Hudson says the move, which has been accompanied by an increase in consumer cyclical weightings and a reduction in highly-rated defensives, is in anticipation of monetary policy loosening taking effect in the opening months of 2013.
In recent months, the US Federal Reserve unveiled a third bout of quantitative easing (QE) while the Bank of England has kept monetary policy loose and topped up its own QE programme in July. The European Central Bank also stepped up efforts to support the euro through its outright monetary transactions programme.
Hudson said: “We think that is likely to show up in activity levels in the first part of 2013 as this big stimulus package starts to come though. In that environment you’d expect to see cyclical assets performing better than defensive assets. From a top-down perspective that’s broadly the reason for the move.”
The manager has taken the fund’s allocation to early-cycle industrial cyclicals from around 50 basis points to about 3.5%. This was achieved by starting new positions in Premier Farnell and Cookson and adding to an existing holding in GKN.
“These are businesses that are at the early stage of a recovery cycle and we’d expect to see those type of companies responding most quickly to the changes we expect see in global economies and leading indicators next year,” Hudson added.
In addition, the fund has extended its overweight in consumer cyclicals and now has about 12% allocated to this space. “It’s a big overweight for me relative to where the benchmark is,” the manager said.
Hudson has also sold growth defensives which re-rated over the course of the year and are now looking relatively expensive. He has sold his position in distiller Diageo and trimmed holdings in engineering support services company Babcock and catering group Compass.
“If you have defensives you want them to look genuinely cheap,” he commented. “I look at lot of those stocks – for example, Unilever which I don’t own – and I see a very high P/E multiple for likely level of growth that company can achieve across the cycle.”
