Q: What has been happening on the UK equity markets this year?

A: The UK economy has continued to perform satisfactorily with growth slightly ahead of what would generally be regarded as trend levels.

UK equities have made steady upward progress over the course of the last six months, notwithstanding the correction of late February/early March. The long standing theme of small and midcap stocks outperforming their larger counterparts has reversed in recent months, owing to concerns over the environment of rising interest rates.

Q: Looking at the UK stockmarket over the next 12 months, what do you think the key influences will be?

A: We continue to feel that the UK economic outlook is relatively benign. A further modest tightening of monetary policy may be needed to dampen underlying inflationary pressures but this should not be sufficient to cause more than a gradual slowdown in economic growth. Against this background, UK equities appear reasonably priced and offer the prospect of steady rates of profits and dividend growth over the next 12 months. These factors, combined with continued corporate activity, should help to underpin equities over the coming months.

Q: Do these conditions point you towards certain sectors which you think are more interesting than others?

A: Areas which we currently favour are oil services, which offers strong medium term growth prospects and is benefiting from the continued strength of the oil price, construction, where late cycle stocks are trading well and support services, where there are some good opportunities as the trend towards outsourcing continues. Against this we remain cautious on consumer-related areas such as retailers and housebuilders, as the consumer is coming under increasing pressure from rising interest rates.

Q: How do you decide which stocks to buy for your portfolio?

A: The fund combines top down and bottom up analysis. Top down analysis takes into account expectations for economic growth and interest rates and whether there are any particularly significant economic events which will influence how the portfolio is positioned.

Bottom up analysis aims to identify those companies which: display consistently above average rates of profit growth, are likely to have their earnings revised upwards and have the potential for a re-rating

Q: What stocks have you bought recently?

A: Recent purchases include Cairn and Tullow, in order to lift our exposure to the oil producers' sector to a broadly neutral position. We also recently invested in New Star Asset Management, which is attractively priced given its strong growth prospects.

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