Foreign & Colonial is long on history but too expensive today

National Express is on the road to recovery; Potential bid for Devro make the shares a hold

Foreign & Colonial Investment Trust's last run in the FTSE 100, seven years ago, was rather short-lived, lasting all of six months, and its investors will be hoping it can make a longer job of it this time.

The £1.4bn trust – the world's oldest, dating from 1868 – invests in international companies with its biggest holdings in Shell, Vodafone and GlaxoSmithKline. It is a monster fund, with about 500 holdings, and aims to provide its shareholders with income and capital growth .

The fund has historically been a core holding for the retail investor's portfolio and 73 per cent of its shares are held by individuals. Shareholders get exposure to a wide spread of investments and many independent financial advisers will recommend F&C as a starter fund for equity novices.

Investors also have little to fear that its management will be as choppy as the stock markets. Jeremy Tigue has been running the fund since 1997, and has been with F&C since 1981, adding to its steady, stable image.

But the trust's performance has been poor recently, with a return of minus 12 per cent over the past five years, while the sector average was minus 5 per cent.

Perhaps this is why Mr Tigue is planning to increase the fund's gearing this year, borrowing capital to improve its investments, but this will add risk to the portfolio. Other plans include expanding the trust's investment in private equity vehicles – a sector he sees as opportunity-rich while uncertainty in stock markets prevail. But spotting the right deals is not always easy.

The trust's future performance still relies heavily on the corporate earnings of its holdings, and investing in the fund now would be a bet on the upturn of the fortunes of the world economy.

The trust's shares have recently been trading at a 13 per cent discount to the value of the assets in the portfolio, but in the run-up to its entry to the FTSE 100 the discount has narrowed sharply in anticipation of tracker funds buying in. That might soon reverse.

The fund pays only a modest dividend, so it is crucial to pick the right level at which to buy into the shares, and now is not the time. One to revisit later in the year.

National Express is on the road to recovery

National Express went off the rails last year. The transport group, the UK's biggest rail operator, had plenty of excuses to broadcast over the stock market tannoy, but shareholders decided to hit the road. Its shares are down sharply since we wrote positively on them last May and their 14 per cent bounce yesterday took them back only to 396p.

There have been self-inflicted wounds, such as the débâcle in Australia where appalling results forced the group to close its train and tram operations at a cost of £126m. But the group has suffered the rising costs of insurance common to all businesses and the continuing uncertainty over the future of rail regulation has left it in a position where the group's future profitability is in effect a matter of negotiation with the Strategic Rail Authority.

As expected, National Express promised to cut the number of rail franchises it operates in the UK, and is confident that those it keeps on in the interim can be made more profitable through new deals with the SRA. It is too early to call, but at least 2002 operating profit from the UK rail division, while down 17 per cent, were not as bad as had been forecast.

The bus business is still under cost pressures, not least from wage demands, but the hope is that a move into London – where commuters are rediscovering the bus network after chaos on Connex trains and the congestion charge – will reap dividends in the medium term. Its historic coach business is also doing well, as is the school bus operation in the US.

It might take a while longer for the market to relearn to love National Express, but the promise yesterday to put some of its strong cashflows towards improving the share price, via a modest share buyback, will no doubt help. The company also has a 6 per cent dividend which should help shareholders rest until the group extricates itself from its most unattractive rail franchises. Undervalued.

Potential bid for Devro make the shares a hold

Devro shares went from hot to dog in 1998, and have not switched back since. The sausage skins maker suffered a sudden collapse in prices during the debt crisis in Russia and is only now recovering from its own corporate debt crisis.

Yesterday's results showed the group back on something like an even keel, having bought back preference shares that were so close to redemption that they amounted to debt. Cashflow was even strong enough for the group to hike its final dividend, reflecting a degree of confidence in the future.

Devro is concentrating on making skins from collagen (which means it doesn't get much business in the US, where they mould their hot dogs in a cellulose skin that gets stripped off before the sausage is sold). These are less of a commodity than the cellulose products of which it made such a meal in 1998. Taste matters and customers will pay up for quality. Competition also appears to have eased and trading has started well this year.

Management has kept the reins tight on expenditure, so gearing is now down from 150 per cent at its height to a more manageable 60 per cent. The shares, which were up 5p to 54p yesterday, now trade on 9 times Investec's forecast of 2003 earnings, and have attracted the interest of one mysterious new shareholder. It might not be sensible to bet that Acomita, a Swiss outfit, is anything more than a value investor, rather than a potential bidder. But there is no harm in holding Devro shares.