Liberation of a huge cash-pile by Prudential's planned sale of Egg, the internet bank, could spark a "massive rationalisation" in the life insurance sector, says Chris Burvill, manager of Gartmore's cautious managed fund.
Burvill, who is also joint manager of the Gartmore UK equity income fund, says inefficiencies are still big in the financial services sector relative to most others industries, so it is possible a company like Pru will be looking to use excess cash to liberate improved earnings.
Once the first big merger is announced, suggests Burvill, a string of others will follow because no company will want to be left behind.
"Many corporate balance sheets have been repaired to the extent companies could go out and borrow at 5% or 6% to make an acquisition, and still make it earnings enhancing," he says of UK Plc in general.
The clearest example of a big takeover in the financial services sector paying off handsomely is Royal Bank of Scotland’s bid for NatWest in the not too distant past.
The three-year integration of the £22bn deal was completed last year. RBS interim results published in early August 2003 show its retail business, which includes RBS and NatWest retail branches, added 113,000 customers during the six-month period, and contributed £1.5bn to group turnover before manufacturing costs.
Another point IFAs will need to consider when recommending funds is the rush to market balanced funds in light of the pending abolition of the Isa dividend tax credit, Burvill adds.
He says investors should look to returns first and concern themselves with taxation implications second, particularly given the relatively small amounts of additional tax the average stocks and shares ISA account will have to pay when the dividend tax credit ends.
It may also dangerous to hope the Treasury will retain the preferential treatment of bond income which currently makes balanced funds so attractive to ISA investors, he says.IFAonline
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