Rosemary Banyard, the joint manager of Schroder UK Mid and Small Cap, an investment trust, is aiming to make money by backing companies that provide vital services to the government.
She says the size of the opportunities is demonstrated by government plans to spend £5.5bn in a single financial year on Building Schools for the Future, a project to repair and refurbish secondary schools.
Ms Banyard, the joint head of European Mid and Small Caps at Schroders, a fund manager, wants to invest in companies that benefit from ministers’ need to provide front-line services: “We feel the government is going to spend more on healthcare, education and transport. If it doesn’t, it won’t get re-elected.”
Sceptics might wonder whether pressure on the UK public finances could make it difficult for ministers to increase spending significantly. Ms Banyard says she and Andy Brough, the other joint manager, know this but believe the companies they have invested in will escape cuts in expenditure.
A related area that Ms Banyard favours is companies that benefit from legislation. She cites Latchways, which provides safety harnesses for staff doing jobs such as climbing mobile phone masts or tall buildings for maintenance work.
Investments in companies that could benefit from legislation and government spending make particular sense to Ms Banyard because she wants defensive holdings that offer good returns even during a consumer downturn.
She believes consumers have borrowed too heavily. She expects low inflation to erode borrowers’ debt slowly. That, in turn, could lead consumers to cut back on spending.
Against that background of concern, she has given the trust a relatively cautious 5 per cent gearing – a measure of borrowing and investing the proceeds. Ms Banyard says she has to be careful about the impact of a consumer slowdown and the fund is underweight in the leisure, retail, and speciality finance sectors.
She adds: “We don’t take the view that if interest rates drop, all will be well.” Ms Banyard is seeking a further source of returns outside the consumer economy by backing companies with exposure to investment in the oil and gas sector, where the price of crude has been strong. She cites Rotork, which makes the mechanisms that open and close valves.
Another theme she likes is the growth in internet spending. She has invested in Findel, a mail order catalogue company, saying that its online business is rising fast. She believes it is cheap when compared with the valuation of recent takeovers in the sector in the US.
She says she can smell both fear and greed in the stock market.
On the latter, she cites investors who have been pushing up the share prices of housebuilders recently despite worsening data. “That’s greed. People think someone will do a takeover soon.”
The trust’s performance has improved since it came to Schroders in May 2003 from Legg Mason, another fund management group.
Charles Cade at Close Wins, a broker, says investors lost money when the fund was at Legg Mason because their cash was invested in “growth” companies which were out of favour.