Investment: No Pain, No Gain: Our Man's Portfolio; Has Allied outstayed its welcome?

A DEGREE of flexibility is essential in stock market investment. It is no good following rigid rules when they fail to accommodate changed circumstances.

When the no pain, no gain investment exercise was launched in February, I suggested there was little point incurring unnecessary costs by chopping and changing the blue chip element built into a portfolio. Once selected, the collection of stock market leaders should be regarded as a near-permanent fixture. It would, over the years, provide much-needed ballast.

As an example of blue chip stamina I cited Allied Domecq, a seemingly perennial under- achiever. Despite lagging the market, the shares had shown a better return than many other forms of investment and had turned out infinitely more rewarding than much of the stuttering herd on the market's undercard.

A couple of decades ago Allied stood at 80p. In last year's market slump, reflecting the Asian and Russian disasters and the hysteria over battered hedge fund Long Term Capital Management, the price fell to 389.5p. When I tipped the shares at 482.5p in March I took the view that Allied, a Footsie member, would remain, more or less, a long-term blue chip constituent of my portfolio.

Naturally, I hoped the shares would make progress and I am gratified they are approaching 600p. But I am doubtful whether the shares will retain the attributes which prompted my earlier fascination with them. So they may, despite their success and the elevated Footsie status, have to suffer the indignity of the old heave-ho, a fate I had not anticipated.

The excitement which has created the ferment - and, incidentally, allowed Allied the rare distinction of actually outperforming the rest of the market - stems from its proposed pub sale and the support of legendary US investor Warren Buffett.

Although there is a chance the pub sale to Whitbread could run into problems it seems clear that Allied's days serving behind the bar are numbered. If it does not sell to Whitbread then Punch Taverns, with or without Bass, will probably take up the running.

But if Whitbread wins then Allied could endanger its Footsie presence because the shares it is receiving for its pubs portfolio are being handed on to its own shareholders.

Stripping pounds 2.5bn from the Allied capitalisation would not, at the moment, jeopardise its Footsie membership. But the safety margin has been dramatically eroded and it is not difficult to see the occasion arising when its Footsie claims could evaporate.

And there is the complication of the no pain, no gain portfolio getting an inflow of Whitbread shares. Does it want, indeed need, Whitbread shares as an integral part of the portfolio. Obviously the reasons for buying Allied shares cannot merely be transferred to Whitbread as soon as any deal is done.

At this stage it is wise to reserve judgement on Whitbread shares. Still, they must have outstanding merits; at least Allied seems to think so, judging by the fancy rating it is prepared to accept as part of the pubs deal.

But whether they deserve a place in the portfolio is another matter; one I will discuss at a later time should the huge pubs swallow ever be accomplished at all.

It will also be interesting to discover how Mr Buffett treats any Whitbread shares he collects from Allied. The sage of Omaha is in the same barrel - he could not have expected to inherit Whitbread when he descended on Allied. If Allied sells its pubs estate it will, if logic has a place in its boardroom, feel obliged to unload its haphazard collection of food retailing interests.

It will look vulnerable as a stand-alone distiller. The creation of the Diageo spirits colossus has put the other major distilling players under considerable pressure at this particular time. The most likely outcome to this on-going saga is that the drinks rump of Allied will eventually merge with an overseas group, possibly Seagram of Canada or Pernod Ricard of France.

A cash bid would be happily accommodated but a share exchange may not be such a rewarding outcome, particularly if Allied's domicile should go abroad.

At the moment, of course, there is no need for concern. Allied shareholders might as well stick with the group, which at long last seems to have realised it could not take up permanent residence in the last chance saloon and the long awaited demerger in some form or other had to occur.

But once the pub sale goes through and the deed is done, then Allied's days in the no pain no gain portfolio may be numbered.