Investment Companies News

Nick Train, manager of the £160m Finsbury Growth & Income trust, believes merger mania is far from over, but the key buyers are likely to be corporates rather than private equity.

Train says that although private equity interest has waned, the appetite for strategic mergers remains strong. He points to Akzo’s bid for ICI, Kraft’s takeover of Danone’s biscuit division and the ongoing Barclays/RBOS/ABN Amro triangle.

He says: 'I think the ABN Amro bid will come to be seen as an incendiary deal. Investors have waited for a long time for a cross-boarder European banking merger.'

Train believes this is a good example of the move to international rather than national deals, which are necessary because of globalisation.

He adds: 'Most companies are too small to take advantage of the opportunities globalisation presents or to protect themselves against the main threats. For example, Northern Rock and Alliance & Leicester are just too small to protect themselves against the problems of the global financial markets.'

Growth is likely to be favoured over value after a strong run for value stocks. Train says that the ratings of income and growth stocks have converged. He believes the situation is unsustainable because fast-growing companies should be able to command a higher valuation.

He adds: 'There is also a cyclical element. When interest rates rise, it has a malign influence on the high yield sector, like banks and utilities.'

Generally, Train is positive on the outlook for markets. His central case is that the market has now done enough to push inflation out of the economy. The benign economic backdrop is likely to reassert itself, which should create the right environment for further growth in the equity markets.

Train has a buy and hold strategy in the trust, aiming to look at the enterprise value of a company. He also tends to invest in income-generative companies. Among his top holdings are Cadbury, Diageo and HBOS. He believes the corporate M&A activity on the horizon will release value from a number of holdings.

The trust has a good long-term track record, but has been weaker this year. The share price started the year at 324p and is currently 308.25p. The trust trades on a slight premium (0.4%), but Train’s reputation has merited a higher rating over the years. This could be an opportunity to pick up a top-performing trust at a lower price.