Several UK equity income investment trusts have been increasing gearing levels in the last few month...
Several UK equity income investment trusts have been increasing gearing levels in the last few months.
In December Merchants Trust geared up by selling £30m of secured bonds. In the past six months the gearing on the City of London investment trust has been gradually increased from 7% to 10.5%.
While both have similar investment remits in terms of providing a steady income stream the Dresdner-run Merchants vehicle has focused on undervalued businesses while City has built up exposure to the narrow range of growth stocks leading the market.
Nigel Lanning, manager of Merchants, has already invested the majority of the trust's £30m in equities with the balance remaining in gilts until it is needed. One of his most successful purchases was Burmah Castrol, yielding 11%. Lanning says: "It had performed badly and was trading at a 50% discount in P/E terms to the market. We felt its market performance would turnaround as the market fully realised its business potential."
Lanning did not view the stock in terms of being an acquisition target but it benefited from a bid by BP Amoco. Until recently the shares traded around the £10 mark until speculation about a bid started and BP announced its interest. The shares are now trading in excess of £15. Other stocks which Lanning bought into were LloydsTSB and Imperial Tobacco. LloydsTSB shares had been weak but Lanning did not think the share price equates to the value of the company's franchise. He adds: "Imperial Tobacco is financially strong with good management but is undervalued as the market has not yet realised the company's overseas expansion potential."
While Lanning has been investing in the oversold part of the market Job Curtis, manager of City of London, has been increasing his exposure to tech, media and telecom stocks offering no yield. He says: "We felt a bit exposed as we had plenty of yielding stocks but were underweight the growth part of the market. So we bought some of the new economy companies like Sage, Logica and BSkyB."
Although he has recently purchased technology companies in the growth part of the market Curtis believes there are strong franchises at value end which are using technology to work in their favour. The banking sector is supposedly threatened by the competition from internet banks, but Curtis favours Barclays.
He says: "Customers are quite conservative and do not like changing their bank accounts frequently. Also Barclays has already got 600,000 customers on its internet banking service."
Another company which Curtis holds is the Hilton Group, owners of Ladbrokes. Online betting, most of which is based offshore, will take off strongly and Ladbrokes has already got a stronger brand than any betting company based offshore, accor-ding to Curtis. He adds that the Hilton Group offers tremendous value trading on a P/E ratio of 15 times.
Last year Lanning invested in Kingfisher which was unsuccessful in its bid for Asda which was eventually taken by Wal-Mart. Lanning says: "The share price performed poorly after the company's bid for Asda failed due to market concern about management strategy."
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