Mark Dampier: Don’t miss this opportunity to make money in no-man’s-land

According to recent figures from the Investment Association, the UK All Companies sector has recently seen record outflows. I expect this can partly be explained by mounting worries in the run-up to the general election in May. Yet, as I often mention in this column, making short-term investment decisions based on the unknown outcome of a certain event can prove costly.

Since stock markets reached a low point during the global financial crisis in March 2009, many people have put off investing. We have witnessed numerous wider economic concerns, including a possible Greek exit from the eurozone, slowing growth in China and a Scottish referendum, to name a few. Despite this, the UK stock market has been a good source of income and capital growth in recent years.

It can be easy to underestimate and overlook opportunities on our own doorstep. The UK stock market offers more diverse and exciting opportunities than many investors might assume. With this in mind, I am pleased to see the imminent launch of the TM Sanditon UK Fund, set to be launched by Sanditon Asset Management, a boutique investment house, on 22 June.

Boutique investment groups are often formed by long-standing fund managers who have decided to strike out on their own. Some investors are reluctant to invest with new fund groups, because of the lack of an established track record. However, our own research team prefers to track the entire history of individual fund managers.

Julie Dean, who has a long history of managing UK equities dating back to 1998, will manage this new fund. At Sanditon, she has been reunited with Chris Rice and Tim Russell, both of whom she previously worked with at Cazenove Capital (acquired by Schroders Investment Management in 2013). Here at Hargreaves Lansdown, we tend to favour experienced teams, comprised of managers who are highly incentivised by owning a significant part of the business.

Ms Dean and her colleagues adopt an investment approach that relies on their analysis of the business cycle, examining such factors as industrial production, inventory levels and commodity prices. They then tilt their respective portfolios according to their interpretation, using more economically sensitive stocks ahead of expansionary periods and adding to defensive areas during slowdowns. Ms Dean used the approach to great effect at Cazenove, and I believe being reunited with some of her old colleagues in a much smaller organisation will very much suit her style.

I recently met the manager and she views the UK market as neither cheap nor expensive (or as I would call it – “no-man’s land”). That said, within the market there is a big dispersion in valuations between various stocks and sectors, meaning there is still value waiting to be uncovered.

Ms Dean notes that an improvement in productivity has been lacking, but if productivity growth picks up, we could witness a longer expansionary stage of the cycle than is normal. The fall in the oil price should also eventually have a material impact on the economy, acting as a substantial tax for consumers and businesses, lowering the cost of fuel, materials and transport. Household spending could also receive a further boost from falls in the unemployment rate, while Ms Dean also expects to see stronger real wage growth going forwards.

Her portfolio will be relatively concentrated, with around 40 stock holdings expected at launch. She primarily invests in FTSE 350 companies (large and medium-sized), although 5 per cent of the fund will invest in smaller businesses. Suggested initial holdings include Kingfisher, Babcock, Carnival and Lloyds, with no pharmaceutical, tobacco or telecoms companies – current darlings of many UK equity income funds. As such, I believe this fund would dovetail well with many of the more defensive equity income funds. Indeed, I have always believed in the benefits of maintaining exposure to several different fund managers and investment styles within a portfolio, rather than focusing on one particular style or area of the market.

Ms Dean’s pragmatic investment approach has proven a success over the long term. Launching a new fund means she is starting with a clean slate and is able to cherry-pick what she feels are the best opportunities across the UK market.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk