The investment tourists: America just loves our quaint British companies

Think of a famous UK name and it's probably backed by a fistful of dollars. What is it that draws US moneymen to Blighty? asks Abigail Townsend
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The Independent Online

Pop quiz. What do the following have in common: EMI, British Land, Vodafone, Marks & Spencer, Burberry, InterContinental Hotels and Boots? A slap on the back if you knew that they report results this week, but the full 10 points if you also knew they count US investors in the very upper echelons of their share registrars.

Americans investing in British companies is nothing new: it has been going on since the 1980s, when the Conservative government opened up the City and privatised nationalised companies. Twenty years later, foreign investors now own around 35 per cent of the London market.

Yet in recent months, the stakes have been raised and many US investors appear to be taking a more activist approach. Only last week, it emerged that Boston hedge fund K Capital was seeking a meeting with the management of Jarvis after amassing a 12.7 per stake in the beleaguered services group.

In some notable cases, they are even calling the shots entirely. Boston-based Fidelity Investments, the world's biggest mutual fund company with assets under management of around $1trillion (£560bn), owns 30 per cent of the FTSE 250-listed Colt Telecom and has done since it floated. Colt chief executive Steve Akin, who has overseen a major restructuring, last month announced he was returning to Fidelity after a two-year secondment, and his replacement, Jean-Yves Charlier, was chosen by the US group. Chairman Barry Bateman is another Fidelity man.

Americans are attracted to British investments for a number of reasons. "UK companies are cheap relative to US ones," says Nomura's global equity strategist, Anais Faraj. "They have the potential to generate a lot of cash and, at the end of the day, that's what a lot of these funds want.

"You have a larger and more stable dividend yield, and in terms of the price-earnings ratio, US equities are always more expensive than UK ones."

The dollar's strength used to play a big part in this as well, yet even with the greenback's current weakness, US investors are still spotting opportunities. JP Morgan's global equity strategist, Abhijit Chakrabortti, comments: "The other issue is whether the growth differential between the US and the rest of the world is going to narrow. I find that very hard to believe; all the evidence says Europe is actually the worst sector in the world. But US investors doubt the sustainability of US growth and that is what is driving it." Speculation that the Federal Reserve is about to call a halt to the party and push up interest rates has been causing jitters in the US markets for weeks.

The Americans also take a long-term view in Britain; as Mr Chakrabortti points out, there are plenty of short-term profits to be made at home. This explains the choice of investments: UK companies with US backers include BAE Systems, Aberdeen Asset Management, British Energy, Abbey National, Corus, Invensys and Royal SunAlliance - all firms that have fallen from grace in the City but are seen by the Americans as potential recovery stories. And it is long-termism, not an opportunity to wade into the boardroom, that is the attraction, they insist.

As one US investor says: "The whole approach is value investing. We're long-term players and are prepared to make investments as long as the price is a way below what we believe the company is worth. We not strategic investors."

Shares in Jarvis rose last week on speculation that K Capital's acquisition of its holding could be a prelude to a bid. However, it is understood that the hedge fund primarily bought into Jarvis because it judged the shares undervalued.

London also gives Americans a wider field to play. Says one British analyst who has worked in the States: "Here, a long-term investment for one or two years is typical. In the US, a long-term investment could be just six months, a year at the absolute most." If shares go up, they will sell, which is one of the reasons that trading volumes are so much higher in the US.

This, says the analyst, gives the US an upper hand overseas. "They are far more aggressive in the investment decisions and tend to go into the minutiae. The depth fund managers go into before buying is really quite amazing." No wonder they feel they can spot a true long-term bargain over here.

That is not to say, however, that all American investors are sitting passively waiting for profits to sail across the Atlantic. Most may like to maintain a low profile but they are busy behind the scenes, acting on anything from corporate governance to management change - as Piers Morgan found out to his cost at the Daily Mirror. Elsewhere, the San Diego-based Brandes Investment Partners is thought to have held talks with the Russian-controlled Gallagher Holdings about Corus, where it is the second-largest shareholder.

