Credit Suisse Asset Management says it believes the market often mis-prices regulatory change, and it’s making this belief a specific investment theme of one of its UK-based pension funds.

Misinterpreting the impact of regulatory change is to be one of the themes of CSAM’s UK Equity Alpha Fund. “Regulatory change is an important driver of sales and profits across various industries and yet it appears to be something which the market often mis-prices,” Phil True, manager of the UK Equity Alpha Fund, said.

“For example, we noticed some time ago the importance of emission control regulation to the profit outlook for a firm in the chemicals sector. At the time of purchase, the market was more concerned about its exposure to the US consumer through car sales. However, we were attracted by its strong market position in the diesel engine autocatalyst market and this was supported by the work our team of in house analysts had done,” True noted. “The stock has since enjoyed a significant re rating. Profit upgrades such as this have become more widely recognized, demonstrating how thematic investing can focus in on profitable market opportunities which investors at large have underestimated.”

“In early 2004 we moved into the ‘China’ theme and invested in some of the companies that have benefited from growth in the region. However, now that the Chinese phenomenon is so well known we have decided that other themes, such as the ‘regulatory change’ theme, look more undervalued, so we have taken profits in many of our ‘China’ theme holdings,” True added.

The fund is managed on the basis of favoured themes that can be based on broad macroeconomic trends, industry trends or on political influences. True notes that another theme it has successfully played over the past 12 to 18 months is utility stocks. “We now feel that utilities offer less compelling value, although we continue to hold stocks where we feel investors have become too bearish about the impact of deregulation in areas such as broadband,” he said.

Another theme it expects to continue to provide good returns is “infrastructure spend”. “Whilst most investors are concerned about a squeeze on public spending budgets, we think several companies in the market are well positioned to benefit from the funds still going into government or local authority financed budgets, both here and in the US,” he added. “Significant opportunities exist for specialist infrastructure companies in areas such as defence, education and healthcare.”