Barnard's star stocks

TOP-PERFORMING fund manager Michael Barnard has snapped up shares in BT and Barclays in a bid to benefit from the ongoing stock market recovery.

The UK's blue chip FTSE 100 index has already bounced back 40% since the low last March. The FTSE Small Companies index has risen nearly 60%. And Barnard believes the rally in both will go on.

'Most commentators are now saying we are back in a bull market,' he says. 'There's obviously still a long way to go until we return until the previous stock market high but I think we'll get there within 10 years.'

The FTSE 100 peaked at 6930 on 30 December 1999. Only in March last year did the millennium hangover seem to clear and global share markets appeared to bottom out. The FTSE 100 has bounced back from 3287 points to 4419.

Barnard's funds have weathered the stock market turmoil remarkably well. His Marlborough UK Equity Growth fund has turned £1,000 into £4,240 since 1995 when he took control. The performance ranks the fund number one out of 147.

He also took charge of the Marlborough UK Equity Income fund in June 2002. His performance on that fund also ranks first out of 71 funds.

With the Equity Income Barnard hunts out 'undervalued' stocks which deliver high dividend yields and that have profits that are likely to grow year after year and carry on paying a decent income.

His top holding is Invox, which runs premium rates phone lines for anything from competition prizes to mobile phone ringtones. Nearly 10% of his fund – the maximum allowed under fund rules – is invested in the stock. 'It also has a huge database of three million active users,' he says. The share price has more than doubled from 150p to 332p in the past year.

Metalrax, an engineering firm which makes a variety of tools and kitchen products, is the second largest holding in the fund. The stock, which yields 6%, has seen its price rally 30% in the past year. 'It's been increasing its profits pretty year-on-year for 20 years,' he says.

BT is the next largest bet and a relatively new play. Barnard has been impressed with the profits recovery at the phone company. 'The company is very cash generative,' he says.

Next up is Alexandra, which makes workwear uniforms. Barnard has held the stock for a year and a half and continues to be impressed by the firm's profits recovery.

Other top holdings include tobacco firm Gallaher and Barclays. Again, he says both stocks are cheap and are paying out healthy dividends. But he also believes the share prices of both could be pushed up by takeover speculation. Several US banks have been linked with a takeover of Barclays, says Barnard.

Alliance & Leicester is another favourite bank. 'It's got one of the highest yields of the 'quality' banks,' says Barnard. 'I've avoided the likes of Abbey and Lloyds. The dividend might be cut at Lloyds and at Abbey it might just be maintained. I'm looking for companies where it's being increased.'

Other top ten holdings include Virdian, the former Northern Ireland Electric, fund manager Investec and Acorn Income, an investment trust run by respected small caps fund manager Peter Webb.

The Equity Growth fund currently yields 4.59% and carries upfront charges of 5% and then 1.5% a year.

Broker Killik & Co is impressed with Barnard's 'proven ability'. Its only warning is that the funds have tended to suffer when the UK's smallest stocks have lagged. 'The recurrence of a similar investment climate could bring some short term weakness,' the broker warns.

But it adds: 'Barnard's periods of underperformance have tended to be brief and have proved to be good long term buying opportunities.'

It also adds that the fund's small size of just £9m is an advantage because it can back minnow companies from which other large funds are barred