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SCMP Reporter

THE ART OF INVESTING is all about balancing risks with potential rewards.

Baring Asset Management has come up with a variation on the theme with its Leading Sectors fund which begins trading tomorrow.

'It is meant to be a less volatile ride than a single sector fund but a more profitable fund than investing in a broad global fund.

'It is positioned half way between the two,' said manager Lucy Macdonald.

Barings has picked five sectors it considers to have the best growth potential to build the fund from: financials, healthcare, technology, media and telecommunications. Industrials, utilities, consumer goods and energy stocks are barred, as they are considered to be relative deadweights in the portfolio.

While the accent is still on growth, having not one but five sectors to pick from gives Ms Macdonald more options on the offensive and the defensive.

'After last year and the experiences people have had with their tech funds, which were the highest selling specialist product last year, [they] are definitely a bit more receptive to having a little more diversification in their portfolios.

'We think that taking these five sectors together you get quite a good trade off between risk and return.'

While she is limited to these sectors for now, if a better growth prospect shows up an alteration can be made.

'Over time we have given ourselves the flexibility that we can change the sectors because we want a durable fund.

'We don't have to have five, there is no magic about five, it can be more or less,' Ms Macdonald said.

The benchmark for the fund is the Morgan Stanley Capital International World Index.

'Working out how the sectors would have performed in a hypothetical fund bore out the concept. Over the past seven years, you would have got an extra 6 per cent over the index taking on 3 per cent extra volatility.

'That is before you are adding value on stocks.'

The fund manager is also a specialist in global media stocks.

Barings has teams of fund managers covering the five sectors which provide ideas for the fund.

'There are quite a lot of discussions among us but when it comes down to it I have to make the decisions on the stocks,' Ms Macdonald said.

While she admitted the speed of the downturn in the United States economy in the second half of last year caught Barings by surprise, there were now grounds for optimism.

'We are not expecting a protracted recession in the US. We do think it is possible that we can go into a technical recession but we don't think it is going to be that extended because we have quite an early aggressive response on interest rates.

'We think that will do its work and provide a recovery.

'The problem for the market at the moment and why we are not more aggressive is we don't know the timing of that recovery. It could be three months, it could be six months or it might still be a little bit uncertain towards the end of the year.'

After running a hypothetical version of the fund, Ms Macdonald will begin putting real money to work after a global fund-raising exercise. Despite the uncertainties, there was a good case for investors to follow.

'If everything is clear there are no real opportunities. We are investing now because we think valuations are interesting but we can't go out and say there is no risk. I don't think one bad year means you should stay out of equities.

'One bad year probably means you should be getting into equities, particularly if interest rates are coming down and because we have had a bad year means statistically we are less likely to have another one.

'The level of bearishness that is out there now is much more healthy for an investor than the over-optimism we had last year. I feel much happier about launching this fund now.

'We are obviously going to be investing cautiously because that is how we do it.

'The prospects for the markets I feel much more happy about. On valuation grounds, against fixed and against cash, valuations are quite good for equities.'

Ms Macdonald is starting out roughly neutral against her benchmark. Financials are 33 per cent, healthcare 21, technology 25, telecoms 14 per cent and media 7 per cent.

Going forward to outperform the benchmark, she will have to strike the right balance between the sectors for the market's changing conditions and choose well among the sub-sectors and stocks.

For instance, in technology 'we haven't got much exposure in the more cyclical end of telecom equipment, chips and PCs.

'We have got a major overweight in software, particularly moving, managing and storing, database management and also telecom-type software,' she said.

British information-technology services company Logica is an example of a technology stock she likes. It also shows there are not many places to hide in technology these days.

The company, which has a sought-after mobile software business, reported that second-half pre-tax earnings jumped 52 per cent.

But on Wednesday the stock, which trades at 67 times this year's expected earnings, slumped 9.5 per cent on worries margins were being eroded.

In financials, US giant Citigroup, which is on an overseas expansion drive, was a top active bet with 3 per cent in the fund against only 1 per cent in the index.

Normally Citigroup trades at a premium to HSBC Holdings but it is now at a discount.

'We think it has got good growth potential. We like its increasing exposure to fee-based income. At the moment it has got quite a lot of value compared to its peer group,' said Ms Macdonald.

In the media sector, financial information provider Reuters is one of her top picks.

'The top line has been accelerating as the market for financial information is recovering from the impact of Y2K and quite a lot of bank consolidation,' she said.

The overall tone of the stock selections was neither aggressive nor defensive, she said.

'At the moment we are mid-range and thinking to move a little more aggressively when the market begins to reward that.

'We are not quite there yet.'

Lucy Macdonald

1984: Graduated with a degree in  music from Bristol  University.

1985: Economist with Baring Asset  Management.

1989: Analyst and fund manager at  Baring specialising in Brit ish equities.

1997: Appointed deputy head of  the British equity team.



Barings' Leading Sectors fund to move cautiously