"We have some world-class companies but there's also a fat tail of under- performers," says Nomura's Mr Faraj. "Often, the reason for that is overpaid, weak management, and a lot of US investors think they can do a better job."

Fidelity leads the way in this hands- on approach. Yet even it concedes that much of the hard work has now been done in Europe: tortuous restructurings have seen jobs axed and executive salaries cut. As Fidelity cheerfully states on its website: "The results could be good news for those who invest outside the US in the coming years." Hence its investments not only in the likes of Colt but giants such as Vodafone, where it has the second-largest stake behind fellow US investor Capital.

Whether the US occupation is permanent is up for debate. Certainly, should foreign buyers care to move elsewhere, the market would suffer. Mr Chakrabortti at JP Morgan says: "One of the great protections of the US market is that foreigners can't damage it because they only own around 11 per cent. Ours is a very narrow market."

Yet for the time being, no one appears to be going anywhere. The pickings in the UK, however they are achieved, are just too tempting for our American cousins to ignore. As the US investor says: "Our holdings are made purely from the point of view that we're fiduciary investors on a long-term basis. When other investors recognise the disparity and the price picks up, we will be a seller."

Until then, have a nice day.

The secret world of a $750bn fund manager

The message was very polite: "I'm sorry, but we do not discuss our holdings, our philosophies or our strategies."

The Capital Group of Companies, the giant US fund manager, is, according to external reports (which it refuses to confirm), America's third-largest investment firm with $750bn (£40bn) under management. In the UK its influence is massive. It holds 15 per cent of AstraZeneca, 14 per cent of Pearson, 11 per cent of BG, 10 per cent of National Grid Transco, 8 per cent of BHP Billiton, 5 per cent of Marks & Spencer. The list goes on and on.

In America it is even more powerful. Its media analyst, Gordon Crawford, was the man who told Steve Case of AOL Time Warner that he had to resign from the company he founded.

Yet for such an influential com-pany, Capital is almost pathologically shy of the media. Its analysts (Capital does not call them fund managers) are never quoted in the press, it does not issue investment reports, it does not even run adverts. Its website gives you no contact numbers, and no current executives are mentioned.

So what is known about Capital? It was founded in 1931 by Jonathan Bell Lovelace, who had made his name at a Detroit stockbroker, EE Macrone & Co, where he had predicted the Wall Street crash of 1929. His colleagues did not agree, so JBL (as he was known) sold his stake in Macrone, cashed in his personal investments and moved to California.

His old Detroit clients backed the new company, and soon it was given management of what was to become one of the largest mutual funds in the US, The Investment Company of America.

In the 1950s, JBL decided to hand shares to some of the senior executives at Capital, and today it is wholly owned by 300 analysts. It has two classes of shares: "A", which have one vote, and "B", which have 10. The B shares are held by about 60 longstanding employees who all have excellent investment records, are committed to Capital's philosophy of fundamental research and would never agree to sell the company.

Charles D Ellis, author of Capital: The Story of Long-term Investment Excellence (Wiley), says the group's investment philosophy is to take long-term positions and rarely sell out. Different investment strategies are encouraged, so long as they work. Capital believes in what is called the "multiple counsellor system", where up to 10 different analysts manage a fund so that it is not beholden to one ego.

Do Capital's methods work? Its investment returns are better than those of most of its rivals, it has avoided all the mutual fund scandals and competitors can't tempt its analysts away: its staff turnover is under 3 per cent a year.

Jason Nissé

STARS OF THE MEDIA SHOT DOWN BY US ACTIVISTS

Under Piers Morgan, the Daily Mirror was highly critical of the way in which Tony Blair supported a US-led war in Iraq. But had he looked closely at Trinity Mirror's shareholder register, he might not have been so anti-American. More than 27 per cent of the Mirror publisher's shares are held by a handful of American funds.

