Harry Nimmo, manager of the £1.3bn SLI UK Smaller Companies fund, has highlighted several factors which have prevented him making a "wholehearted" move into housebuilder shares, despite a strong run for the sector.
Housebuilders benefitted following last year's announcement by Chancellor George Osborne he would double the annual housing budget to £2bn to build 400,000 new homes. Crest Nicholson, Bellway and Redrow, which all sit in the FTSE 250, have seen their share prices rise by 30%, 25% and 18% respectively over the past 12 months.
Nimmo holds names including Crest Nicholson and Telford Homes in his fund, but he has resisted a major move into the sector, saying its fundamentals are too weak and he dislikes the cyclical nature of this area.
"Property firms have to constantly reinvent the wheel and the barriers to entry are low so we have not gone into the sector wholeheartedly," he said.
"We hold some firms, although we should have had more over the last few years. But when doing our research, we have found they have weaknesses including cyclicality. We prefer those sectors which can grow organically and an unduly high level of cyclicality concerns us."
Looking at his current positioning, Nimmo said he favours growth sectors such as software and healthcare as well as UK consumer areas including retail, leisure and media. Consumer services is his top sector weighting at 28% of the portfolio.
The manager also likes wealth managers Mattioli Woods and Brooks Macdonald as they are successfully growing their businesses, despite the increased legislation and costs involved in running a financial services firm.
Meanwhile, the fund is steering clear of sectors such as oil & gas, mining and industrials as Nimmo is concerned earnings will remain under pressure due to the fall in commodity prices.
"We continue to avoid the manufacturing, engineering, mining and oil & gas sectors, where there has recently been some slowing and a reduction in earnings forecasts," he said.
"But the decline in oil & gas prices is not the universal negative investors seem to think. The result is reduced input costs for various industries, such as food and leisure, and more money in the pockets of consumers.
"Consequently, consumer industries remain well placed, and those stocks hit hard during recent market weakness should surprise on the upside."
The SLI UK Smaller Companies fund has returned 40.2% over three years to 1 March, according to FE Trustnet, versus an IA UK Smaller Companies sector average of 33.7%.
