We have been seeking opportunities in sectors of the UK stockmarket with two characteristics. First,...
We have been seeking opportunities in sectors of the UK stockmarket with two characteristics. First, that it is easy to identify why companies in those sectors should achieve superior rates of growth over the next three to five years virtually regardless of what happens to the UK or the world economies. Second, that those areas are undergoing restructuring.
We have been looking for companies with clear commercial leadership in their respective sectors and/or whose stockmarket valuations are substantially lower than their value to a strategic investor.
Defence and aerospace is one area where we are overweight. We have held stocks such as Smiths Industries, BAe Systems and Racal Electronics, companies set to benefit from the rise in expenditure on military aircraft and other equipment. The long-term growth in the organised savings industry remains a key theme. Individual investors in the UK have received the message that they must provide for their own retirements. We hold stocks such as Schroders and BWD.
We also favour composite insurers. This sector was sold down in late 1999 as a result of the softness of bond markets and large losses from natural disasters. We have taken advantage of the weakness in stock prices to increase our holdings of Royal & Sun Alliance and we also hold CGU. The benefits of the buoyancy of world stock markets, and the likelihood of higher insurance premiums, has not yet been discounted.
A key theme in the UK as in others, has been the rerating of media companies that control content in the form of publishing and TV production rights. Companies that control distribution have been prepared to pay a premium for content that will enable them to differentiate their services in an increasingly competitive marketplace. The Time Warner/AOL merger is a good example of this trend.
Particular UK companies are clear global leaders, such as Vodafone AirTouch. Shell is an obvious beneficiary of the firming of the oil price and is taking steps to cut its operating costs over the next three years.
The strength of United Biscuits' brands in the UK is the main reason why the company has been subject to competing bids. In general, though, branded consumer products are an area where we have relatively little exposure. The high profile problems of leading companies such as Coca Cola and Procter & Gamble in the USA highlight how it has become increasingly difficult for suppliers of consumer products to maintain the value of brands.
The water utilities are another area where we have reduced exposure. In an environment where regulators are taking a harder line on pricing and on the amounts that the companies must spend on capital works, it will be difficult for them to achieve growth.
Graham Kitchen is UK Income Fund manager at INVESCO Asset Management
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