The Mercantile Investment Trust’s Guy Anderson has admitted to concerns about his overweight position in consumer discretionary stocks ahead of the forecast rate rise from the US Federal Reserve.
The co-manager of the £1.7bn JPMorgan trust said the positives still outweighed the negatives on the sector, but added he was closely monitoring it in the face of the upcoming headwind.
“Typically, if you look through cycles of consumer discretionary in general and the retail sector, it underperforms during the early stages of the rate rise cycle,” the manager said.
“At the moment we are keeping a confident watch because it’s our largest overweight, but we think the positives outweigh the negatives,” Mr Anderson said.
“It’s easy to speak of the negatives because [a rate rise] means less money in an investor’s pocket, but it should be indicative of a strong economy.”
Mr Anderson’s comments come as Bank of America Merrill Lynch sounded the alarm about US consumer discretionary stocks, recommending that investors move to an underweight position in the sector due to the high valuations of companies and the likelihood it will underperform when rates rise.
Mr Anderson has been building the consumer theme in his portfolio for more than a year, and the recent slump in the oil price has prompted him to up that weighting further.
According to the trust’s latest factsheet at the end of May, more than 30 per cent of its assets were invested in consumer goods or services stocks.
The trust is playing both sides of the retail story, investing in discount retailers such as Poundland and The Card Factory, and also the likes of kitchen maker Howdens Joinery, which benefits from consumers splashing out on big-ticket items.
Elsewhere, Mr Anderson, along with fellow co-managers Martin Hudson and Anthony Lynch, has upped his exposure to the housebuilding sector.
Although many UK equity managers have said housebuilders are too expensive following an extended rally, Mr Anderson said the sector had further to run and added to his exposure after the Conservative victory at the general election, which scuppered the introduction of rent controls proposed by the Labour party.
Mr Anderson said: “The investment case is clearly different to what it was five years ago, when [the housebuilding sector] was an industry coming out of a very violent downturn. At that point we were able to purchase these companies at a discount to [net asset values].
“At this point the market is about as favourable as we can imagine it being,” he added. “It’s a very cyclical industry and we think that [this favourable part of the cycle] will go on for longer before the next bump in the road.”
In the past year the trust has delivered a total return of 15.8 per cent, in line with the 15.7 per cent rise in its benchmark, the FTSE All-Share index. In three years the trust has gained 101.7 per cent, compared with a 92.3 per cent rise in its benchmark.