Mark Dampier: Biotechnology could boost income fund

When Bill Mott launched the PSigma Income fund in 2007 I suggested it was a good choice for income and growth investors. Unfortunately performance has not lived up to expectations. It hasn't helped that the fund was launched at the peak of the stock market in 2007. Some initial holdings in the banks also didn't help, although to be fair to Mr Mott he soon changed this.

He has been wary and far from convinced we have fully recovered from the excesses of the early and mid-2000s, and preferred to invest in larger, more defensive companies which tend to be less reliant on strong economic growth for success. With hindsight it is plain to see small and medium-sized high yield companies were the best areas in which to invest.

Many investors question my continued faith in Mr Mott, but I believe PSigma's merger with Miton Investment Managers last year will be positive for the fund; I'm not ready to write it off yet. Gervais Williams, a highly successful small and medium-sized company fund manager, will support Mr Mott on a day-to-day basis. While not directly involved with this fund, the emerging talent of George Godber also adds strength to the wider team. This new structure should bring forward better stock ideas to complement Mr Mott's underlying, and usually correct, economic views.

The influence of Mr Williams is already being felt. He added Quindell; a consulting, software and outsourcing specialist, to the portfolio and initial results are encouraging. It is one of Mr Williams's top stocks from his other funds and while it is currently quoted on AIM it is expected to step up to the FTSE 250 index in due course.

The fund is not going to become small and mid-cap oriented. It is expected to have 10 to 15 per cent exposure to this area. Elsewhere, Mr Mott continues to focus on the pharmaceutical and biotechnology theme, where around 20 per cent of the fund is invested. He remains convinced these sectors will "embark on a multi-year opportunity". Key holdings are GlaxoSmithKline and AstraZeneca in the UK; and Novartis, Roche and Bristol-Myers Squibb overseas.

Overall, the team asks itself five simple questions: what are the prospects for a rise in turnover? Can corporate margins be sustained? Is the management team good enough? How much financial headroom is there in the balance sheet? Are there low expectations in the share price?

This system helps give the team an objective view on each company. Examples include SSE, which has a balance sheet that looks worse than first appears; and food retailers such as Tesco and Sainsbury's which are losing market share. These positions have now been sold.

New additions to the fund have included Royal Mail and Stobart Group.

I think its bias to larger companies might begin to pay off over the next few years, as this area is beginning to look good value relative to smaller and medium-sized companies which have had such a good run recently.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independent