View From City Road: Warrants warrant more than faith

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Equity warrants covering whole sectors appear to be throwing off the spivvy reputation they acquired when they first came into vogue. There have been a large number of them in recent months, so the demand for this type of investment vehicle must be strong. The latest to join the list is a punt on the insurance sector, courtesy of Warburg, which last night fixed a price for an issue of 20 million warrants on a basket of five composite insurers - Commercial Union, Sun Alliance, Guardian, General Accident and Royal.

The reason for buying warrants is the direct gearing they give to share prices in the sector. For pounds 11.10 investors can buy 10 warrants that give exposure to a basket of shares worth pounds 84. A rule of thumb is that a 25 per cent rise in the basket would double your money on the warrant.

On the other hand, there is some headroom to make up first. The strike price at which the warrants can be exercised is 5 per cent above last night's closing price for the basket. As always, the sponsor has taken a hefty margin for itself.

Warburg was not the first into the market, though it now claims to have done the most sectors, with warrants for banks, pharmaceuticals, food retailers, water and business services. Salomon, BZW, Credit Lyonnais and Societe Generale have also been active.

In the US and on the Continent, there is substantial private investor interest in warrants, which Warburg claims is being mirrored here. To buy now, however, requires faith that the market is bottoming and that the interest rate shocks of the next year or so are priced into shares already.