L&G's AAA-rated Penny's top growth stocks for 2011

Like many of his peers L&G UK equity fund manager Richard Penny (pictured) anticipates another good year for equities and reveals some of the stocks he's backing to play the rally.

He writes:

A sigh of relief greeted the close of 2010. Despite many economic headwinds, the UK stock market delivered a double-digit return.

In fact, the UK’s FTSE All Share has seen a close to 40% increase in corporate profits, and even after the recovery rally of 2009/10, the equity market looks cheap.

The prospective price/earnings (P/E) valuation for 2011 looks to be between 10.5 and 11.5 times earnings, which compares favourably to a long-term average of 13. The UK All Companies fund sector has seen a huge spread of returns among equity funds over the past two years.

Returns have ranged from 20.3% at the lower end to 176% at the top.

The winners have been stock picking funds with titles that reflect a focus on microeconomic factors rather than macroeconomic ones. This year looks set to continue the theme, with highly concentrated and flexible mandates likely to be among the winning funds for 2011.

Large and mega caps for value

2009 was a value year where refinancing and recovery stocks, many of them smaller companies, drove performance; 2010 was more about growth stocks.

This year looks to be similar to last, with perhaps a wild card of increased M&A activity thrown in.

Among very large companies, the so called mega caps, there is a great deal of internationally exposed businesses with very attractive yields. These include Royal Dutch Shell, British American Tobacco, GlaxoSmithKline and Vodafone. All of these companies yield over 5%, and by growing their dividends became attractive to private individuals and income funds alike.