Fund managers take decision to invest in holiday operators

Holiday operators will weather the uncertainty over Western economies in 2011, as people turn to beaches and mini-breaks to escape crisis fears and the bad weather, according to fund managers at Scottish Widows Investment Partnership.

Luke Hickmore and Roger Webb, co-managers of the 63m Scottish Widows Investment Partnership Strategic Bond fund, have invested in senior debt issued by holiday companies TUI and Thomas Cook as they believe holiday habits will remain unchanged in the tough times ahead.

"The standard approach people are taking towards holidays is the same in recessionary and expansionary times and when the economy goes sideways," said Mr Hickmore.

"They may change a bit but the basic pattern has been the same right through the crisis," he added.

Mr Webb said that insurance is another sector that did not waste a good crisis to emerge stronger, as insurers improved their balance sheets to offer a relatively stable outlook.

The Scottish Widows Investment Partnership fund invests in insurers RSA and Prudential on the basis that the sector can weather volatility much better than banks potentially can.

Launched on June 14, the fund also invests in sovereign bonds and includes high yields as well as investment grade debt.

It returned -2.5 per cent in the month to the end of November and -0.5 per cent in the three months to the end of November, outperforming peers by 2.13 and 0.47 percentage points respectively, according to Lipper Global.

Mr Hickmore and Mr Webb expect an economic recovery in 2011 with a continued spell of rising inflation in the UK, which the managers are seeking to hedge with long-dated gilts.

"The Bank of England is really struggling to keep inflation below the two per cent target. We think it is going to go up," said Mr Webb.

They are avoiding direct investment in euro-denominated sovereign debt, due to the possibility some peripheral, debt-ridden EU countries such as Portugal may need an Ireland-style bailout.

While not focusing on emerging markets, the managers are "playing the emerging markets story" through companies such as Glencore, the Switzerland-based commodities trader, and Anglo-Swiss miner Xstrata, which Mr Hickmore described as a "top-quality business".

"We like it, like it, like it," Mr Webb said of this sector servicing commodity-hungry countries.