Private Investor: British legend could hit even greater heights

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The Independent Online

Sometimes I find myself writing this column in a sort of virtual sense because I am, to use the technical markets term, skint. Like now, when I find myself with no spare funds to invest and, as usual, a huge prediction not to sell what I hold. I am, possibly the last, buy and hold investor, though the strategy has served me admirably well. But, as a consequence, I sometimes have less to report and reflect upon.

The biggest single factor in whatever modest success I've had over the last few years has been the explosion in values of mid-capstocks, the sort of companies you find in the FTSE-250 or FTSE-350 and which rarely if ever make headlines. So you'll know that I've done nicely out of the likes of AG Barr and Nichols plc, the soft drinks makers, as well as medium-sized transport concerns such as Arriva, and the services group Serco. As a whole they've substantially outperformed the FTSE-100 giants since the great TMT crash of 2000.

I had been expecting thelarger cap companies to play some sort of game of catch up for a couple of years now, but nothing hasreally happened. With the exception of some mining stocks such as Rio Tinto, up near the unbelievable £40 mark again this week, they've been, relatively speaking, dogs. All the fuss about the FTSE scaling sixyear highs shouldn't disguise that. I've been busily selling down my shares in Vodafone, probably the biggest hound in the big cap kennel, for a few months. The shares have have edge dup, but I still don't regret it.

That said I do wonder whether the sort of factors that have driven the FTSE-25 to such highs (albeit off the boil a little these days) might intrude into the world of the large caps. Now that the dreaded private equity funds are so large andt hreatening the likes of J Sainsbury, and now that shareholders are starting to openly wonder why so many great companies have been so poor at delivering shareholder value, might not the time be arriving when we see some truly remarkable corporate activity amongst the blue chips?

Maybe not. Like the very largest plodding vegetarian dinosaurs in your kids' schoolbooks, sheer size may still prove a deterrent to predators, at least for the likes of HSBC and Vodafone (two outfits badly in need of a little change). My tip is to look for companies that could be more realistically the targets of takeovers as well as being decent businesses in their own right, cash generative and with good yields. Down the FTSE-100 list, Rolls-Royce, for example (at number 74 by market cap). This is along-time favourite of mine, actually going back to the day almost exactly 20 years ago when it was privatised, one of the last to be sent to the stock market by Mrs Thatcher's government. I bought quite a number after 9/11, when they were savagely and irrationally sold down. (By the way, I hope you too have noticed the comparative lack of impact terror attacks have on the financial markets these days. On that measure, at least, the terrorists are already defeated).

Now Rolls-Royce is a rare British success story in manufacturing, although many would say that its products are more hi-tech and IT based than an example of old-fashioned metal bashing. They've skilfully created a business where they make more outof the servicing and repairof units than they do fromtheir sales, and they spendmillions and millions onR&D. Now it has been suggested to me that if someonecame in and bought the company they could slash that R&D budget and start extracting huge amounts of cash from Rolls-Royce. I almost feel guilty about mentioning the idea, but I flatter myself if I think that those clever guys in private equity haven't thought of that one already. Of course they'd be dismembering a great British legend, probably with a humiliating selloff of the remnants to BMW at the end of the process, but that's capitalism for you.

Alternatively – and my own favoured option – Rolls-Royce can continue to invest for success in the longterm and continue its journey to become the world's most successful engineering company, both in those and in financial terms. Maybe you share that dream. And when the private equity lobby starts sniffing around you can always vote no to whatever they're offering.

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