THIS IS A MAILER I RECIEVED FROM A TOP INVESTMENT MANAGEMENT HOUSE THIS WEEK
As you may have seen there has been quite a lot of press coverage recently on UK mid cap fund managers' views on house builders. The reason for this is that house builders represent around 15% of the FTSE 250 Index.
Allianz Dresdner UK Mid Cap Fund Manager Trevor Green, however, has avoided significant investments in the UK house building sector which has lead to his outperformance year to date. It's also worth noting Trevor Green's impressive track record since he started managing the UK Mid Cap Fund:
UK Mid Cap Fund Performance (as at 26/11/04)
1 mth 1ST
3 mths 1ST
6 mths 1ST
1 yr 1ST
2 yrs 1ST
Since Trevor Green
joined in April 2002 1ST
Please see below comments from Trevor explaining his stance on house builders.
"Current data is now pointing clearly to a cooling down in the housing market. In fact the Royal Institution of Chartered Surveyors (RICS) published a survey on 16th November which stated that the housing market is weakening and that house prices falls are spreading across the country."2
"History suggests that it typically takes a year for rising interest rates to affect the housing market. This time it is no different, with rates first rising in November 2003."
"In November, the first sell side house building analyst broke from the consensus and reduced earnings expectations3 for the sector by 14% for 2005 and 20% for 2006 on the conservative assumption that volumes and prices reduce by just 3% in 2005. This was a stark reminder of how cyclical this sector can be."
"Although the outlook is for interest rates to peak soon and possibly fall next year, house owners are only beginning to be hit by higher rates as the typical two-year fixed-rate mortgage expires. So an increasing number of house owners will be paying more over the coming months, irrespective of the direction of interest rates. The effect of this can be seen with the significant fall in mortgage approvals from July this year."
"Trevor explains that the following issues are behind his decision: "Corporate activity is often cited as a reason to buy a FTSE 250 house builder. However, there hasn't been a takeover in the mid cap part of the market for over a year. This lack of activity - despite takeovers in other sectors - points towards the fact that the larger house builders do not see compelling valuations in their smaller competitors' share prices at the moment."
"Whilst I agree with the longer term demand and supply imbalances underlying the UK housing market - as highlighted by Kate Barker's review earlier this year4 - this is a longer term factor. The market is focused on the shorter term issues."
"The only house builder I own is Taylor Woodrow, for two reasons: firstly, on valuation grounds and secondly, the company has significant exposure to the US house building sector which is currently being re-rated in line with US investors' confidence in their own housing market, with recent data still very reassuring."5
"In conclusion, I remain nervous of the sector in general at the moment. However, I will continue to watch the data closely and, in particular, the actions of the house building companies themselves, to determine when to consider adding to my single holding in the UK Mid Cap Fund."
Source: Standard and Poor's as at 26/11/04. Mid to mid, basic rate tax.
Source: Royal Institution of Chartered Surveyors press release 'Housing market weakens', 16th November 2004.
Source: ABN AMRO, 10th November 2004.
Source: Barker Review of Housing Supply, HM Treasury, 2004.
Source: October 2004 US Housing statistics.
For Professional Advisers only. This information is for the sole use of the addressee who it is believed is a market counterparty or an intermediate investor as defined by the Financial Services Authority and persons of any other description should not rely upon it. Issued by Allianz Dresdner Funds Ltd. Authorised & regulated by the Financial Services Authority. Member of the Investment Management Association. Member of the Allianz Dresdner Asset Management Marketing Group. Registered office: 1st Floor, 155 Bishopsgate, London, EC2M 3AD. Registered number 1963362. Registered in England. Past performance is no guide to the future. The value of shares and the income from them can fall as well as rise as a result of market and currency fluctuations and you may not get back as much as you originally invested. For our mutual protection, telephone calls are recorded and may be used for quality control and training purposes, however, Allianz Dresdner Asset Management reserves the right to use such recordings in the event of a dispute.
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