Monthly Archives: March 2015

Stocks in Focus: Kier Group plc

This week I am looking at Kier Group plc, the integrated construction and property services company that announced its interim results last month. The figures were encouraging and reflected the group’s robust position in key markets compared to peers. Group revenue was up by more than 10% and the interim dividend was increased by 7%, reflecting the Board’s confidence for the future. Order books shrank heavily across the industry during the recession but the building and construction services sector is now experiencing an improvement in opportunities both in terms of quality and numbers. Kier take a risk averse approach to their project bidding process and are willing to turn down jobs if they cannot reduce risk to satisfactory levels. The focus on the quality of orders and their level of risk mitigation is commendable, although it does lead to them spending significantly more on bidding expenses than their nearest competitor in order to make sure they get the right deals.

The group also has a new finance director, Bev Dew, who joined from Balfour Beatty at the beginning of the year. Mr Dew filled the role vacated by Haydn Mursell, who became Kier’s chief executive last summer. Following the acquisition of the facilities management company May Gurney last year, the services division continues to perform in line with expectations and has enabled Kier to promote a broader range of services to customers, which led to several contract wins.


Points of View: Market Highs

Last week witnessed a new high for the FTSE 100 index after market friendly remarks regarding US monetary policy from US Federal Reserve chairwoman, Janet Yellen. The new closing high of 6949.6 was reached on Tuesday 2 January 2015, surpassing the previous record close of 6930.2 on 30 December 1999. How comparable are these peaks and should investors worry at the thought of equities reaching new highs?

Back in 1999 the stock market was driven by the dotcom bubble, which ultimately burst.  At the peak, investors were guilty of hysteria and were willing to pay an average of 25 times the earnings of a company to own shares compared to a more reasonable 16 times earnings today.

The dotcom bubble also changed the components of the index.  At the previous peak, the FTSE 100 had 14 technology companies in its constituents.  Now just four remain.  Mergers and acquisitions have also caused names like British Steel, Cadbury and Boots to fall out of the index.

Income driven investors will also remind you that the FTSE 100 index is purely calculated according to the capital value of share prices. This method ignores the fact that a large part of an investor’s return comes from receiving and reinvesting dividends.  Indeed, since 1900, an index with income reinvested would have grown 170 times more than the same shares without reinvestment.

In conclusion, a sensible approach is to focus on total return and whether prices are reasonable relative to earnings rather than whether prices are high relative to the past. 

Stocks in Focus: Intertek

This week I am looking at Intertek, the global inspection, testing and certification company. The last couple of years have been tough for Intertek and this has been reflected in the share price, which fell from a 2013 high of around 3400p to a recent low of around 2150p in December. A large part of the fall occurred towards the end of the year and is widely attributed to the 39% of its revenues which are derived from the oil & gas sector and the fear that the recent reductions in capital expenditure (capex) by the oil majors would feed through to Intertek’s bottom line.

Intertek announced its full year results on Monday, which were broadly in line with expectations. There has been good growth across most businesses although a couple of headwinds remain. A strategy to exit low-value contracts took 2% off organic growth and the Industry Assets part of the business, which is particularly exposed to oil & gas capex, was weak. However, the 39% headline figure of its revenues exposed to oil & gas potentially exaggerates Intertek’s cyclical exposure to the sector.  In fact, the majority of its oil & gas exposure comes from relatively stable sources of operational expenditure and cargo inspection.

The question for investors is whether the recent falls in the share price leave it as an attractively priced asset.  Some argue that margin pressure from its oil & gas customers will see the downtrend continue. Others argue that oil & gas capex will recover in due course and remove this headwind from Intertek’s otherwise attractive outlook. 

Major Changes to Pension Legislation

This newsletter has been prepared in respect of major changes which will affect how you may wish to take pension benefits in the future.

Major Changes to Pension Legislation Newsletter February/March 2015

We will be pleased to answer any initial queries you may have regarding these important changes in legislation, and if necessary refer you to one of our pension specialists.

Why do US managers struggle to beat the market?

It has long been accepted wisdom in the investment community that actively managed US equity funds cannot beat the returns achieved by funds that passively track the market. To a large extent this is true, although the reality is that some active funds do beat the index. It is instructive to look at the reasons for this disparity and it is easy to see that the active mangers fall into two groups; the active and the overly active.

Taking the last group first, for it is undoubtedly the largest, the overly active managers are guilty of taking a very short term approach, keeping their portfolios in such tight alignment with the very index they are tasked with beating, that the term “closet indexers” can often be applied. The scandal of this is that they are charging an “active” fee in return for largely passive management. What drives them to do this? Quite possibly it is the fear of failing to deliver even a market return that outweighs the prospect of delivering a market beating return. The consequences of straying too far from the security of their peer group may be a loss of bonus, or even a loss of job. Many managers feel that it is far better to be safely in the middle ground than risk such a fate. This culture of fear can also prevail at a corporate level, with entire fund management businesses unwilling to stick their necks out but unable to kick the opium of higher fees.

The other, far smaller group consists of a number of hardy souls who believe in backing strong companies to deliver good share price and dividend growth over a period of many years, and who are prepared to accept that there will be slips and stumbles along the way. These managers back their judgement by holding on in the tough times instead of running for the safe shelter of the index. They may occasionally get it wrong and have to sell out at a loss, but so long as they believe their reasons for investing are still valid they may even add to their holdings on bad days. Naturally, most of these more independently minded individuals tend to end up working for like-minded fund management businesses. These houses gain their own reputation for good long term performance and attract investors who recognise the greater rewards of taking a long view.

Our own approach mirrors that of the smaller group in that we have an aversion to chopping and changing portfolios to reflect the short-term factors driving markets. We strongly believe in taking a long term approach, accepting that there will be times when we lag the market but that these periods will be insignificant in the long run.