The Observer (UK): Big (and small) will be beautiful next year: “Could 2005 be the year of the large company? A growing number of fund managers think it is time for big companies to make the running and are piling into the likes of Vodafone or Shell in preference to tiddlers such as Thus or Melrose Resources.”: “But beware: Shell's proposed restructuring means it will jump from 3.6 to 8.6 per cent of the index, which, added to BP's weighting, would leave oil accounting for more than 18 per cent of the portfolio. That is a heavy exposure to oil.” (ShellNews.net) 5 Dec 04
Sunday December 5, 2004
Could 2005 be the year of the large company? A growing number of fund managers think it is time for big companies to make the running and are piling into the likes of Vodafone or Shell in preference to tiddlers such as Thus or Melrose Resources.
Performance statistics would certainly support a switch. Over the last year, the medium-sized companies of the FTSE 250 have risen by 14 per cent, twice as fast as the giants of the FTSE 100; over five years, the gap is even greater, with the FTSE 250 showing a 10 per cent gain, compared with a 30 per cent fall in the FTSE 100. Small companies have also done better, although by a smaller margin, over both periods. The outperformance is reflected in the ratings, with the FTSE 100 on a price-earnings ratio - a key valuation measure for stock markets - of 14 times, and a yield of 3.2 per cent, compared with 18 times and 2.7 per cent, respectively, for the FTSE 250.
Mark Tyndall, manager of the Artemis Capital fund, says there have only been three times in the last two decades that the yield on large companies has been that much greater than their medium-sized brethren. He believes that makes the FTSE 100 a better bet. 'For the last five years performance has been driven by special situations, smaller companies, recovery stocks - anything but large caps.'
Artemis's favoured sectors for the next year include banks, telecoms, utilities and resources companies: all of which are dominated by FTSE 100 companies. The least favoured, in contrast, include chemical, automotive and food manufacturers, most of which fall within the mid-cap index.
Other fund managers agree. Michael Taylor, head of equities at Threadneedle Investments, says big companies are more likely to be able to produce 5 per cent or so annual profits growth over the next few years. 'That deliverability is not priced into these companies,' he says. Investing in small- and medium-sized companies is usually riskier than buying big stocks as the impact on profits is greater if something goes wrong, and they may have less depth of management and a shorter trading history.
As John Stavis, manager of Fidelity's Income Plus fund, points out,12 months ago many fund managers believed - and we wrote in this column - that large caps looked better value, but that did not stop them lagging for another year. But managers' behaviour, as well as their sentiments, is now starting to indicate that large caps could outperform. All three of the fund managers quoted above tip large cap stocks for 2005 - BAE for Fidelity; Tesco, Rolls-Royce and Shell for Threadneedle; Barclays, BP and Centrica for Artemis.
If these managers are anything to go by, Vodafone should be a sure bet: it is tipped by both Artemis and Threadneedle. Tyndall points out that it used to be on a 'stratospheric' rating but is now roughly in line with the market. Yet its recent results were 6 per cent ahead of forecasts - quite a feat for such a large company. And Threadneedle's Taylor points out that it has the same rating as British Telecom, yet the prospects for growth in its mobile business are far greater than BT, which faces a gradual attrition of its fixed-line customers.
Those who do not want to invest directly in these companies - and buying just a small number of stocks does increase the risk of things going wrong - should look for a fund that has a high exposure to large caps. Artemis's capital fund is shifting that way, while Bestinvest also recommends Rensburg's Blue Chip fund, Cazenove's UK Growth Income and Lazard's UK Alpha. Rowan and Co likes Schroder's UK Large Cap. You could also consider a FTSE 100 tracker or the FTSE 100 iShare from Barclays Global Investors. But beware: Shell's proposed restructuring means it will jump from 3.6 to 8.6 per cent of the index, which, added to BP's weighting, would leave oil accounting for more than 18 per cent of the portfolio. That is a heavy exposure to oil.