The return of the take-over bid

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					                                                                                                                              3 September 2010

The return of the take-over bid
After a year in which bids were few and far between, new issues          and strategic attractiveness of the company to known potential
rare and the only share issues came from emergency fund raisings,        corporate buyers. On the other hand, we would be cautious about
corporate activity in the equity market is picking up. First Cadbury’s   investing in potential acquirers that could end up over-paying, as
was bought by Kraft, then Tomkins, Chloride and SSL followed. News       Kraft did. Microsoft is cheap and has plenty of cash but investors
Corporation is bidding to take BSkyB private, the Koreans want Dana      worry that the cash will be spent on poor acquisition, as it nearly
Petroleum and GDF Suez is merging its international operations with      was with Yahoo in 2008. Investors should be wary of companies
International Power. Activity has picked up in overseas markets too,     with strong cash flow but low or nil dividends, particularly if they are
notably in the resources and healthcare sectors: after Exxon bought      known to be on the look-out for deals and therefore potential prey
XTO and Roche bought out Genentech last year, Kinross Gold is            for under-employed investment bankers.
bidding for Red Back, Sanofi for Genzyme, Intel for McAfee and BHP
Billiton for Potash.                                                     We would be cautious about investing in
Overall Mergers & Acquisitions (M&A) activity is still low. On a 12      potential acquirers that could end up
month rolling basis, it adds up to scarcely over 2% of global market     over-paying, as Kraft did.
capitalisation, at the bottom of a historic range of 2% to over 10%
and close to the lows seen in the early 1980s, 1990s and in 2003.        Potential target companies are seeking to keep investors happy by
As we have pointed out regularly in the past, M&A lags the market        increasing their dividends or buying back shares. There has been
cycle. It might be more sensible for companies to make acquisitions      intelligent speculation that Lloyds may use some of its surplus
when they are cheap and avoid them when they are expensive but           capital, given that it is precluded from paying dividends until 2012,
that is rarely possible. At the lows, valuations are uncertain, risk     to buy back shares from the government, which would certainly be
appears high and it is expensive for bidding companies to issue          a better idea than another binge of imprudent lending. Such a
paper. Companies are then too focused on their own performance to        buy-back would probably be in addition to a partial divestment of
seek expansion via acquisition.                                          the government’s stake, perhaps next year.
                                                                         A public offering of shares in Lloyds and RBS is likely to be at higher
Current trends, however, are unusually
                                                                         than current prices so there is no reason for investors to wait. For
supportive of M&A activity.                                              now, the new issues market is quiet. Supergroup, a favourite of ours,
                                                                         has doubled in less than six months but Ocado, which we avoided,
Current trends, however, are unusually supportive of M&A activity.       has been dismal. The only other notable new issues this year have
The rapid recovery in profits has brought an equally rapid               been Jupiter and African Barrick (both reasonable companies but not
improvement in cash flow: the gap between the free cash flow yield       on our buy list) but the shortage of new issues should increase, not
of non-financial companies and corporate bond yields is at a record      reduce investors’ attention. New issues perform much better early in
high. As this implies, valuations have not kept pace with earnings       the cycle, when there are few of them, than those late in the cycle,
and cash flow but corporate bond yields have fallen significantly.       when there is an avalanche of them.
Corporate leverage has fallen and net cash on the balance sheet,