The ousting of Mr Morgan as editor of Trinity Mirror's flagship title came after a brief board meeting when it was shown that the photographs the paper ran of alleged abuse of Iraqi prisoners by British soldiers were fakes.It soon became clear that the US shareholders were behind the coup.

The three biggest holders in the publisher are Capital Group, Fidelity and Tweedy, Browne. Only Tweedy has made any comment about Mr Morgan's departure, saying the issue was one that affected the company's reputation. Tweedy is a small activist fund best known for its role in the ousting of another major figure in the UK media, Lord Brown of Crossharbour, from his New York-listed vehicle, Hollinger International. It has also raised issues with Trinity Mirror in the past over its papers' anti-American stance.

Capital and Fidelity, two of the biggest fund managers in the US, do not concern themselves with politics. They are, however, willing to weigh in when they are unhappy about the management of companies in which they invest. And as they tend to take large stakes, their criticisms hit home.

It was Fidelity, through UK-based fund manager Anthony Bolton, which engineered the ousting of Michael Green, founder of Carlton Communications, when it merged with Granada to form ITV.

Capital is best known for its role in getting rid of Steve Case, the chief executive of AOL Time Warner, the world's largest media company. It is also the largest independent shareholder in News Corporation and one of the few outside influences Rupert Murdoch listens to.

Only a few days before Mr Morgan was ousted, Trinity Mirror chairman Sir Victor Blank was telling people that "Piers will survive this". That must have been before he took those transatlantic phone calls.

Jason Nissé

FROM SAN DIEGO TO ST MICHAEL

The West Coast's Brandes Investment Partners is not your typical American denizen. In a country so insular that it sees nothing peculiar about the "World" Series, Brandes was established 30 years ago with a decidedly outward looking attitude: as a global investment manager.

Not, of course, that everyone leapt at the idea. Convincing clients - a mix of institutions and individuals - to buy into its philosophy was not easy. But it now manages funds worth around $80bn (£44.8bn), and of that, $37bn is in international equities and an estimated 14 per cent in British firms.

It employs around 500 staff, all of whom own the business, and opts for a long-term value approach as favoured by investment gurus such as Warren Buffett. The portfolios, however, have remained small, with an average of between 60 and 70 stocks. Brandes tries not to veer above 5 per cent stakes but often forgets its own rules: it owns 7.6 per cent of Marks & Spencer, 11.6 per cent of Corus, 15.2 per cent of Invensys and 7.1 per cent of BAE Systems. It is the biggest shareholder in M&S, Invensys and J Sainsbury.

The UK accounts for 26 per cent of its European Equity Portfolio, which invests in 14 countries. According to company statistics, had you invested $100,000 in August 1995, as at the end of March 2004 you would have had $314,000. A fund tracking the benchmark MSCI Europe Index would have given you $176,000.

Brandes' choice of UK companies is interesting. It also owns substantial stakes in Abbey National, Aberdeen Asset Management, Boots, BT, Cadbury Schweppes, De La Rue, Elementis, Friends Provident, GlaxoSmithKline, Heywood Williams, HSBC, ICI, Reuters, Royal & SunAlliance, SABMiller, Wm Morrison and Trinity Mirror. Some notable instances aside, it is hardly a roll call of the best London has to offer, and in the past Brandes has got it wrong - such as owning a vast chunk of British Energy just as the company went into freefall.

Yet Brandes has no intention of defending its actions to anyone, deciding instead - in the public eye at least - to remain largely anonymous. It refuses to discuss individual stocks or strategies.

Its reputation does precede it: when it increased its holding in Sainsbury's to 7 per cent, shares in the retailer strengthened. But Brandes wants no fuss, just a nice return on long-term investments. Whether the companies repay its faith remains, as yet, to be seen.

Abigail Townsend

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