House prices in the US have been steadily on the rise recently, which is seen by many as one of the principle drivers of the recovery.
Kerr, who manages the five-crown rated OId Mutual UK Dynamic Equity fund, says the theme can be played indirectly from our side of the pond, with very attractive results.
“One of the major themes we are playing in the portfolio is the recovery of the US housing market, via UK construction companies,” he said.
“To us, it looks like the US housing market is beginning to fly. The figures show that 50 per cent more houses will be built this year compared to 2012, which will lead to much better volumes for businesses likes of Ashtead, Keller and Tyman.”
“Our largest holding is Ashtead, which is an industrial equipment plant hire company. Ashtead generates 90 per cent of profits from the US. Then there is Keller, which specialises in laying foundations before construction, which also has big exposure in the US.”
“Tyman is another holding; it sells plastic windows and doors and also make most of their money in the US.”
“We are much more positive on the US economy than any other as it seems to be further down the road to recovery,” he added.
According to FE data, Kerr has 5.10 per cent of his £233m Old Mutual UK Dynamic fund in the FTSE 250-listed Ashtead, making it his largest individual holding. The manager has a further 2.05 per cent in Keller.
Our data shows that 44 funds hold Ashtead in their top-10, making it one of the most popular mid cap stocks with UK fund managers. Investec UK Smaller Companies, Marlborough Special Situations and Artemis UK Growth are all big holders of the stock.
Keller and Tyman are less popular, appearing in the top-10 of seven and two portfolios, respectively.
Kerr says another theme he is pursuing in his fund is UK house builders.
Though the manager says the underlying UK housing market isn’t that strong, he is overweight in the sector because those companies are now selling houses built on cheap land bought after the credit crunch – which means companies are now seeing “very good margins.”
“We felt the sector would see a re-rating,” he said. “It was trading on a big discount to book rating and thought it was on a journey to a premium. Though many of these companies are now on a slight premium, we think they can go further,” Kerr said.
“Also, Osborne’s ‘help-to-buy’ scheme could turn out to be quite significant. He has put a lot more money behind the idea than he has done with other policies, and if – that is a big if – the banks are prepared to lend then it would really help the UK housing market.”
“There is a huge amount of demand for housing, but the issue has always been the inability to pay the initial deposit; however when the government is offering an interest free loan of 20 per cent then that should change,” he added.
Kerr holds UK house builders such as Galliford Try and Barratt Developments in his portfolio.
The FE Alpha Manager’s Old Mutual UK Dynamic Equity portfolio was launched as an OEIC in June 2009, after having been run as a hedge fund four years previous to that.
According to FE Analytics, the fund is one of the standout performers in the IMA UK All Companies sector in recent years, posting top quartile performances over six months, one year and three years.
Since the fund was launched, it has returned 115.43 per cent, significantly beating its FTSE 250 ex ITs benchmark.
Performance of fund versus sector and index since June 2009
Source: FE Analytics
Old Mutual UK Dynamic Equity differs from the majority of its peers as Kerr has the ability to take short positions on stocks he expects to de-rate. His long positions can make up anywhere between 60 to 100 per cent of the portfolio, while he can short between zero and 30 per cent.
However, due to his optimistic view on the current economic climate Kerr says he only has a small amount of short positions.
“The macro situation has calmed down a lot,” he said.
“There were a lot of big risks out there and it was difficult to ever feel comfortable in that environment.”
“Risk-on risk-off cycles were every three months, but we didn’t try to re-balance over three months. Instead, we just concentrated on yielding companies that could deliver growth all the time.”
“However, over the last six months that has changed.”
“We had the US fiscal cliff, which seems to have tone through without a hiccup. Then there was the regime change in China which had caused a hiatus in policy, but that transition seems to have gone smoothly.”
“The biggest one of the lot was the ECB’s actions; they stepped up and showed that they will do whatever it takes. It has massively changed the game,” he added.
Though Kerr is optimistic over equity markets on a long term view, he says wouldn’t be surprised to see a sell-off in the immediate future.
“Equities have gone form very cheap, to slightly cheap,” he said.
“They are by no means expensive but certain parts have been overbought. However, when markets have gone up by such a long way in a relatively short period of time, there is usually some form of consolidation.”
“Eleven-and-a-half times earnings are still cheap compared to long term averages. Though we may not be bullish on the UK economy, we are bullish on UK markets,” he added.
Old Mutual UK Dynamic Equity requires a minimum investment of £1,000 and has an ongoing charges fee (OCF) of 1.75 per cent.