both in the US and the UK, is at a record high. Business confidence      New issues perform much better early in
is high but economic uncertainty makes management cautious
                                                                         the cycle, when there are few of them, than
about investing for organic growth. Growth through acquisition is the
obvious answer and it is seemingly available on attractive terms.        those late in the cycle, when there is an
The negative is that companies which might be attractive targets are
                                                                         avalanche of them.
also in good shape. Their share price may be low but bidders need
to be generous to gain Directors’ agreement and shut out rival bids.     Where there has been an avalanche in issuance, is in the corporate
This means that the acquisitions above may have strategic benefits       bond market. This is not necessarily negative as companies are
but none are obviously cheap. Private equity funds, which are flush      replacing bank debt with corporate bond issues but investors should
with cash and keen to acquire, are struggling to complete deals          tread carefully, understand the purpose of each issue and refuse to
which meet their return on investment criteria, only partly due to the   overpay. Otherwise, the low level of corporate activity is a positive
difficulty in obtaining sufficient leverage from banks.                  sign: we are almost as far as it is possible to be from the market
                                                                         conditions of 2007, which brought the disastrous acquisition of ABN
Our individual stock recommendations regularly suggest that the          by RBS, and of 2005, which brought 387 new listings on AIM. That
company may be the target of a bid at a generous premium: this is        is, in the medium term, very bullish for markets.
not just wishful thinking but a realistic assessment of the valuation                                                                                                                            1
Economic Outlook
The combination of weak equity markets but strong government            Slow growth, no inflation, rising risk aversion and the possibility of
bond markets in August has stemmed from fears of a double dip           more quantitative easing in the US has produced another boost to
recession in the US, aided by disappointment that the Federal           the bond markets, both government and corporate. This reduces the
Reserve did not instigate more aggressive quantitative easing at        pressure, for now, on the US and others to reduce their profligate
their August meeting. Global data has been much more mixed:             fiscal policies while the stressed Eurozone members can take
strong in the UK and Germany but with marked differences in             comfort from yields that are low in absolute terms. 10yr US Treasury
activity within the Eurozone. Divergence has become a key theme,        yields hit 2.5% while the yield on 10 year Gilts fell to 2.85% and on
potentially providing lessons for the future conduct of policy.         Bunds to 2.15%. The latter two are historic lows.
Government Bond markets have rallied strongly whilst equities have
                                                                        Credit markets have been resilient to the weakness of equity markets
retreated, creating strong divergence patterns (see chart opposite).
                                                                        and spreads have contracted as the hunt for yield continues and the
                                                                        prospect of a rise in interest rates fades further into 2011. High Yield
US economic data continues to disappoint.                               and Emerging Market Debt have seen continued in-flows by
GDP forecasts are being downgraded to a                                 investors and prices have responded. With both corporate earnings
                                                                        and balance sheets in good shape, spreads on corporate bonds
consensus of 2.5% for 2010, with an
                                                                        should continue to tighten though yields and prices remain vulnerable
undershoot a distinct possibility.                                      to a general rise in those on government issues.

