Neptune’s Rob Burnett has built up a 10% cash weighting in his European Opportunities fund and is continuing to position defensively in response to the region’s recent economic concerns.
Burnett believes the recovery on the Continent is fragile, saying quarter-on-quarter data indicates the eurozone – with the exception of France – is heading back into a recession.
However, the manager is more concerned on the effect of the sovereign debt problems on the markets. While Greece has been in the headlines, Burnett says many other nations face related pressures – including Portugal, Ireland and Spain.
Burnett says the £1.04bn Neptune European Opportunities fund has been underweight in all the relevant countries since November 2008.
The manager is also cautious on the euro, believing the recent strength of the currency was “unsustainable”, particularly in relation to the dollar.
While Burnett’s move to underweight materials in Q4 last year hit the fund’s relative performance, the call has been rewarded in 2010. The manager also cut financials during the latter part of 2009, after sharing in the significant gains for these stocks since the market lows.
“We significantly reduced our exposure to financials in the fourth quarter of last year, where the deteriorating macro environment and new US regulation is adding further pressure,” he says.
“Overall, bank valuations are neutral. But, given the poor fundamental picture, we believe there remains downside risk and thus we are underweight.”
Given the uncertainty, Burnett has boosted the European Opportunities fund’s cash weighting from 3.4% at the turn of the year to about 10%.
The manager continues to focus on defensive areas of the market.
“We are overweight in telecoms, a defensive sector with dividend potential – an important consideration given the low growth environment,” Burnett says.
Burnett also favours healthcare and consumer staples – including Novartis, Roche and Nestlé.
“The recovery is fragile, and given the headwinds, we are cautiously positioned,” he adds.
“When visibility improves in relation to real consumer demand, we will position the fund more aggressively.”
