All you need to know, except how to make money


Once a year Hoare Govett teams up with the boffins at London Business School to produce a wealth of fascinating but also frustrating statistics on the performance of smaller quoted companies. Fascinating because they highlight some remarkable long -term investment trends; frustrating because, as with much academic work, it is not easy to draw conclusions that allow investors to make money in the real world.

The fact that, in the long term, smaller companies outperform bigger ones is a well-established investment phenomenon. But like all such stock market "laws", it is a poor guide to short-term returns. From 1989 to 1992 small companies underperformed the market for four years in a row. Last year, however, brought good and bad news for smaller company aficionados. The good news was that, for the second year running, smaller companies again outperformed the market as a whole. The bad news is that they stilllost investors money: the return on the Hoare Govett Smaller Companies Index was minus 4.1 per cent, while the FT All Share Index was down 5.8 per cent.

One new trend that Hoare Govett's research highlights for the first time is that returns also rise the smaller the small company is. Investing in the smallest tenth of the broker's index (itself the smallest tenth of the market) would have turned £1,000 in 1955 into £146m today, a 35 per cent compound total return compared with 14 per cent for the All Share index and 8 per cent for gilts.

The trouble is that achieving that return would have been (a) impossible for the average investor, because of the high cost of dealing in very illiquid stocks (the bid-offer spreads on very small stocks are huge, and sometimes it is simply impossible to get hold of shares in any volume); and (b) silly, because it would have involved selling the most successful shares as soon as they outgrew the qualifying limits.

The other problem with purely statistical information is that it cannot explain exactly why it is that small companies do so much better, especially in rising markets. They tend to have different characteristics to bigger companies: greater exposure to interest rates, a greater bias towards cyclical, as opposed to defensive, market sectors, and so on. Such speculation, say Professors Dimson and Marsh, is beyond their remit. Nothing would drag from their chaste, academic lips a forecast as to whether thesmall company effect will recur this year.

As with most investments, the higher returns from smaller companies reflect their greater risk. Fine if you picked the best-performing small company share last year - Hawtal Whiting, up 417 per cent. Not so good if you backed one or more of the 14 smaller companies that became worthless in 1994.

Meanwhile, a piece of statistical frippery that might yet make an investment "law" of the future. Companies with silly names, say the LBS boffins, tend to outperform those with boring ones.

Where does TSB go from here?

The TSB is the bank that will one day say yes to a bidder. Though you can hardly expect the top brass to admit it, the strategy of the past few years leads logically to the conclusion that the bank is available if the price is right.

Under the chairmanship of Sir Nicholas Goodison TSB has slowly been clawing back some of the shareholder value lost during the spending binge it embarked upon in the immediate aftermath of its flotation - Hill Samuel and other ill-judged acquisitions. TSB managed to squander its inheritance in record time. Sir Nicholas's job has been to sell or mend the new acquisitions, returning the group to its core business of personal banking.With its vast but until recently far from prosperous customer base, the o ther element of strategy has been to go upmarket so that it can sell more insurance and investment products to banking clients. So far TSB does not appear to have shown anything like the same flair or success in this pursuit as Abbey National. It is hard to see where the bank goes from here.

This week, all the usual bid suspects have been trotted out, from Abbey National through Deutsche Bank - which denies any interest - to Commerzbank, BNP and even Hanson. A UK bank would justify a bid with cost cuts; a foreign bank might have ambitions toexpand in UK retail banking or to combine TSB's treasury operations with its own investment banking. This is one of those tales that seems bound to come true eventually.

Sainsbury's shows a way ahead These are challenging times for supermarket operators. Only a few years ago, the big chains were cheerfully spending up to £700m a year on head-long expansion, with new out-of-town stores cropping up near every conurbation.

Double-digit growth was the norm and the public seemed increasingly willing to pay a premium for those little luxuries - washed and graded Jersey potatoes, ready-made meals of salmon en croute and the like. How things change.

Competition from discount stores and tighter planning regulations have stopped the march of the out-of-town developments.

After constant denials, even Sainsbury's now concedes that the market for mammoth supermarkets may have reached saturation point.

As growth slows the mega-grocers are generating huge sums of cash that are no longer being consumed by new openings. The big question has been: where are they going to spend it.

Yesterday, Sainsbury's showed one way forward. Though Sainsbury's opened its first Homebase branch back in 1981, the chain has remained a niche player in a market dominated by national operators such as B&Q and Texas. The deal to buy Texas Homecare givesSainsbury's the kind of muscle that could dramatically alter its profits profile in DIY.

In group terms, this is no big deal, but it is a good one none the less.

Few in the City and on the high street doubt that it can make the Texas deal work. Alongside Marks & Spencer and John Lewis, Sainsbury's is considered by many to be the best retailer in Britain.

The company's distribution systems, stock control and management will now be brought to bear on a Texas chain that has struggled to establish an identity in the market.

Sainsbury's has managed to give Homebase the same upmarket profile as its supermarkets, competing on quality and value rather than price.As the Texas stores are re-branded as Homebase, we can expect smarter stores, better layouts, staff who have some idea of what they're selling.

We can also expect more deals from Sainsbury's as it attempts to make itself less reliant on its core business of UK grocery retailing. It bought a stake in Giant Food Inc in America last year. The rest will follow within the next two years.

Tesco, Sainsbury's equally cash-generative rival is not standing idle, either. It owns 95 per cent of Catteau in France and 51 per cent of Global in Hungary. Other European deals are expected The halcyon days of the big supermarket chains are over, but so far they seem to be adapting well to the new environment.

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