                                                                        Strong divergence: S&P 500 vs 10yr US Treasury Yields
US economic data continues to disappoint. GDP forecasts are being
downgraded to a consensus of 2.5% for 2010, with an undershoot a
distinct possibility. Unemployment in the US is at an extreme: 9.8%
are formally unemployed but adding in those who have given up
looking or have taken part time jobs increases this to 17%. The
average period of unemployment is 35 weeks, previous peaks
having been 20 weeks in 1983 and 2004. Jobless claims made new
highs for the year at 500,000 and existing home sales new lows,
though this was assisted by the end of a tax credit for new home
This weakened picture in the US has led to suggestions, notably by
several Federal Reserve members, of further policy measures,
                                                                        Source: Bloomberg, 3rd September 2010.
although this is not iminent after Bernanke’s speech at Jackson
Hole. The equity market was disappointed that, at their meeting on
August 10th, the Federal Reserve only announced that cash raised        Credit markets have been resilient to the
from existing programmes would be rolled over into additional           weakness of equity markets and spreads have
purchases of Treasury bonds, but if the economic data continues to
                                                                        contracted as the hunt for yield continues
be poor, the Fed believes it has the ‘tools’ for the job.
                                                                        and the prospect of a rise in interest rates
This side of the Atlantic the picture looks                             fades further into 2011.
better. UK second quarter GDP has surprised
                                                                        The Dollar has benefited from having been oversold while the rally
to the upside at 1.1% (since revised to 1.2%)                           in the Euro has reversed, declining to 1.265 from 1.333.
while growth in Germany was an astonishing                              Sterling/Dollar has retreated from our 1.60 target to 1.54. Emerging
2.2%.                                                                   market currencies have been fairly range bound in recent weeks:
                                                                        we continue to expect them to appreciate on average but this is a
This side of the Atlantic the picture looks better. UK second quarter   medium term view. The US Dollar potentially faces a two-way pull;
GDP has surprised to the upside at 1.1% (since revised to 1.2%)         down, if quantitative easing is expanded but up if this results in
while growth in Germany was an astonishing 2.2%. Overall, the           better growth. This may well be a story for 2011. The Yen has
Eurozone recorded 1% growth, held back by Spain at 0.2% and             continued to strengthen, to the surprise of everyone, and could now
Greece at -1.5%. Portugal and Ireland are also struggling, the latter   test 80 to the Dollar, not seen since 1995. Unsurprisingly, this has
weighed down by the mounting costs of an unaffordable banking           led to the Nikkei equity index under-performing (the index is down
bail-out. Spreads on government bonds have been widening again,         14% in the year to date whilst the currency has appreciated by 9%)
back to the historical highs in some cases.                             but intervention or revamped policy is likely soon.                                                                                                                         2
Eden Asset Allocation Framework
Equity holdings have been increased by 5% across the three models       Emerging Markets
to take advantage of weakness by adding to these positions. Cash
                                                                        Buy. As a result of strong earnings growth, good valuations and an
weights reduced to 8% in Medium Risk Balanced and to 5% in
                                                                        absence of economic concerns, out-performance has returned and
Medium Risk Growth and High Risk Growth models. We remain
                                                                        should continue. China and Russia look good value.
underweight in Government and Inflation linked bonds. We are also
reducing Investment Grade holdings at tight spread levels and           FIXED INCOME: HIGH GRADE BOND WEIGHTINGS REDUCED
shortening duration into the rally.                                     Developed Markets
EQUITIES: WEIGHTINGS INCREASED                                          Avoid 10 year Gilts, European and US Government issues which look
Valuations are sitting on the long term mid levels. However balance     even more expensive, discounting a return to global recession which
sheets are in good shape, Q2 earnings have been better in 75% of        is unlikely. There is still a lot of uncertainty in the fiscal outlook while
announcements, and analysts are being cautious on the outlook for       a pick up in growth would be negative for bonds so why take the risk?
2011.                                                                   Corporate bonds
US Equities                                                             High grade credit spreads look stretched, reduce these holdings.
Positive, despite the deteriorating economy. Strong Q2 earnings and     Opportunities higher up the risk spectrum, for example in financials,
value will overcome the current macro headwinds. Technology,            and high yield still offer good value. Be aware that valuations will not
pharmaceuticals and reliable growth stocks are especially attractive    be immune from higher government bond yields.
but financials and consumer stocks are also interesting.                Emerging Markets
UK Equities                                                             Local currency and corporate Emerging Market debt funds remain
Positive, especially with the economic and fiscal outlook improving.    our preferred sectors, both for the currency and the bond return. Buy.
There is value across the market: in domestic earners as well as        ALTERNATIVE INVESTMENTS: NO CHANGE
overseas earners and the resources sector. We particularly favour
companies with a high or medium but growing yield. Mid caps also        The gold price is starting to move up again. It usually does well in
look good value despite recent out-performance.                         Q4; buy the metal or a precious metal equities fund. Some private
                                                                        equity funds are on good discounts while asset values are rising,
Europe ex-UK                                                            liquidity is still poor but valuations remain interesting. Property
Positive though has been out-performing. The € is weakening again,      shares and reits remain good value.
helping overseas earners, and should go lower. Eurozone worries are     ALTERNATIVE INVESTMENTS HEDGED ASSETS: NO CHANGE
returning but value is excellent and earnings momentum better than
in other regions. Avoid banks despite the stress test white-wash.       Remain an important diversifier in portfolios. Prefer Macro based
                                                                        listed strategies along with some non equity UCITS vehicles.
                                                                        CASH AND CURRENCIES: WEIGHTINGS REDUCED
Neutral. Very cheap, with strong earnings momentum and good
earnings surprises but the renewed strength of the Yen to Y84-$1        Reduce cash for investments as above. At current levels both
threatens to undermine both the economy and earnings.                   developed and emergency currencies look within their defined
Asia Pacific ex-Japan
Buy. A Chinese turn-around remains elusive but other economies
(Asean, South Korea) are doing well. Out-performance has resumed;
our preference is for regional funds.

