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The price is right

Despite two years of strong UK equity market growth, unfashionable value stocks will continue to outperform, says Invesco Perpetual UK aggressive manager Ed Burke.

The fund, launched in July 2001, has risen by 74 per cent against a Lipper sector average of 7.2 per cent.

Burke runs the fund on the basis of seeking out undervalued stocks that he believes will turn round on a two to three-year view. He has the freedom to adopt a bottom-up, go-anywhere approach to running the fund.

By taking a two to three- year view on stocks, Burke feels he is better placed to exploit the potential for market mispricing. The fund currently has 25 stocks, with Burke prim-arily holding companies he believes have the potential to double in value. This means he will tend to hold unfash- ionable companies.

One of Burke’s earliest moves was to buy Rolls-Royce in the aftermath of the September 11 terrorist attacks. It was then valued at 80p, suffering from poor sentiment because of global fears about the outlook for the airline industry.

He took the view that the stock was worth 2. He holds 5.5 per cent of the fund in the engine manufacturer, with the stock now worth 343p and continuing to rise.

Burke says: “Quite often, the fund might have comp-anies in it that are snoozing. I am not trying to keep it in fashion but to get the best returns for investors. There is still a valid growth story in Rolls-Royce as, along with GE, it has a global duopoly on aircraft engine manufacture and there is significant scope for good returns.”

Burke also holds 5.4 per cent of the fund in mobile communications firm O2 which fell to 50p after becoming independent from BT. Burke took the view that the firm was not going to have to spend the money it thought it would to launch 3G technology, with BT having borne all the pain of paying for the licences, eff-ectively “gifting O2 to shareholders”. Burke also feels that management flair has been responsible for turning “dull old Cellnet into funky O2, stealing Orange’s crown to some extent”. The stock continues to rise.

The fund also invests in tech firm Arm Holdings, which produces low-power usage, high output chips for 90 per cent of high-end mobiles sold globally. Each mobile sold pays a revenue to Arm for the usage of its intellectual property and the chips are also used in Apple’s iPod. Burke bought the stock in 2003 when it was valued at 40p and it is curr-ently valued at 115p.

Despite strong equity performance in the UK for the last two years, Burke feels there is still room for markets to run and he is reassured by apparent renewed confidence among UK investors.

Burke says: “The reality is that equities have been rising since March 2003 and I do not think they are expen- sive yet. It is unfortunate that it is hardest to sell them to UK investors when they are the best idea but equities were at generational lows in March 2003 and since then earnings growth has kept up with share prices. There is no sense of overstretch by any means.”


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