A changing macroeconomic environment means the type of companies providing the greatest potential for capital growth has changed according to Sam Liddle, fund of fund manager at Miton Optimal Asset Management.
Following a strong period of economic growth and high demand, which fuelled strong performance in commodities, Liddle thinks markets are now heading for a period of slower economic growth.
Indeed going into next year he predicts lower earnings growth as the investment cycle turns.
In this environment, Liddle says he looks for sectors which are less fully valued and are less sensitive to the ensuing economic downturn. In addition he says he looks for areas in the market which are currently under-owned by investors.
He says: "We now have 10-11% of the Miton Global Portfolio in the healthcare and biotech sectors. These sectors have been under-owned for over five years and valuations look very attractive. Biotech stands at 10-years lows relative to their peers in America, so it is also cheap and owing to the nature of the business, as a sector it is less sensitive to a downturn."
Liddle has 10% of the Global portfolio in technology and currently favours the financial and utilities sectors for achieving capital growth. "All these sectors have seen an increase in merger and acquisition activity and I expect good growth from each sector next year and beyond," he adds.
Within these sectors Liddle favours the Pictet Biotech, Axa Framlington Healthcare, Polar Capital Biotech, Jupiter Financial Opportunities and Pictet Water funds.
However to achieve maximum capital growth, without looking at the risks, Ben Yearsley, senior investment manager at Hargreaves Lansdown, says he would opt to invest in Russia.
Or else he says he would invest in specific single country funds such as India or China, or specific sector portfolios, examples being financials, commodities or property.
There are two big risks when investing in Russia, says Yearsley. The first is a fall in commodity prices. The Russian market is very dependant on oil and gas, so if the prices of these fall, Yearsley says it will have a knock on impact on the Russian stockmarket.
Yearsley says that you cannot avoid political risk when investing in Russia, in particular Vladimir Putin. "You saw this with what happened to Yukos. It's chief executive, Mikhail Khodorovsky, was a critic of Putin and the company was later bankrupted as a result, if you believe the press reports." Khodorovsky was imprisoned and sent to Siberia and the company was declared bankrupt on August 1, 2006.
As a result of the risks, Yearsley notes the potential returns in Russia are difficult to quantify. "You could get 60-70% growth or you could equally get a similar loss," he says. "However in the UK you are more likely to achieve a high single digit return of 8-10%. This is the whole point of having a portfolio is to blend all the different markets together. You have the safe and steady stuff and the higher growth areas, such as Russia, China and the emerging markets," adds Yearsley.
For pure Russian exposure, Yearsley recommends Robin Geffen's £30.7m Neptune Russia and Greater Russia fund. According to Financial Express, over one year to October 16, 2006, the fund has returned 57.17%, compared to the IMA Specialist sector average return of 21.61%.
Bambos Hambi, fund of funds manager at Gartmore, however says that while Russia and China have had good runs, he is reluctant to buy them at this time. This he says is because both countries rely on the American economy doing well. "The US is slowing and the impact of this on Russia and China is unclear," says Hambi.
Instead Hambi says the immediate sector which comes to his mind for capital growth is technology. "Tech has been bombed out for the last six years. However if we get the rise in capital spending that many commentators predict, the sector might take off," he says.
This, adds Hambi, is because many corporates have now rebuilt their balance sheets and have more to spend on capital expenditure. The tech sector, he adds, may be the major beneficiary of this.
The risks of investing in tech, he adds, are that because the sector is of a high beta nature, it would fare badly of there was a global slowdown/recession. "However while we feel a slowdown is happening, we think the probability of a recession in the US is low," says Hambi.
He adds: "We have spent a lot of time thinking about tech and have been speaking to those in the know for the last 12-18 months to see if now is a good entry point into the sector. After a six year bear market we felt that valuations would be cheap, however they are still fair value so it is not a screaming buy at this point. However for a higher risk investor now might be a good entry point and you could potentially double your money over the next 12-18 months."
The tech funds Hambi recommends are the Polar Capital Technology and Alan Torry's SocGen Technology fund. Over one year to October 17, 2006, according to Financial Express, the IMA Technology sector has returned 6.90%, while over three it has posted a 9.97% return. Torry's fund meanwhile has returned 12.30% and 11.71% respectively.