Top-performing fund manager Mark Martin has closed out his major bet on housebuilders which had helped him to rise up the performance rankings.
Mr Martin, who runs Neptune’s £268m UK Mid Cap fund that invests in medium-sized companies, was an early adopter of positions in housebuilders, first investing in the sector in 2009.
Data from FE Analytics shows his fund is now ranked in the top decile of its sector for its performance over the past one, three and five years.
But now the manager has sold out of the sector entirely on the view that it has become expensive.
“Everyone knows the housebuilder story,” he said. “It is not new and their valuations are beginning to reflect that other people have spotted it.”
Housebuilders’ price-to-book ratios have surged, the manager claimed, trading towards the peak levels reached in 2007 prior to the property crash.
This is not Mr Martin’s only concern about the sector. The composition of debt in the UK is also making him nervous.
On these shores, 70 per cent of outstanding mortgage loans are variable rate and so are more interest-rate sensitive. As a comparison, only 14 per cent of mortgages are interest-rate sensitive in the US.
With rates in the UK at record lows and the direction of travel likely to be upwards, Mr Martin is worried about how UK homeowners will cope.
That said, the manager is still eager to take advantage of recent increased activity in the housing sector.
He has been buying housebuilder suppliers, such as Marshalls, which manufactures natural stone and concrete hard landscaping products.
Mr Martin is also keeping a closer on eye on mergers and acquisitions (M&A) activity among UK companies.
Typically, M&A activity increases as markets grow, but in recent months markets have improved, while merger deals have lagged behind.
But deal volumes are starting to pick up, with transactions appearing in concentrated spurts, according to Mr Martin.
Elsewhere, the manager has been a strong advocate of the healthcare sector. It has been the largest overweight and biggest sector in the fund for more than a year.
It currently makes up 22.9 per cent of his portfolio, compared to the FTSE 100 ex investment trust index, which has 9.8 per cent and the FTSE 250 ex investment trust index, which has 2.8 per cent.
The fund manager has been keen on the sector for more than 18 months, but thinks it is poised for more growth as it is benefiting from political tailwinds.
This year’s new Patent Box scheme allows companies, like pharmaceutical firm Glaxo-SmithKline, to apply a lower rate of corporation tax to profits earned from patented inventions and other innovations. The G20 and the Organisation for Economic Cooperation and Development have criticised the scheme for handing out big savings to large groups, however Mr Martin is convinced it will benefit the sector.