Shares: Fund groups can outpace the market

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The Independent Online
THE popular wisdom in the stock market is that sharesin fund management groups outperform the market in bull phases, but do worse when it is going down. There is something in this view and, if you fancy your chances of calling the market turns, you could probably make a fortune punting in and out of fund managers' shares.

But these shares also make great long-term investments. Shares in the doyen of the sector, M&G Group Holdings, have risen since 1969 from 3.33p (adjusted for scrip issues) to 1,007p after peaking at 1,243p in February. That is a compound growth rate of an almost unbelievable 25 per cent a year, even without including dividend income. If that had been reinvested in M&G shares (even better if it could have been ring-fenced against tax in a PEP), the return would have been higher still.

On more recentform, the performance of M&G is not an isolated phenomenon. Mercury Asset Management, the market leader in pension fund management, has increased its funds under management many-fold since the early 1980s. Perpetual, the unit trust and PEP specialist that is a particular favourite of this column, has increased its funds under management - most in high-earning unit trusts - roughly 300-fold since 1980 from a business begun in 1974.

This hugegrowth is a UK replication of the equally spectacular expansion of the US mutual fund industry. Between 1980 and 1993, Fidelity - the market leader - grew its funds under management from dollars 20bn ( pounds 13bn) to dollars 220bn. The second largest US group, Vanguard, expanded its funds under management from dollars 7bn to dollars 114bn.

This industry growth seems likely to continue on both sides of the Atlantic. A number of factors are at work. Low interest rates have increased the attractions of equities relative to cash. Equities have performed well in the 1980s and 1990s despite periodic setbacks. Awareness has grown of the opportunities presented by shares in emerging markets. Investors are becoming richer and more adventurous. Fund management has also become more professional, with good managers achieving sound results for investors.

A new and potentially significant factor in Britain is growing disenchantment with investing via insurance schemes. Investment in unit trusts is much more transparent in terms of costs and benefits, which makes it likely that the unit trust industry will continue to gain market share. PEPs are also having a phenomenal impact, both in attracting money and helping to accelerate the growth rate of funds under management. It seems likely that by the end of the century the unit trust industry in the UK is going to be very large indeed. Investors have also surprised observers by continuing to invest in PEPs and unit trusts through the recent correction in the stock market.

Last but not least is the international dimension. Investors all over the world are looking to spread their risks geographically and to capitalise on the faster growth rates of Far Eastern and emerging markets. This presents a big opportunity for UK-based fund managers with their unrivalled history of expertise in overseas investing. The six shares I would recommend for broad- based exposure to industry- wide growth are the pension fund leaders, Mercury Asset Management, at 628p and Gartmore at 1781 2 p; the unit trust specialists, M&G Group at 1,007p and Perpetual at 1,160p; and the two all-rounders, Edinburgh Fund Managers at 652p and Jupiter Tyndall at 324p. More aggressively growth-oriented investors should buy only the last three.

The group in the news is John Duffield's Jupiter Tyndall, which has just doubled its funds under management to pounds 4bn, with the acquisitionof Queen Anne's Gate Management for an initial pounds 7.6m with a two-year deferred consideration of pounds 2.44m. That may seem a lot fora business that is heavily dependent on seven water company clients and made profits of just pounds 300,000 in the year to 31 March 1994. But the acquisition brings in a highly regarded investment team and gives Jupiter critical mass by taking its pension funds under management to about pounds 3bn. Jupiter made headlines recently by luring one of the UK's hottest fund managers, Leonard Licht, from Mercury Asset Management, with a package worth millions.

Mr Duffield is clearly making waves. He has also hired a marketing director from Perpetual. But the results are explosive. He began the business with a desk and a secretary in 1985 and has rapidly built a group expected to make pre-tax profits in 1994 of pounds 12.5m against last year's pounds 9.4m, with all the potential from the Queen Anne acquisition still to come. On a prospective price-earnings ratio of 11 and with net cash of pounds 32m, the shares still look attractive.

Perpetual has been recommended time after time in this column, but still looks a strong buy, even though the shares have climbed 28-fold from their 1992 low point. Investors are still pouring into the group at a spectacular rate, with funds under management likely to top pounds 3bn at the September year- end. Earnings per share are poised to roughly treble to 90p from last year's 35p to drop the p/e to just over 12, with a correspondingly huge hike in the dividend and a balance sheet awash with cash, despite heavy investment to boost capacity.

My third fast-track selection, Edinburgh Fund Managers, has about pounds 4bn under management from its Edinburgh headquarters, with the funds divided among investment trusts, discretionary funds, unit trusts and private clients. The active management has taken a string of initiatives over the past 18 months, including the acquisition of Target Trust Managers from Hill Samuel and Drayton Asia Trust from Invesco. Three new investment trusts, UK Smaller Companies, a Tiger Trust to invest in the Far East and an Inca Trust to invest in South America, have all been successfully launched. It has taken a stake in an Indian fund management group and opened an office in Atlanta, Georgia, to help build on the group's dollars 200m of funds managed for US clients. On forecasts of profits topping pounds 13m this year against last year's pounds 9.8m, the prospective p/e is an attractive 13.3.

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