Old Mutual UK Dynamic Equity Fund (GBP) Class A Accumulation

The present state of the UK's finances gives plenty of reasons for pessimism. We have an economy expected to stay in recession longer than most, a weak currency which could decline even further, unemployment predicted to rise for a further 18 months and few prospects for graduates. However, investors should not be deterred, despite the economic problems. Many types of company can thrive regardless of the difficulties faced by the UK economy, for example companies with niche products, and those deriving earnings from overseas.

In fact, a recession can actually be advantageous for many companies. Cutting costs is made easier by the fact that redundancies are already widely anticipated, and suppliers expect to be negotiated with on price. Meanwhile, those looking to recruit receive huge numbers of high quality applicants. For firms whose products or services are genuinely in demand, it is a time when both market share and profits can be improved. For many, the icing on the cake is the weakness of the Pound. UK exporters will generally find it easier to compete with overseas rivals, and any overseas earnings are worth more in Sterling terms.

In 30 years I cannot remember a time when all the fund managers I admire were singing from the same hymn sheet, but today we frequently hear the same message: the economy is awful but parts of the stock market are very promising. In this environment careful stock picking is crucial, so the most important decision an investor can make is which fund managers can best exploit the situation.

As far as finding opportunities in UK small and medium-sized companies is concerned, we believe Old Mutual has the finest team in the industry. In fact we had first-hand experience of their expertise and meticulous processes when we floated our own shares - of all the investment teams that grilled us it was Old Mutual's which asked the most pertinent and searching questions.

When the Old Mutual UK Dynamic Equity Fund launched last summer, it was an opportunity for private investors to access a fund similar to one that had performed exceptionally well for institutional investors. We remember the occasion extremely well. Old Mutual came to tell us about it in Bristol and, as usual when they visit, everyone in the investment team crowded into the room. By the end of the meeting our analysts were almost getting their chequebooks out in their enthusiasm.

The Old Mutual team has built a reputation in the City for accurate research, and this fund is a collection of their best ideas. The portfolio is concentrated, with currently fewer than 70 holdings, so this can increase risk. If, in the course of their research, the managers come across companies with poor prospects, this fund has the ability to use sophisticated investment techniques such as 'shorting' to profit when a share falls in value. This offers the fund additional flexibility, though it does place greater emphasis on the managers making the correct decisions - the fund will inevitably fall in value as well as rise over the short term.

In conclusion, I believe this is exactly the type of fund that can do well over the next few years. It is run by one of our favourite teams and has all the qualities we look for: a small, pragmatic, highly incentivised group of fund managers able to reach decisions quickly. The fund does carry a performance fee, but in this case we firmly believe it is worth paying. To keep the fund small and easily-manoeuvered, Old Mutual are are considering capping the fund's size when it reaches £150m. The fund currently stands at £110m, so those considering investing might wish to act soon. I am confident they will be richly rewarded over the long term.