Return strategies for 2010 will be different

As macroeconomic data releases become more mixed and investor risk appetite shows signs of peaking, so stock and sector leadership within the equity market has changed. This reversal, which began at the end of last year, is set to continue. 2009 was an exceptional year and to generate outperformance for investors, fund managers had to get just one call right – buy risk.

However, the strategies for generating superior returns in 2010 will be different.

Buy quality companies with sustainable competitive advantage generating high returns. These companies normally outperform, and certainly do in the long run, but they were left behind in last year’s “dash for trash”.

Buy stocks you expect to deliver positive earnings surprises, that is, where consensus expectations are too pessimistic. Again this strategy usually pays off, but last year individual company fundamentals did not drive share prices.

Buy self-help situations, in particular where a new management team can turnaround a good company that has been badly managed. The skill is to buy the companies that can be saved and avoid the value traps.

Buy M&A targets. Corporate activity typically lags moves in the stock market by about six months and we are already seeing signs of a resurgence. The key to identifying likely M&A targets is to spot companies with strategic, often unique market positions or assets, operating in industries where there is a strong business and financial rationale for consolidation to happen.

Finally, take another look at the unfashionable and unloved deep value asset plays. The market does not ignore value for ever so do not worry too much about finding catalysts, just be patient.

Robert Churchlow is manager of UK Growth Trust and head of UK equities at Legal & General Investment Management

Categories: UK

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