A decade after Lehman Brothers failed, what do managers think about banks?
On Monday 15th September 2008, I remember walking into the office, not knowing quite what to expect....
Mergers and acquisitions (M&A) are accelerating. Believe it or not, $1.4 trillion worth of deals have already been announced globally year to date*, marking a 75% increase on this time last year and the strongest first four months of any year on record.
This scale of increase in M&A activity is often cited as being an indicator that the economic cycle is reaching its final stages, and this may be the case, but there are other factors at play today. In the UK in particular, Brexit uncertainty has resulted in a weak currency and made our companies look cheap.
As Job Curtis, manager of The City of London Investment Trust said at our investment dinner last month: “The recent rise in merger and acquisition activity in the UK is more a sign that our stock market is very good value for overseas buyers, rather than it being a sign that investors are over-confident and it is the top of the bull market.”
Another Elite Rated manager who agrees with this sentiment is Mark Martin, who runs Neptune UK Mid Cap. Mark points out that the UK stock market is currently trading on a 35% discount to the global market and that larger small companies (those not quite big enough to be medium-sized) especially, are in a valuation ‘trough’.
Unlike many of its peers, the Neptune UK Mid Cap fund can, and will, invest in companies at the mid-small crossover point. And, so convinced is he in their long-term value, that two-thirds of the fund are allocated in such businesses today.
“M&A is most likely to occur in small and medium-sized companies,” he said. “9% of UK small-caps are taken over each year. This falls to 6% for mid-caps and 3% for large caps. Five companies that I currently own have been approached as targets in the past 12 months, each time at share price premiums.”
Mark says the deals that have taken place in the UK this year have been spread broadly across sectors, which is why he is not worried about the trend but believes it is overseas companies taking advantage of the discount.
“The indiscriminate selling we have seen does not make sense,” he concluded. “M&A buyers are ready to pounce and undervalued, internationally-facing companies are ripe for take over.”
The Neptune UK Mid Cap fund currently invests in just 28 stocks. He has very high conviction in a few companies with his largest holding Devro, accounting for 9.7%* of the fund. His top ten holdings account for 62.7%* of the fund.
Mark is more cautious on housebuilders than some of his peers, as he believes they are expensive and vulnerable as they are not currently subject to rational demand and supply – government intervention has inflated their prices. Instead, his biggest sector overweights are to technology and consumer staples, while his other underweights include financials companies and consumer discretionary stocks.
*Source: Dalogic & Kames, May 2018
**Source: Fund fact sheet, May 2018