UK mid-cap managers cautious on housebuilders

Fund managers invested in UK housebuilding firms have expressed muted concern following some recent heavy selling that saw stocks fall between 14 and 19% in less than two months.

Last year shares in FTSE 250 house builders rose between 50 and 75%, however an indiscriminate period of profit taking in the mid-cap space last week saw share prices plunge.

Shares in Taylor Wimpey and Berkeley fell 18% to 107p and 16% to 2,340p respectively between 24 February and 15 April, while Bellway fared a little better, shedding 10% to 1526p in the same period.

FTSE 100-listed firms Barratt Developments and Persimmon also suffered losses as share prices fell from 452p to 365p and 1,469p to 1,265p in the six weeks to 15 April.

Share prices have recovered slightly over the past few days, however Derek Mitchell, manager of Royal London UK Mid-Cap Growth fund has warned of further headwinds to come.

"We've had two good years of outperformance from this sector and I think now there are several things on the horizon along with the recent sell-off that has given people cause to rethink," he says.

Mitchell, who recently sold out of Barratt Developments, listed political wrangling over the so-called "mansion tax" as a potential problem as well as the impending rise in interest rates following strong economic growth in the UK, which could make mortgages unaffordable for many.

"Historically, as interest rates rise housebuilders perform less well so I'll be looking to reduce my exposure as that happens. House builders are less of an easy win now and people are right to take money off the table," he adds.

Mitchell's comments were echoed by Stephen Williams, equity analyst at wealth manager Brewin Dolphin who last week claimed that a cyclical downturn was "on the horizon" for housebuilders.

"Plenty of growth to come"

"Over the last three years, housebuilders have seen their shares perform strongly as recovery has come through. However, we believe that this stage is coming to a close and that many management teams in the house building sector are beginning to prepare for the next cyclical downturn, which could occur any time from 2016," Williams says.

In contrast, Guy Anderson, manager of Money Observer Rated Fund Mercantile Investment Trust, who has 16% of his portfolio invested in house builders, said that while he would be "keeping an eye" on these stocks, there was still plenty of growth to come and he wouldn't be selling out.

"There is still a lot of pressure for housebuilding to increase because household formation is running ahead of the number of new homes we have built. So there are a lot of tailwinds coming through to the sector including a positive regulatory environment, which is rare," he says.

However, Anderson did admit that the sell-off had been "quite painful" for his fund, pushing returns down to 0.06% year to date compared to 0.17 from its sector, IT UK All Companies.

He concludes, "These are positions we have ridden and we are happy to let them grow, even those that have been promoted to the FTSE 100. We are quite happy to run our winners, but from this point we are going to be more focused on those in the mid-cap part of the market."