London, July 22 - Housebuilders and food retailers look attractive to Andy Cawker, director of UK equities at Insight Investment, who has been adapting the way he hedges his fund to exploit deteriorating market conditions.
Cawker, who manages the 126 million-pound ($206.5 million) Absolute Insight UK Equity Market Neutral fund, said he owns stocks in these sectors because conditions for many UK consumers have actually improved, despite the recession.
"It's slightly counter to what we all might have thought," he told Reuters.
"They (these stocks) are currently benefiting from the consumer, who's got a lot more income than they've had for a long time. Mortgage costs have fallen dramatically, also utility bills. Disposable income is much higher."
Cawker said he is net long -- the stocks he owns outweigh short positions -- in housebuilders and food retailers, while he is marginally net long retailers, helped by a position in Halfords.
The fund limits exposure to overall market movements using pairs trades -- buying one stock and betting on a falling price for another stock in the sector or for an index in order to hedge out certain risks. "At the start of the year they (housebuilders) were on very conservative land valuations and the stocks were trading at a discount to book value. There were very difficult trading conditions but we liked the cash generation," he said. "Recently, as the housing market appears to be stabilising -- although mortgage availability still isn't there -- we're now seeing analysts upgrading their forecasts." He also owns food retailers such as Booker and Wm Morrison Supermarkets, which he has hedged with undisclosed short positions in other consumer stocks.
MORE PRECISE
Cawker has moved from hedging stocks in his portfolio against the index to hedging against individual stocks over the past two years as market conditions deteriorated.
In summer 2007 the vast majority of stocks were hedged against the index, rather than against stocks in the same sector, because he said the numerous rumours of private equity bids were actually pushing up the prices of poor quality companies.
However, by the start of this year most stocks in his fund were hedged against other stocks in their sectors.
"A lot of business models were found out (by the recession) so you could make money on the short side. It's a far more precise way of hedging," said Cawker. "The dispersion (in valuations) within sectors was also very wide, which led to lots of opportunities."
He said that stocks are now still mostly hedged against other stocks, although the proportion had fallen as mispricings in the market have been corrected.
"You're now trying to pick the long-term winners and long-term losers," he said. ($1=.6103 Pound)