Mutual

Top 10 holdings as at Percentage
Ashtead 4.65
Barratt Developments3.65
easyJet3.49
Greene King3.34
Capital & Counties Properties3.26
St James's Place3.03
Persimmon3.01
William Hill2.95
Dixons Retail2.73
Invensys2.69