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Vanishing value

Matt Goodburn reports on the stockmarket disappearing act

Anthony Nutt, the manager of Jupiter’s £3.2bn income trust, is warning that the UK market is set to become a harsher environment for value investors as private equity and foreign investors continue to buy up undervalued stocks.

Nutt lost at least 14 stocks from his 100 stock portfolio last year to mergers and acquisitions and has lost companies including Corus, McCarthy & Stone, AB Ports and Gondola this year.

He says: “Value has had much stronger performance than growth in the last few years but it is getting more difficult now. The companies being bought out are good quality businesses so this reduces the spectrum of stocks in which I invest.”

“The hotter parts of private equity will eventually blow over but will leave parts of the UK market decimated, with a harsher market of unattractive areas.”

Nutt says decent value stocks still exist but it will take sharper stockpicking skills to dig them out.

Axa Investment Management distribution funds co-manager Richard Marwood says the market is losing its best stocks to corporate activity and the wall of money going into private equity.

He believes many of the companies being taken out are big losses for value pickers and investors.

Marwood says: “There are still opportunities but if you look at groups like BOC, AB Ports, Pilkington, BAA and Scottish Power, these are big well established businesses and as the heritage stocks get taken out, replacements do not have that pedigree.”

He believes the economic cycle is key to the availability of value stocks and cites the last technology boom as an example.

Marwood says: “At the top of the last bull market you had companies like Baltimore which was a new business that rocketed into the FTSE 100 and now it is just a small cap again. You could say the same for a stock like Party Gaming now.

“Big businesses often get big just by surviving. Look at the FTSE 100 now and you see a lot of mining stocks which are mainly decent businesses but they are there because of demand for commodities, both real and imagined.”

Baring Asset Management head of UK retail Charlie Deptford believes the high rate of merger and acquisition activity will not end in the near future and stocks will continue to be taken out of the market.

He says: “Takeovers will only disappear when you get higher core borrowing costs or poor cashflow so the current bingeing on UK plc is unlikely to stop in the near future.”

Deptford says the private equity houses have exit strategies so at some point are likely to return many companies to the market.

He says: “There is a constant regeneration of companies in the global economy and some of these will find their way into the FTSE 350. Back in 2000, a lot of the tech companies were low quality and speculative and when the markets were re-rated they got kicked out and replaced by many better companies.

“It is difficult to find much growth right now but five years from now I do not believe that will be the case. Some event will cause the market to produce more quality and growth.”

Artemis head of communication and product director Nick Wells says the company is neither growth nor valueorientated but thinks at present there are still opportunities to find value.

He says: “We are styleagnostic but believe the market is fair value and we are still finding plenty of value.”

However, Seven Investment Management director Justin Urquhart Stewart agrees with Nutt’s bearish outlook for the UK market and is concerned about the level of debt being racked up by private equity firms in their pursuit of corporate targets and the state in which they return companies to the market.

He says: “There is a huge amount of borrowing providing leveraged buyout support to private equity. Twenty years ago, it was described as asset-stripping and I think we are seeing a form of it again.

“I can understand Nutt’s frustrations because we are running out of decent stocks. When many of these companies are returned to the market they are more like a ship lined with lead. When the first signs of a turbulent market hit us, many will sink.”

Urquhart Stewart says when they are returned to the market, many of the companies are likely to be highly geared, with the value taken out and with weaker balance sheets.

He warns: “If they hit a period of difficulty we will see big problems and I would urge people to look beyond the UK market.”

Liontrust marketing director Jonathan Harbottle also believes value is becoming progressively harder to find and thinks market conditions over the last five years were far more conducive to finding good value in the UK market.

Harbottle says around 100 classic value stocks came to the market between 2000 and 2004 but fewer than 10 are still listed.

He says: “The period 2000 to 2004 was characterised by an explosion of high-value stocks which were yielding at least 2 per cent more than a long-dated gilt at around 6 per cent. Normally, these classic value stocks are very rare but in that period the number was around 100 and there are now fewer than 10 left.”

But Harbottle believes that the dearth of value stocks may have some benefit for the overall investment community.

He notes: “Value is harder to find now but that is not necessarily a bad thing because there should be a balance between equity income and growth and it should mean more stable returns from a far wider range of investment styles.”

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