Investment Column: Schroders is flying high, so take profits

Polo Resources; Theo Fennell
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The Independent Online

Our view: Take Profits

Share price: 1667p (+87p)

With rival Gartmore in freefall, Schroders looks like a bastion of stability in the world of fund management. This bluest of blue-chip managers has had its fair share of ups and downs. But recently it has quietly gone about the business of picking up mandates and making money without making a big song and dance.

Yesterday's nine-month trading statement was another case in point. Profit before tax surged to £282.7m compared to the £79.9m posted over the first nine months of 2009. The company also saw net inflows £21.5bn (2009 £8.7bn), although a decent slug of that was lower margin institutional business. Total funds under management now stand at £181.5bn, up from £138.9bn, better than the City had expected.

Given those sort of numbers. Schroders is a raging buy, right? Well, hang on a second. Schroders' admittedly impressive performance is fully reflected in the shares. They sit on a premium rating (for a fund manager) of 13 times forecast full-year earnings. Aberdeen Asset Management, for example, is on just 12. The forecast dividend yield is also no better than pedestrian at 2.2 per cent.

We haven't looked at Schroders since August 2009 when the shares stood at just 996.5p. We suggested investors buy, which has proven to be very good advice. However, Schroders is unlikely to repeat that sort of performance over the next year and the shares now sit at a ten-year high.

Fund managers are a geared play on the markets, and equity markets have recovered strongly recently. But there are enough uncertainties out there to suggest that, at the very least, stockmarkets may pause for breath over the coming months. Schroders has been a great performer for us, and we wouldn't blame anyone for holding these shares However, now looks an ideal time to some take profits.

Polo Resources

Our view: Buy

Share price: 5p (+0.4p)

AIM-listed Polo Resources, which invests in undervalued natural resources companies and projects, saw its shares soar by nearly 10 per cent yesterday. Although some of those gains must have been inspired by the broader rally in commodity stocks, Polo did post full-year results, revealing that its net asset value (NAV) per share at the beginning of this week had hit 6.86p. The figure implies that Polo's shares, which trade at under 5p, are undervalued and should gain ground from here. Ordinarily, such a gap would be enough to support a positive view, but there is more to Polo, which owns 27.6 per cent of Caledon Resources, the coking coal producer that recently agreed to be bought by China's Guangdong Rising Assets Management Co in a deal worth around £252m.

A successful takeover of Caledon will drive Polo's NAV to 7.22 per share, thus widening the gap between the value of the assets and the share price. As if that wasn't enough, the prospective proceeds would leave Polo with 5.44p per share in cash, according to Liberum Capital. Unless Polo suddenly decides to ramp up its investments elsewhere, this suggests that the company may well move to return some capital to shareholders. For us, this is a clear signal that it is time to buy.

Theo Fennell

Our view: Hold

Share price: 39.3p (-1.67p)

The return of the eponymous founder to Theo Fennell last year appears to have put the sparkle back into the upmarket jeweller. Yesterday, the company said that its pre-tax losses narrowed to £877,330 for the six months to 30 September, compared with £1.08m the previous year. The chairman Rupert Hambro is also "confident" that recent initiatives will have a positive impact on sales in the second half, and thatFennell is "well positioned to return to profitability".

The initiatives include a store refurbishment programme, a relaunched website and the introduction of an "accessible" silver jewellry collection, Alias. Such moves bode well for the company, particularly as it appears to have strong momentum, with like-for-like sales from stores open at least one year up by 12.5 per cent over six months of trading

Theo Fennell's shares trade on 15.1 times forecast earnings for calendar year 2011, which is a substantial discount to luxury fashion rivals Burberry and Mulberry. We said buy these shares at 35p in June. With the company looking in reasonably good shape, there's every reason to hang on in there. Hold.

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