Money: Sale reaches fever pitch

Alison Eadie reports on how the world is copying the UK's privatisation s
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The Independent Online
Roll up, roll up for the great privatisation sale. It may be winding down in the UK, but the pace is quickening in Europe, Latin America and South-east Asia.

This week there have been sales pitches from Mercury and Guinness Flight, arguing that the investment success of UK privatisations can be repeated elsewhere in the world and now is an excellent time to be jumping on board. To underline its point, Mercury has waived dealing charges until the end of the year on investments in Mercury European Privatisation Trust (MEPT) bought through its investment trust savings plan and Guinness Flight is allowing former shareholders in the Kleinwort European Privatisation Investment Trust (Kepit) to buy into its Global Privatisation Fund free of initial charge and with a 1 per cent bonus allocation of units added at the end of next year. The offer lasts until 9 December.

Such vigorous drum banging is not just because new privatisations are coming thick and fast - over the next five years some $200bn of state assets are expected to be sold in Europe and $100bn in the rest of the world - but also to counter negative publicity generated by the winding up of Kepit.

Kepit's disappointing performance over its two-and-a-half-year life raised doubts whether privatisation worked as well in countries with less free- market zeal than Thatcherite Britain. Thierry Ferero, manager of Fidelity's Global Privatisation Fund, said that UK privatisation worked because the government allowed companies to change their culture and go for productivity and profits growth. "If the state privatises assets without relinquishing control or if friendly shareholders keep a dominant stake, there is no incentive for management to change."

He said the culture in Europe was changing, with Germany grasping the nettle ahead of France and the picture still complicated in Italy. In emerging markets, which make up 25 per cent of Fidelity's fund, the story is different as privatisations are bought for growth, not for restructuring and cost-cutting potential as in the developed world.

"We look at whether management is good enough to deliver the long term infrastructure projects," Mr Ferero said.

The investment parameters of privatisation funds have a significant impact on performance. Kepit was unlucky in that it raised too much money at the top of the market, but it also suffered from a narrower investment approach than its peers. It concentrated on new issues in continental Europe and was hit by overpricing of issues, notably in France and Italy.

MEPT, whose launch timing was equally bad, has a wider brief and a better performance to show for it. It interprets privatisation to include old UK issues - its two biggest holdings are aero-engine manufacturer Rolls- Royce and British Airways - and companies that buy assets from governments. It also has almost 8 per cent in Eastern Europe. Paul Harwood, MEPT joint manager, says a privatisation ceases to be eligible when it stops making money for the trust.

Since launch in March 1994, MEPT's total net asset value has risen by an undiluted 37.7 per cent against a rise of 28.1 per cent in the benchmark MSCI Europe index, but its shares have delivered a total return of only 18.2 per cent. The wide discount of shares to their net asset value, which eventually forced Kepit's demise, is improving for MEPT partly as a result of its share buyback programme. But at a 15 per cent discount, against an investment trust average of 10 per cent, the shares are still lagging and therefore cheap, according to Lough Callahan, managing director of Mercury Investment Trusts.

He says: "If you believe it is a good time to invest in Europe as interest rates come down and in privatisations with pricing now more realistic, then MEPT, with its above-average performance, has to be one of the more attractive trusts to buy."

Funds for private investors include investment and unit trusts, which trade at asset value, and range from global privatisation and utility funds, which are similar in content given their high proportion of telecom and energy stocks, to more narrow geographical or sectoral funds. GT's Telecommunications Fund, a European unit trust, invests worldwide but only in companies with at least half of earnings or assets in telecommunications.

Many of the global trusts are fully PEPable, which requires that at least half their assets are in Europe. But asset allocation can differ after that. Gartmore Global Utilities has 15 per cent of assets in North America, having made good money out of the regional US telephone companies, whereas Fidelity Global Privatisation has nothing there. Jeremy Podger, manager of Guinness Flight Global Privatisation Fund, says: "We believe the balanced global approach is more beneficial in hedging risk."

Private investors preferring to take the greater risk of buying privatisation shares directly rather than through a diversified fund will have plenty of choice, particularly of European issues. Deutsche Telekom, Europe's biggest privatisation, starts trading on world stock markets on Monday, having been well subscribed by private domestic investors.

However, international fund managers have been more lukewarm, viewing the offer price as rather rich and questioning whether the management culture has changed sufficiently for the company to succeed in the brave new competitive world.

The theory of privatisation investment holds that once free of government rule, companies become profit-driven, shareholder-conscious, efficient and able to gain advantage from near-monopoly status, especially in the initial years. There will be plenty of opportunity to test the theory in the next five years when global issues are expected in telecoms, utilities, oil and gas, airlines, banks and other financials, steel and paper. Whether it works will depend in large part on the stockpicking abilities of fund managers. They, at least, are convinced it is a buyer's market.