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Financial Times: Large caps prove attractive

By Ellen Kelleher in London

Published: October 5 2006 03:00 | Last updated: October 5 2006 03:00

The story in the UK equity market at the moment is that large-cap stocks are looking cheap for the first time in decades, according to Martin Walker, manager of Invesco Perpetual’s UK Equity fund.

Why? FTSE 100 stocks have been de-rated as fund managers have opted to switch out of equities and put money into sexier sectors such as bonds, commodities and hedge funds.

“That has been a big factor which has pushed down the valuation of stocks such as Glaxo, Shell, BP and HSBC,” Mr Walker says. Another trend that has contributed to the devaluation of large caps is the surge in bidding activity in themid-cap sector. Mr Walker is uncertain whether this will continue.

But his outlook for the UK and wider economy is quite cautious. And he remains committed to investing in large caps as he thinks they are less risky. They carry less debt and in most cases use less gearing.

“The valuation argument suggests that a move into large-cap stocks is a better plan,” he says. “I’m putting more and more money into them.”

Two of his darlings are Shell and BP, as both oil groups have failed to participate fully in the rally in the oil price during the past five or so years.

Mr Walker prefers Shell to BP because he thinks Shell is the stronger company, taking into account the strength of its reserves and its downstream business. While he is hesitant to make predictions about the direction of the oil price, he does believe the Organisation of the Petroleum Exporting Countries will attempt to defend the price of oil if it wavers.

The portfolio’s 10 biggest holdings include a 7.1 per cent stake in BT Group, a 6.4 per cent stake in GlaxoSmithKline, a 6.3 per cent stake in Royal Dutch Shell B shares and a 6.1 per cent stake in HSBC. In particular, Mr Walker likes Glaxo, because he thinks the pharmaceutical company, which is trading at 13 to 14 times earnings, has a strong pipeline of new drugs that could generate billions of pounds in sales.

Sectors to be avoided in his opinion include UK high street banks, which he thinks are quite vulnerable to an economic downturn as many are highly-geared. The exception is HSBC because it offers more products and is operating in more countries than many of its peers. “I think it will be more defensive than other banks,” Mr Walker says. And with the exception of Tesco, Mr Walker is bearish on general retail stocks in the UK as he thinks they look expensive. “Half of Tesco’s consumer base is now overseas and it has an interesting growth angle,” he says.

The fund is one of the oldest in the Invesco Perpetual family. It opened in August of 1938 and now has £224.32m in assets and 42 holdings.

Its recent results are fairly impressive. In the past six months, it reported a 6.1 per cent return against a 0.06 per cent return by the UK All Companies benchmark, according to Standard & Poor’s. In the past year, it reported a 20.72 per cent return against a 14.5 per cent return by the benchmark.

Ellen Kelleher

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