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Head of UK Equities Leigh Himsworth shares his latest thoughts.

Unfortunately, selling in May seems to have happened… and with a greater emphasis on a number of my stocks! There has been a continuation of the trend that had begun in April, with investors now choosing to see the negative in any story and focusing on some of the more outlandish such as North Korea taking on the world. More importantly for investor sentiment has been the collapse in the BP share price following the Deepwater Horizon incident, responsible for significant proportion of the fall in the FTSE All-Share.

A number of my stocks have been badly hit by global market falls in May, but there has been an overriding trend behind them. The first is a handful of stocks who were giving back some of their significant gains from March and April. Paragon and Yule Catto each delivered over 20% return during these two months, as the All-Share rose just 4%. However, as the market fell nearly 7% in May, they both fell back over 14%. Both of these companies are geared into an economic recovery, with Paragon linked to the buy-to-let housing market and Yule Catto’s chemical operations linked to a wider global economic recovery. I still feel both these companies are good stocks to play on the back of what I believe is a recovering economy.

There have also been a few stocks falling on the back of poor newsflow, in particular, Yell and Regus. Each fell around 20% in May, with consequent downgrades to earnings forecasts. These stocks are also plays on the economic recovery, but to different extents.

The office renting model of Regus is an obvious play on the corporate recovery, whereas the income at Yell is dependent almost entirely on advertising spend. In light of the recent spout of risk aversion, I have decided to stick with Regus, but sell Yell. I know from personal experience how well Regus benefited from the last economic recovery. In fact, back in 2003 the company had the added burden of restructuring its US business out of Chapter 11 – a problem it does not have today.

Yell, on the other hand, is rather worrying, and comments from its management give me the impression that profitability is still a long way off. In hindsight, it was wrong to include Yell in the portfolio, a more aggressive selection with very high levels of operational gearing into recovery.

These moves act to serve as a timely reminder that we mustn’t get too carried away with a significant stance at present, either too bullish on recovery or too bearish, as there remains plenty of evidence of a gentle recovery. I remain of the view that we will witness a ‘subdued recovery’ in the UK and am gearing the portfolio accordingly.

While the market certainly did ‘Sell in May’, I feel it would be wrong to ‘go away’.

Leigh Himsworth Head of UK Equities

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For professional investors only. Past performance is not a guide to future performance. The value of investments and the income from them can go down as well as up, and you may not get back your original investment. Please ensure your clients read the Simplified Prospectus before investing. The Gartmore UK Alpha Fund may hold a limited number of investments. If one or more of these investments declines in value, or is otherwise adversely affected, this can have a greater impact on the Fund's value than if a larger number of investments were held. The Funds can invest in smaller companies which can be more risky than investing in larger companies due to lack of liquidity and increased volatility. Funds with an emphasis on a particular sector or geographical area are exposed to a higher risk of volatility than a fund which is more broadly diversified. Issued as at 22 June 2010. All opinions and estimates constitute the fund managers judgement as of the date of this communication and are subject to change without notice. This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

• This entry was posted on: Friday, 25 June 2010 08:58 BST
• Filed under: Interesting Leigh
• Tags: Gartmore UK Alpha Fund, Gartmore UK Growth Fund, Interesting Leigh, Leigh Himsworth
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