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International Herald Tribune: Investing: In British equities, being midsize isn’t big enough : ‘City yentas are talking up the possibility of a merger between BP and Shell’

By Conrad de Aenlle
Friday, July 13, 2007

As the manager of a fund called Gartmore Cautious Managed, Christopher Burvill would never risk the entire portfolio on a hot horse running at Newmarket. But even in the context of the fund’s safety-first mandate – it aims to keep no more than 60 percent of its assets in British equities and the rest in bonds and cash – he has become extremely wary of the stock market.

After long being overweight in stocks, Burvill became concerned about valuations and sold enough of his holdings last month to move his allocation to just under 50 percent. Attracted by yields approaching 6 percent, he has raised the bond portion of the portfolio to 43 percent, the highest in the fund’s four-year-plus history.

Burvill is not the only investor who considers the environment for British stocks worrisome. A series of increases in interest rates by the Bank of England, the latest on July 5, and a sense that there are more to come, has dimmed the mood of many who make their living in the market.

In the most recent monthly survey of fund managers published by Merrill Lynch, the proportion of respondents predicting economic weakness in Britain over the next year outnumbers the group anticipating strength by more than four to one.

Managers who foresee deteriorating corporate earnings there exceed those expecting improvement by a ratio of 47 to 20. A majority sees the market as fairly priced, and of those who do not, twice as many judge it to be overvalued rather than undervalued.

Edward Collins, a manager of British equity portfolios for New Star Asset Management, shares in the spirit of caution, but only up to a point.

“The recent rate rises will put pressure on consumer-sensitive areas of the economy,” he said. “However, there is a robust labor market, and investors can take some comfort from the fact that U.K. equity valuations remain attractive and company finances are in excellent health.”

Factoring in all the pros and cons, Collins finds “little reason to suggest that markets cannot continue to make progress, albeit at slower rates.”

A lot slower, if at all, in the case of one segment of the stock market, in his opinion. Conditions are likely to remain difficult for providers of consumer durables, items like cars, electronic equipment and travel, whose purchases can be put off. They are especially prone to suffer under the current interest rate climate, he said.

But there are plenty of companies whose growth prospects will be minimally affected by the continual rate increases, Collins advised, and this is where he has been searching for opportunities. He considers the backdrop especially favorable for industries like aerospace and defense, where his selections include BAE Systems and the jet engine maker Rolls-Royce.

Other favorites include the British-Dutch publisher Reed Elsevier and several oil-service companies: Abbot Group, Hunting and Sondex.

Many of his choices are midsize companies, a group whose short-term prospects are deemed less than bright by the managers surveyed by Merrill Lynch. By an overwhelming majority, 93 percent to 7 percent, they say they expect the FTSE 100 index of larger companies to outperform an index of midsize ones over the next 12 months.

Burvill agrees. The Gartmore manager has been selling shares of midsize companies. “The fund is more heavily weighted in megacaps than it has ever been,” he told Gartmore Investors. Examples include the energy giants BP and Royal Dutch Shell; HSBC, one of the largest banks; and a couple of phone companies, BT and Vodafone. Those five, he said, were trading at low valuations compared with the broad market.

Among smaller companies that Burvill has cut loose lately are TDG, which is involved in logistics and supply-chain management, and DS Smith Packaging.

One of the benefits of holding giant companies, apart from reasonable valuations, is that their size and financial strength make them relatively immune to a downturn. So do their healthy dividend yields, which range between 3 percent and 5 percent.

Many blue chips are being supported by the prospect of corporate couplings or uncouplings, Burvill added. Vodafone has been the subject of takeover rumors, and City yentas are talking up the possibility of a merger between BP and Shell. Other large businesses, he said, are considered candidates for being broken up, including the drug makers GlaxoSmithKline and AstraZeneca.

Britain is the ideal market for a fund like Burvill’s. The country is often cited as a haven for investors during turbulent economic and market conditions, and for all his misgivings, he has no trouble enumerating businesses that should pass any stress test imposed on them.

All the same, he has no plans to raise the equity allocation of his portfolio until valuations for the broad market improve. “We see no reason to go above 50 percent now,” he said. and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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