The Investment Column: New Star has risen high, but at this level its glitter fails to dazzle

Buoyant stock markets make broker Charles Stanley a hold; Put Associated British Foods on your menu
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Lucky them. The rest of us, however, have missed the chance to board. While New Star is undoubtedly the biggest success story in the asset management sector of the past five years, at this price, its orbit is just too close to the sun.

In just five years, New Star has grown assets under management to more than £15bn. Its list of retail funds includes a string of winners - the company is already the largest independent retail fund manager in the UK - and it has begun to pick up an impressive list of institutional clients.

In fact, Mr Duffield is already outdoing his previous success at Jupiter Asset Management, which he sold to Commerzbank in 2000. So much so that it is not impossible that New Star could one day buy Jupiter, reuniting employees - who yesterday showed enormous confidence in the company by retaining almost all of their shareholdings - with their former colleagues.

However, there is a limit to the price it is worth paying to cadge a lift on the New Star rocket. A market capitalisation of close to £900m is stratospheric for a fund manager with £13bn in assets, especially as retail funds, which investors generally prize less than institutional money, account for close to half that total.

On conventional asset management principles, a valuation of roughly half the current price would be fairer. Moreover, while the whole fund management sector is benefiting from speculation about consolidation, a takeover of New Star seems out of the question while Mr Duffield and his employees retain almost 60 per cent of the shares.

New Star has every reason to be confident about its prospects. But even allowing a premium rating for Mr Duffield's outstanding track record in running asset managers, new investors will find much better value in one of the company's mutual funds.

Buoyant stock markets make broker Charles Stanley a hold

Might the collective noun for stockbrokers be a jitter? Market participants are prone to scares and had Charles Stanley - broker to modestly wealthy individuals - been reporting its results two weeks ago it might not even have expressed cautious optimism.

Its fortunes are inextricably tied to the equity markets. If they are going up, its clients are likely to be investing more; if it is plunging, as it did last month, then all bets are off. In the six months to 30 September, on which the company was reporting yesterday, the market was more up than down. Its clients may not be doing many more trades (many modern investors prefer to use new-fangled contracts for difference), but by concentrating on the wealthiest clients, it is persuading them to take bigger positions. Revenues were up 20 per cent, the total of funds its was managing for clients was up £1bn to £8.7bn, and pre-tax profit jumped one-third to £5.4m.

With markets likely to be driven higher still by buoyant corporate profitability and lashings of takeover activity, the future looks good. Modest expansion in corporate broking and the opening of new offices in Birmingham and Glasgow will help bolster future results, and the share price of 13 times earnings looks about right. Hold.

Put Associated British Foods on your menu

Life at Associated British Foods, the maker of Silver Spoon sugar, is both sweet and sour at the moment.

The sweetest part of the business is its Primark retail chain, whose spectacularly successful performance helped AB Foods announce a 12 per cent rise in annual profits yesterday. Primark's ability to produce the latest fashion trends at bargain basement prices means that while other high street retailers have suffered at the hands of an increasingly stingy consumer, its tills have not stopped. Like-for-like sales rose 9 per cent for the year, and operating profits were up 30 per cent. It now accounts for a quarter of group profits.

As if this impressive organic growth record was not enough, AB Foods has bought a number of ex-Allders and Littlewoods stores that, once converted, will double Primark's retail selling space in the UK.

Ironically, the sour part of AB Foods is its sugar division, one-third of the business, which is struggling amid a glut of production. Changes to EU sugar subsidies next year will further damage the business.

Talk of a break-up of AB Foods, which also includes the Twinings tea and Ovaltine brands, is frequent. But it seems unlikely, given the lacklustre growth prospects of Primark-less AB Foods.

Shares in the group have soared over the past two years. The investment needed for converting the new stores and the difficulties in sugar might stunt profit growth over the next year, but from 2007 onwards, Primark's expansion will bear fruit. Tuck the shares away for now.

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