Model weights (%) for Medium          Model weights (%) for Medium      Model weights (%) for High
Risk Balanced Portfolios              Risk Growth Portfolios            Risk Growth Portfolios

           10                                         10                                                              Equities
      5                                      5                                 5                                      Bonds: government
                                         5                                 5
  8                                                                                                                   Bonds: corporate IG
                            50                                     55                                  65             Bonds: high yield and EM
 10                                     15                               15
                                                                                                                      Alternatives: risk assets
      12                                         10
                5   5                                                                                                 Alternatives: hedged                                                                                                                             3
Lloyds Banking Group (LLOY) Banks                                                                                                                    Buy
Medium Risk                            Year End Dec               2009A        2010E        2011E
Price: 71.5p                           EPS (p)                    7.5          1.8          7.2
Market Cap: £48,700m                   PER (x)                    9.5          39.7         9.9
12 mth high/low: 76p/47p               Net Dividend (p)           -            -            1.0
Next Results: Oct ’10                  Net Yield (%)              -            -            1.4

Source: Consensus Forecast, FactSet, 2nd September 2010. Chart: Proquote, 2nd September 2010.

Having merged with TSB in 1995, Lloyds Bank stuck to its knitting as a             2009 disappointed with a £6.3bn loss, including a deterioration of loan
plain vanilla high street bank, until the acquisition of Scottish Widows in        write-offs in the fourth quarter. Over the past two years £30bn has been
2000. The “bancassurance model” did not work and almost £2bn was                   provided against loans inherited from HBOS. Last year, net lending fell
written off. But, under Eric Daniels from Citigroup (chief executive to this       by £45bn to £660bn as part of a deliberate strategy of downsizing the
day), the hatches were battened tightly down. So much so that LloydsTSB            book by £200bn by 2014. Some £157bn of government and central
was apt to be criticised for its conservatism, avoiding self-certificated          bank funding falls due over the next two years and dividends are
mortgages and buy-to-let. Of all the leading banks, it should have been            suspended until 2011. Nonetheless, recent interims showed an impressive
best placed for the credit crunch had it not succumbed to the disastrous           turnaround. Adjusted pre-tax profits reached £1.6bn, against a £3.96bn
politically motivated HBOS rescue in October 2008. HBOS had cast aside             loss last year. There was a huge cut in loan impairment charge, from
the famous conservatism of Halifax and Bank of Scotland in a dash for              £13.4bn to £6.55bn as Lloyds grappled successfully with the HBOS
growth aimed at becoming the “fifth force” in UK banking.                          book. Costs fell 5%, just over half way towards target savings of £2bn
The combined Lloyds/HBOS business is the biggest UK retail bank with               from the integration of HBOS. Full year pretax profits of £2.59bn are
a 35% share of current accounts, 29% of mortgages and 25% of the                   expected, to be followed by £6.9bn profit in 2011, 32% more than
market in both savings and personal loans. Until recently, such a                  expected six months ago.
concentration of market power would have been inconceivable. Following             Barring an economic slump, Lloyds is on the road to recovery, holds a
successive waves of government-backed fund raising in 2008/9 the                   truly commanding position in UK high street banking, is cheaply valued
balance sheet is strong, with the Tier 1 ratio a robust 9.0% and net               on assets and earnings, and offers the potential in due course for an
asset value 100.9p per share. It comfortably passed the recent round of            attractive dividend yield. The government will sell or reduce its holding,
stress testing. For the time being, it remains 40.5% owned by the British          but only when the price has risen further.
taxpayer at an average entry price of 64p.

Barratt Developments (BDEV) Housebuilding                                                                                                            Buy
Higher Risk                            Year End June              2009A        2010E        2011E
Price: 100p                            EPS (p)                    -23.8        -3.4         2.6
Market Cap: £974m                      PER (x)                    -            -            38.5
12 mth high/low: 184/92p               Net Dividend (p)           -            -            0.25
Next Results: Sept ’10                 Net Yield (%)              -            -            0.2

Source: Consensus Forecast, FactSet, 2nd September 2010. Chart: Proquote, 2nd September 2010.

