Fund of the week: New Star Alpha does well out of merger boom

This year’s rash of merger activity has proved handy for Tim Steer, manager of New Star’s £268m UK Alpha fund, said Kathryn Cooper in The Sunday Times.

The year hasn't ended yet, but it's clear that the value of deals completed in Europe in 2005 is going to surpass that of the last boom year, 2000. About a fifth of the fund's 50% gain since its launch four years ago has come from taking advantage of this and buying into takeover targets early.

Steer picked up shares in plasterboard supplier BPB and advertising business Aegis, shares in both of which have soared this year thanks to takeover bids, and he anticipates more bids in the house-building sector. Taylor Woodrow is, he says, a possible target. UK defence stocks are also of interest given that they have good market positions and are cheaper than their US rivals.

So what doesn't he like? UK retailers. With little evidence on the horizon that consumption is going to boom again anytime soon, he has reduced his exposure to the sector from 10.9% of the portfolio's value to 7.6%.

Another key to Steer's success in the past has been his heavy exposure to mid-caps, says Tracey Cook in Investment Adviser. Steer was such a fan of the sector that last summer they made up 75% of the portfolio of 50 to 62 stocks. But while he is a "strong believer" that corporate activity means mid-caps still look good, he is bulking up on exposure to large-cap stocks they made up 13.8% of the portfolio last September, but that's now up to 24.9%. Recent large-cap buys include BP, BAE Systems, Rolls-Royce, British Land and Hammerson.

Contact: 0845-608 8704, www.newstarinvest.com

UK Alpha Fund's top ten holdings

Name of holding             % of assets

Rolls-Royce Group               3.7%Photo-Me International        3.6%BP                                    3.5%Wolfson Microelectronics      3.5%BAE Systems                      3.3%VT Group                           3.3%SIG                                   3.1%Rotork                               3.0%Intermediate Capital Group    3.0%Balfour Beatty                     2.9%

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