In the market, small is beautiful

Back Aviva as a long-term policy; Bespak may yet win the right prescription
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The Independent Online

Shares in small companies have performed, on average, better than shares in large companies. That was true in spades last year, when the biggest rising FTSE index was the Fledgling, which measures the tiniest 450 shares on the main market. It rose 56.5 per cent in 2003, compared to 16.6 per cent by the FTSE All-Share. Similarly, over la longue durée. According to London Business School's latest analysis, out yesterday, the capital gains from the smallest 1,000 shares on the market over the past 50 years have been more than six times the rise in the All-Share.

London Business School's report cautions that large company shares can outperform for long periods of time, as they did for most of the Nineties. But there are reasons for expecting further growth from the little acorns this year. The first is the current mood of the market, rewarding smaller, riskier companies. The return of the private punter is also helping. Valuations also seem appealing, with the price-earnings ratio on the small-cap about 11, compared to 16 on the FTSE 100, according to the London Business School's sponsor, ABN Amro.

The trouble with the insight is that it is very difficult to gain exposure to small-caps as a class other than through highly selective active investment funds, whose performance can be holed below the waterline by a disaster or two. And small-caps, of course, have more than their fair share of companies on the financial ropes.

It's all down to the stock picking, then, and this column tries to provide as much commentary on small-caps as on blue chips. And ABN Amro, too, has assembled its own "small is beautiful" portfolio. This mainly involves house stocks (and we'll skirt over Eidos, which had a profit warning yesterday). But it also highlights Uniq, the food group, where investors are urged to look through falling reported earnings to underlying growth; Anite, which should sell more software to the recovering telecoms and travel industry; and WS Atkins, now a maintenance contractor on the London Underground.

Back Aviva as a long-term policy

It's been a tough year or so for Aviva, the insurer which owns Norwich Union. Customers, seeing their savings ravaged by the stock market, have kept their money under the mattress, or at least under the bank manager's mattress.

But things are on the turn. Yesterday Aviva said it boosted its market share in 2003. Unlike its deadly rival Standard Life, Aviva says it has no problems passing the regulator's new solvency test. Consumers are coming back to invest.

The Government will soon decide if to impose further price caps on savings products. But if mass-market savings products come in at the right price, trusted Norwich Union ought to do well.

Less than half Aviva's business comes from the UK. Tie-ups with international banks have led to growth in Europe. ABN Amro recently signed up, helping Dutch sales rise 28 per cent. Aviva also has a general insurance business that brings in cash.

The ageing population and the shift to private pension provision do give life insurers sound long-term prospects. Aviva's diverse geography, product mix and distribution channels make it a solid bet. Its dividend yields a healthy 5 per cent.

The shares have had a good run recently and at 538p they are edging near to some pundits' price targets. That might constrain them in the short-term but, trading at 1.2 times net assets, they are cheaper than Prudential's.

Aviva stock should be a core long-term holding.

Bespak may yet win the right prescription

Mercy! Mercy! Bespak, the medical devices manufacturer, is crying out in pain after a pummelling by two of the playground's biggest bullies, Pfizer and GlaxoSmithKline. The company makes tens of millions of Diskus inhalers for GSK's giant-selling asthma drugs, but the world's number two pharmaceuticals group squished Bespak's profits last year by demanding a whopping price cut. The plan to replace the income with work for Pfizer's new inhaled insulin product, Exubera, has failed because Exubera is delayed in last-minute trials.

All the while, Bespak's core business, making the innards for other medical inhalers and sprays, is going nowhere fast. The hope is the US will catch on to new environmentally friendly products, but there's no sign yet. Interim profit was down 45 per cent to £3.1m so there have been big job cuts and the axe for a prized project to develop nasal spray drugs. Costs are down considerably, but it will be a little while longer before this feeds through to group profits. Bespak was at least right to reject opportunistic bid approaches last summer, when the shares were half yesterday's 580p.

We've taken a sceptical view on this company for the best part of two years, and it isn't time to rush in yet. However, investors should keep their eyes open for Pfizer's filing for regulatory approval of Exubera. When that happens, and presuming the cost savings have come through as planned, Bespak could become interesting.

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