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As a very famous American billionaire once said (albeit about land), establish where people are going to buy next, buy it first, and when they get there sell it to them. We believe that the next area of the stock market which could find favor is defensive companies.

 

 

Since March this year we have seen one of the biggest ever rises in the market, led by the racy areas that suffered the biggest falls towards the end of 2008. It is therefore interesting to see how different fund managers have reacted during a time when it has been almost impossible not to make money for their investors. Some have invested fully in the market and benefited accordingly, whilst others have remained on the sidelines in cash awaiting a setback. The conundrum they all now face involves not only assessing the future direction of the market, but also deciding in which part of the market to invest.

 

There are still a few raging bulls about, and we feel that in the short-term they could generate the best returns. However, aggressive investors could seek lower risk assets at some stage to help safeguard the phenomenal gains made. Similarly cautious investors and institutions that have missed the rally might continue to wait in vain for a setback, but eventually will invest. So it looks to us as though defensive stocks will soon be capturing the attention of all types of investors, and this increase in demand should push up prices.

 

Defensive companies are those that are relatively resilient to setbacks in the economy; often this is because they provide an essential service, for example electricity generation, food retailing, or medicine. They have so far lagged their racier peers in the rally, and we feel they represent phenomenal value today. Most equity income fund managers naturally focus on more defensive firms, as these companies tend to pay better dividends, so these funds could be a great way to gain exposure. Equity income funds currently yield in the region of 4.5% – 5% (net, variable and not guaranteed), so investors can therefore enjoy a healthy income, plus the potential for future capital growth if the market reappraises the value of defensive companies. You will find three fund suggestions overleaf.

 

Elsewhere in this issue we look at the Old Mutual UK Dynamic Equity Fund. This is an aggressive, higher risk fund which uses alternative investment strategies with the aim of enhancing returns. Finally we look at an unusual way to play the emerging markets theme through Sarasin AgriSar, which looks to benefit from the growing demand for food and changing diets in these regions.