The City warms up for its match of the day

Have you caught football fever? Patrick Tooher says investors should stick with the top clubs

The vast majority of investment fund launches tend to be met with a blaze of indifference in the financial press. But proof, if any was needed, of football's growing popularity in the City was to be had in full measure last week.

Hordes of hacks gathered at a sports theme bar in London on Thursday to hear Match of the Day pundit Alan Hansen give details of merchant bank Singer & Friedlander's new Football Fund, the first of its kind in this country. The anticipated demand is such that the print-run for application forms has been raised from 200,000 to 1.2 million.

Shares in quoted clubs such as Manchester United, Celtic and Tottenham Hotspur have soared in the past year, largely on the potential cash from pay-per-view television, which could earn Premier League teams anywhere between pounds 750m and pounds 2.5bn a year. That compares with the pounds 670m deal over four years agreed between BSkyB and the Premiership last year.

Indeed, revelations in the Independent that top teams were engaged in talks with BSkyB about the introduction of pay-per-view as early as this year prompted a clutch of clubs to accelerate their flotation plans.

A dozen clubs are listed on the main market or the Alternative Investment Market (AIM), with Newcastle United, Birmingham City and Aston Villa to join soon. The rush last week prompted Ken Bates, the Chelsea chairman, to warn that clubs raising money to buy players was "the stock market road to ruin".

But with the football index of shares showing a 696 per cent rise between 1993-96 - outpacing the stock market by a factor of 10 - potential investors are right to wonder if they have missed out on much of the fun.

There are plenty of reasons to be cautious. Shares in many clubs remain notoriously illiquid. Many offer implausibly wide spreads - the difference between buy and sell prices - and not just those shares traded on a matched bargain basis on Ofex, an over-the-counter market for shares. Moreover, information about them is thin. For example, it is still unclear who ultimately owns Chelsea Village, the quoted vehicle for Chelsea Football Club.

Second, most of the clubs with the really exciting growth prospects are already listed. Liverpool and Arsenal, meanwhile, insist they have no plans to go fully public.

Third, many clubs remain the personal fiefdoms of the second-hand car dealer with the sheepskin coat and slim panatella. Not surprisingly, many of them are badly run. According to the football unit at accountants Deloitte & Touche, in 1995 half the Premier League clubs made a loss after transfer fees.

And last but not least, football is unlike any other business. Whereas most companies can earn decent margins despite competition, there is by definition only one winner of the Premier League or the FA Cup. Worse, teams cannot hide on the football pitch, so results matter.

Or as Howard Wilkinson, the FA's new technical director, so accurately put it the other day after Kevin Keegan resigned as manager of Newcastle: "Money is pouring into the game more quickly than it can be dealt with. Given these rewards, the fear of failure intensifies to an illogical point. We should all remember every time someone wins, someone else must lose."

Slowly but surely, however, football is getting its act together off the field and becoming a more attractive investment proposition in the process.

The game is being transformed by a new breed of professional manager keen to maximise the returns from gate receipts, merchandising, sponsorship and television income for what are, in effect, local monopoly franchises.

For example Caspian, the quoted media group and owner of Leeds United, recently signed former Manchester United finance director Robin Launders, and has assembled a strong team to negotiate pay-per-view deals.

And the problem of illiquidity is being addressed as new financial instruments, such as the Singer & Friedlander fund, allow the risks to be spread. Indeed, the Stock Exchange is already looking to establish a separate football sector following the Newcastle flotation.

But the main reason why sound investment opportunities still exist in football is to do with ownership of exclusive rights to broadcast matches. These rest with the clubs, not the broadcasters, the Premier League, kit sponsors or boot manufacturers.

Pay-per-view, to be introduced to coincide with the launch of digital television, will allow top clubs to exploit this revenue potential, earning top teams like Manchester United "untold riches", according to Greg Dyke, boss of Pearson Television.

Television income is likely to soar again if a European Super League materialises. The spoils will not be shared evenly, of course. A report on pay-per-view's potential by Harris, the market research group, predicted that if armchair fans paid pounds 10 a time, this could earn Manchester United up to pounds 400m a season while less popular clubs such as Coventry might net only pounds 15m.

No doubt the differing earnings potential of the clubs will be reflected in the valuation of their shares. In the meantime, investors should stay with this growth sector by sticking with its quality players.

Unless there are sentimental reasons for that potential package of shares in Scunthorpe, Colchester or Torquay - should they ever float, that is - your wallet should back Manchester Utd, Newcastle or Tottenham.