Sick U.K. Economy Has Edinburgh Funds Seeking Earnings Abroad

http://www.fxfxfx.com 2010-02-02 16:34:36

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Edinburgh’s managers of U.K. stock funds are taking the “U.K.” out of their investments.

Aegon Asset Management, Martin Currie Investment Management and Scottish Widows Investment Partnership are buying companies on the London Stock Exchange that do the bulk of their business abroad. Stocks include copper producer Kazakhmys Plc of Kazakhstan and Great Eastern Energy Corp. Ltd. in India as well as miners Xstrata Plc and Rio Tinto Plc.

“When you’re looking for superior growth, your eye is caught by overseas earnings,” said Stephen Adams, 47, who is in charge of 10 billion pounds ($16 billion) at Aegon. “We’re happy to pay a premium if necessary.”

Investors in Edinburgh’s 400 billion-pound fund industry are trying to reconcile buying U.K. stocks without leaving them vulnerable to an economy that shrank at twice the pace of the U.S. last year and is limping out of recession.

British gross domestic product expanded 0.1 percent in the final three months of 2009 from the quarter before, the Office for National Statistics said last week. While that signaled the end of six straight quarters of contraction, the longest on record, it was less than the median 0.4 percent forecast in a Bloomberg survey of 33 economists.

“I am definitely more geared to the overseas earners than average,” Jeff Saunders, 47, head of U.K. stocks at Martin Currie, said at his office in Edinburgh. “I’m not optimistic about the U.K. economy.”

BP, Kazakhmys

A national election by June and the specter of no party winning an overall majority in parliament, along with rising taxes, also are weighing on U.K. markets, said Adams.

“Last year there was a tremendous rebound,” said Adams. “This year will be about sifting out the long-term winners.”

At Martin Currie, Saunders’s picks include BP Plc, Europe’s biggest oil company, and Kazakhmys, the largest copper producer in Kazakhstan. London-based BP, which derives more than three quarters of its sales from abroad, rose 15 percent over the past six months. Kazakhmys, the best performer in London’s benchmark FTSE 100 Index last year, gained 33 percent over the same time.

Scottish Widows, part of Lloyds Banking Group Plc, is buying shares of Great Eastern and KSK Power Ventur Plc to gain from faster growth in emerging markets and reduce exposure to the U.K., said Peter Cockburn, head of U.K. equities.

The fund company expects the FTSE 100 Index to rise by 7 percent to 8 percent this year after rallying 22 percent in 2009, led by stocks such as Kazakhmys and Xstrata.

‘Very Choppy’

“We have a strong view that volatility is going to pick up from very suppressed levels,” Cockburn said. “It’s going to be very choppy in terms of market direction.”

Great Eastern, which explores for methane gas in Indian coalfields, has risen 52 percent over the past six months. KSK, a developer of power products across India, gained 15 percent.

Cockburn, who is in charge of 20 billion pounds of investments, also holds mining companies such as Xstrata and Rio Tinto. He has been reducing holdings in recent weeks after their shares rose more than 30 percent in the past six months.

“It’s a very strong case you can make on a long-term view,” Cockburn, 38, said at his office in Edinburgh. “But our feeling is that they’ve run a bit too hard, too quickly.”

When it comes to more U.K.-oriented companies, Cockburn bought Scottish & Southern Energy Plc for its dividend and “revenue stability” and Lloyds, though some Scottish Widows funds aren’t permitted to hold the bank because it’s the money manager’s owner, he said.

‘Long Slog’

At Martin Currie, Saunders cut his holding of Barclays Plc, Britain’s second-largest bank, after buying the stock in the second quarter of last year.

“We bought into the banks when it looked like they weren’t going bust,” he said. “We’ve cut back now on the basis that the recovery seems to be over and at best there’s a long slog.”

Adams said he reduced holdings in mining companies, taking the position in his funds to about 14.5 percent compared with an 11 percent representation in the U.K. All-Share Index.

“We believe in the long-term positive outlook for metals and mining,” he said. “It won’t take long for us to start pushing that back up.”

The Martin Currie U.K. Growth Fund has risen 19 percent in the 12 months to Jan. 29, placing it 289th out of 307 comparable funds, according to data from Morningstar Inc. Over five years, it places 214th after increasing 5.7 percent, the Chicago-based research firm said.

Stronger Gains

The Scottish Widows U.K. Select Growth Fund is up 43 percent, placing 38th for the year, Morningstar said. Over five years, the fund places 17th, gaining 46 percent. The Aegon U.K. Equity Fund increased 29 percent over 12 months, ranking it 174th. Over five years it places 23rd after rising 45 percent.

Recent purchases for Aegon include Rotork Plc, a maker of valve actuators used in oil pipelines based in Bath, southwest England. Adams increased Aegon’s stake in the company to 5 percent from 4 percent in November, he said. Rotork has risen 44 percent over the past six months.

Gains in mining stocks such as Xstrata and Rio Tinto, both of which have more than doubled over the past 12 months, are no reason to sell, Saunders said.

“If anything, it’s a cue that things are going well,” said Saunders who oversees about 550 million pounds. “And you should continue to hold them or maybe buy some more.”

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