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Financial Times: Strength in special situations

By Ellen Kelleher in London
Published: May 31 2006 03:00 | Last updated: May 31 2006 03:00

There are two types of companies in which Luke Newman, manager of F&C’s £50.5m Special Situations fund, likes to invest: those that are undergoing some sort of change and those with share prices that imply little to no growth.
Mr Newman’s thesis is that value tends to be found when companies are either in a position of recovery or a turnround. The fund is quite focused as there are just 30 to 50 stocks in the portfolio.It has a bias toward mid- to small-cap stocks.

The sorts of changes, which make a stock worthy of investment, can come in a few forms. A company can have new management or it can be benefiting from changes within its industry. Car dealerships in the UK, for example, began to represent a buying opportunity about three years ago when the government began to allow them to consolidate their operations.

Another example of a “turnround” project was an investment Mr Newman made in Morgan Crucible, the engineering group. He helped to refinance the company and the portfolio was boosted after the company deleveraged its balance sheet, disposed of its loss-making assets and re-established and developed its businesses.

Young industries like online gaming tend to demonstrate considerable potential for unrecognised growth. “I’m trying to find companies that could remain at growth levels ahead of their competitors,” says Mr Newman. “Online gaming continues to look like very very good value to me because there are so many regulatory hurdles to be crossed in the US. The longer the status quo remains, the better the value.”

But mature industries like tobacco can also prove worthy for investors. “The rationale for consolidation within the tobacco industry looks very profitable and rational to me,” he says.

Mr Newman is also keen on pumping money into unfashionable areas of the market. “I like to invest in companies that have a contrarian feel to them,” he says. He is bullish on consumer stocks in the UK as a play on all the speculation that interest rates will have a big impact on consumer spending levels within the country.

The pub sector also presents opportunities as the net asset values of several regional brewers have not been evaluated for years. In many cases, share prices are trading at sizeable discounts to the true net asset value of the company. Further, he believes consolidation may take place.

Mr Newman has continued to build up a strong position in the aerospace sector as he sees strong growth in the number of passengers and the ordering of new planes by both traditional and low-cost airlines.

He is also looking to increase the fund’s exposure to oil equipment companies as he thinks they will see rising profits as oil groups such as BP and Shell send business their way.

The fund opened in December last year. Since its launch, it has returned7.48 per cent compared with a 4.1 per cent return by the UK all companies index, according to data from Standard & Poor’s. Top holdings include stakes in Royal Dutch Shell, Rolls Royce and Cairn Energy.

Ellen Kelleher

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