Investment Insight: The funds making the most of the FTSE rally

By Darius McDermott

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Jun 13, 2018
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A look under the bonnet of themes within the index

Having hit a high in January, the FTSE 100 fell by 7.2 per cent over the first quarter of this year before bouncing back again. In fact, between 26 March (when the market bottomed) to 21 May (at time of writing), the blue-chip index had rebounded by a stellar 13.9 per cent. It’s enough to make investors seasick.

So what caused this sudden bounce, which has led 2018 to be a game of at least three halves(!) already?

Broadly speaking, I think it has a lot to do with rising US interest rates and the strengthening of the US dollar, given that a majority of the FTSE 100’s underlying earnings come from overseas. This was spurred by president Trump’s tax reforms and positive US economic data, among other factors.

In fact, some of the most global-facing stocks in the FTSE 100 were among the key drivers of its recent rally, with companies such as equipment rental company Ashtead Group, credit score agency Experian and Imperial Brands all returning 20.3 per cent, 20.3 per cent and 19.2 per cent respectively between 26 March and 21 May.

But this can have a number of secondary impacts too, meaning that some pockets of the FTSE fared better than others.

Having looked under the bonnet of each individual stock within the index and how they have performed within our timeframe, I managed to pick out a handful of clear-cut themes.

Oil and commodities

The recent rally in crude oil and the strength of the dollar have made oil particularly expensive for non-US countries. Since this year’s market correction to the 21 May, its spot price (current market price) is up 22.7 per cent, according to FE. This was the result of ongoing supply restrictions from OPEC (the Organisation of Petroleum Exporting Countries) and political tension in the Middle East.

The fourth- and sixth-best-performing FTSE 100 stocks between 26 March and 21 May were BP at 26.5 per cent and Royal Dutch Shell at 25.9 per cent.

One FundCalibre Elite Rated fund we like with a significant exposure to the oil & gas sector is R&M UK Equity Long Term Recovery at 15.4 per cent. The fund, which is headed up by Hugh Sergeant, focuses its attention on good businesses which have suffered from below-normal profit levels. The manager has a wealth of experience, having built up a track record of more than 30 years.

Mergers and acquisitions

One reason that we have seen more M&A activity over the last few months is the market correction in February, which saw the FTSE 100 trail the dust behind all of its major peers on a 9.5 per cent loss. This meant that companies saw it as an attractive entry point.

Online gaming company Paddy Power Betfair announced it was in talks to merge with US fantasy sports website Game Duel – it was also one of the best performers in the index, having returned 22.02 per cent. However, it was also perhaps helped along by the fact that the US legalised sports gambling earlier in the year.

It is not just the dollar strengthening against sterling either; this is also the case for the yen. Japanese companies have been taking advantage of a relatively weak sterling, too. For instance, Japanese pharmaceutical company Takeda confirmed a £46bn takeover bid on Shire PLC company in May. It was consequently the second-best performer between the end of March and 21 May, having returned 42.2 per cent.

"The recent bounce in supermarkets was a bit of a rise from the ashes, as they have had to contend with price wars"

The Elite Rated BlackRock UK Absolute Alpha fund, managed by Nick Osborne and Nigel Ridge, is one of 35 open-ended funds to hold Shire in its top 10 holdings.

The managers will use both long and short equity positions to minimise volatility. They are also unafraid to hold cash when times get tough. BlackRock is one of the most experienced and well-resourced UK equity teams around. We think this fund makes a good portfolio diversifier.

The supermarket bounceback

One of the biggest M&A stories over the past few months was the £12bn proposed merger between Sainsbury’s and Asda. This is probably why Sainsbury plc was the third-best-performing FTSE 100 stock over our time frame, having risen by 35.6 per cent. It meant that investors became more positive towards the UK supermarket sector as a whole, with Morrisons and Tesco both up 24.7 per cent and 22.2 per cent over the timeframe we used.

Funds we rate which hold Morrisons in their top 10 holdings include JOHCM UK Dynamic at 4.1 per cent, Schroder Income at 4.2 per cent and Threadneedle UK Equity Income at 4.2 per cent. Elite Rated funds which hold Tesco include Jupiter UK Special Situations at 4.5 per cent, BlackRock UK Absolute Alpha at 5.4 per cent and Investec UK Special Situations at 4.7 per cent.

All of these funds have a “value”-based approach to stock selection, which means they look for cheap and unloved companies which they believe have been oversold by the market. The recent bounce in supermarkets was a bit of a rise from the ashes, given that supermarkets have had to contend with price wars and the rising dominance of Amazon over recent years.

Darius McDermott is managing director at Chelsea Financial Services and FundCalibre

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