Each week, a professional investor tells us where he’d put his money. This week: Philippe Lecoq, Edmond de Rothschild Fund UK Synergy.
Launching a UK equity fund less than three months before the referendum on membership of the European Union might have looked like a daring gamble, especially given the result of the vote. But the capacity of risk assets to rebound took everyone by surprise and equity markets returned to pre-referendum levels within a month.
A combination of action from the Bank of England and a very rapid return to political stability after the vote has helped the UK market outperform European markets over the summer. And although it is still too early to assess the economic impact of Brexit on the UK, the fact that economic surveys have remained upbeat after such a political shock is rather reassuring news and suggests a recession could be avoided.
Our strategy with the Edmond de Rothschild Fund UK Synergy is to seek out takeover targets or companies undergoing restructuring. This helps the fund benefit from several sources of performance throughout an economic cycle. The approach is ideally suited to the UK market, which has fewer regulatory constraints than the rest of Europe, more open shareholding structures and very robust corporate governance.
In fact, Brexit could prove beneficial for our theme as sterling’s sharp decline offers interesting opportunities for foreign predators while giving UK firms a strong competitive edge. Some bid targets will now look very cheap and that could trigger opportunistic bids insofar as companies still look attractive.
A good example of this is the acquisition of ARM Holding by Japan’s SoftBank barely weeks after the vote. Cambridge-based ARM is the largest-capitalisation stock in the high-tech sector listed in London and a leader in processors for mobile phones and tablets. Its microchips are used in most smartphones. The bid was priced at a 43% premium to the 15 July close, a very attractive proposition in our view, which explains why we sold the rest of our position on the day the news broke.
At present, our holdings include ITV (LSE: ITV), which owns several internationally popular TV shows and is the UK’s leading audiovisual entertainment group with a TV-advertising market share of 46%. It boasts a very strong and rapidly expanding content offering, a big advantage which could appeal to certain UK or US distributors.
Another target is Meggitt (LSE: MGGT), which makes components for the defence, petrochemical and aerospace industries. The sector is still fragmented. Sterling’s fall was initially damaging for the firm, but it makes 80% of sales in the growing defence sector in US dollars and should see sales rise. The recent stake taken by the activist hedge fund Elliot Capital, a specialist in identifying bid targets, reinforces the probability of a takeover.