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Heady ratios out of touch

Shareholders in Mercury Asset Management and Jupiter Tyndall have been on a roll since the markets decided last year that the companies were in effect up for sale. Jupiter's shares, already spectacular performers, were given an added spurt by news of the 420p-a-share offer from Commerzbank of Germany, which locked in a useful gain over the 303p they hit in October before the bid rumours started to circulate.

Takeover prospects have also buoyed MAM since it became clear at the end of last year that its owner, SG Warburg, was going to merge or be taken over. MAM's shares have risen from £6 to £9 since then, though they fell back again this week when it became clear that Swiss Bank Corporation's takeover of Warburg was going to leave MAM as an independent entity.

But not all the rest of the sector has joined in the party. Gartmore shareholders, for instance, have seen their shares lose around 7 per cent of their value in the past five and a half months. Edinburgh Fund Managers' shares have barely been able to keep pace with the market.

There are two reasons for this. Firstly, fund management share prices are already pretty fully valued on the basis of earnings. Prospective price-earnings ratios range between 15 and 16 times for the sector - although they range as high as 19 for MAM compared with 12 or 13 for the market. More particularly, valuations based on funds under management have become stretched.

As our table shows, there is a substantial amount of good will built into share prices. That has been inflated where investors sense a takeover is in prospect - at MAM, the good will premium (the difference between the share price and net assets as a proportion of funds under management) - has grown from 1.5 per cent in December to a peak of 2.1 per cent this week. Where there is a strong retail franchise, such as exists with M & G and Perpetual, the valuation seems to have lost touch with reality.

These heady ratios suggest to analysts like Martin Cross at UBS that bidders are unlikely to want to pay more for fund managers, even if there are any more available to buy. For the second problem facing predators is that most groups are in effect locked up with friendly shareholdings.

The long-standing Esmee Fairbairn Charitable Trust holds the key to M&G with a 34 per cent stake. Henderson Administration has 22 per cent of its shares held by investment trusts it manages, and at Perpetual, which disappointed with a mere 3 per cent interim profits uplift on Thursday, its founder, Martyn Arbib, controls around two-thirds of the equity.

German banks, keen buyers of fund managers in the past, may now have had their fill. The Dutch bank ABN Amro has apparently been a disappointed suitor in the past and NatWest plainly still nurtures an interest in picking up MAM, but shareholders who are holding their breath for a bid at over 900p now look like they are going to be disappointed.