Founded by Sir Lawrie Barratt in 1958, the company listed on the Stock             By 2009/10 interims the balance sheet showed net debt of just £660m
Exchange ten years later. Barratt American was sold in 2004 and UK                 against net tangible assets of £2023m. The recent year end trading
competitor Wilson Bowden was acquired for £2.7bn in 2007. As one of                update flagged operating profit of £85m with a 4% margin and a large
Britain’s best-known and largest house-builders, the group has three               reduction in net debt. Completions were in line with expectations, selling
distinctive residential brands: Barratt Homes, David Wilson Homes and              prices up 11% to £174,000 and forward sales up 27% with particularly
Ward Homes, together with a commercial property development business,              strong results in the second half.
Wilson Bowden Developments. At the end of its last fiscal year Barratt             Despite all this earnings forecasts for 2010/11, having risen from 3.16p
held enough plots in its land bank to build for 5.2 years.                         6 months ago to 3.41p 3 months ago, have since fallen to a current
All Directors are expected to hold a stake in the company equivalent to            figure of 2.6p. This reflects the prevalent low confidence in the economic
100% of their basic salary within five years of appointment. Prior to the          recovery. Public sector pay and employment are threatened and the
recession, Barratt held a good record of operating profits and cash                Home Buy Direct scheme is coming to an end. Management does not
generation, with pretax profits rising from £143.9m to £390.2m between             expect these items to affect Barratt’s short term outlook nearly as
2000 and 2005. However, having ramped up debt to £1,651.8m during                  drastically as implied by the near halving of the share price from its 12
2007, it has paid no subsequent dividends as part of a cash conservation           month high.
policy in the ensuing recession. A pretax loss of £678.9m in 2008/9                Longer term, not enough homes are being built in the UK to meet demand
resulted from finance costs and, more importantly, a steep write-down              from rising household formation, so growth will return. Consequently,
in the value of the land bank.                                                     with its balance sheet cleaned up, Barratt once again represents
Nevertheless, optimism about a recovery took the share price up to an              excellent value for longer term recovery, trading at less than half of net
adjusted high of 184p in September last year and, in October, a combined           assets of 209.6p per share.
placing and 1 for 3 discounted rights issue at 100p raised £693m.                                                                                                                                           4
Hiscox (HSX)                                                              Insurance (non-life)                                                         Buy
Medium Risk                             Year End Dec                2009A          2010E       2011E
Price: 363p                             EPS (p)                     75.2            38.5       43.8
Market Cap: £1370m                      PER (x)                     4.8            9.4         8.3
12 mth high/low: 369p/300p              Net Dividend (p)            15.0         16.0          17.0
Next Results: March ’11                 Net Yield (%)               4.1             4.4        4.6

Source: Consensus Forecast, FactSet, 2nd September 2010. Chart: Proquote, 2nd September 2010.

Many wealthy investors used to augment their investment income by                     23.8% and return on equity from 9.2% to 30.1%. The £2.66bn investment
underwriting at Lloyds. However this involved unlimited liability, and                portfolio remains 95% focused on cash and high-quality bonds, and
large losses were suffered as a result of reckless underwriting by the                delivered a 7.2% return. Net cash in the balance sheet was £121.1m.
brokers. Quoted investment companies, such as Hiscox, were set up in                  Last year’s bumper results reflected a lack of catastrophes, including
the mid 1990s to enable investors to benefit from underwriting profits                hurricanes. This year, Mr. Hiscox has estimated that the Chilean earth-
but with limited risk and these soon evolved into specialist insurance                quake and Windstorm Xynthia, which swept across Europe breaching
companies.                                                                            tidal defences in France, would cost the company £100m. Still, recent
The origins of the Hiscox business, now registered in Bermuda, date back              interim pretax profits of £97.2m, while down from £141.4m, were well
to 1901. Robert Hiscox, the current chairman, who holds 6.6m shares,                  ahead of analyst expectations of around £73m, and full year earnings
joined in 1967. The company specialises in a range of niche areas,                    expectations have fallen only 15% since a year ago. Hiscox continues to
providing home and contents insurance, classic car, fine art, bloodstock,             develop its retail brand in the UK and is building up the business in the
kidnap & ransom and personal accident cover for wealthy individuals.                  US in order counter the cyclicality of the reinsurance market.
For companies, cover types include property, marine, aerospace,                       Net assets per share including investments are estimated at 321p to
professional indemnity, hacker and political risk as well as reinsurance.             which the shares are trading at only a modest premium for a high quality
The key to this type of business is the skill of its staff in raising exposure        underwriting team. Profit discipline in the whole underwriting trade has
to areas of underwriting when rates are high (usually as a result of                  been reinforced in the current era, while low investment profits and
recent claims) and reducing when they are low. There have been several                greater awareness of risk has prevented an influx of capital. Prospects
takeover bids in the sector, sometimes well above net asset value. In                 look particularly bright in the marine sector, where the Deepwater Horizon
2001 Hiscox itself fought off a bid from US insurance company Chubb.                  disaster will increase the demand for and price of insurance but make
Results are volatile but from 2005 to 2009, net written premia rose from              operators considerably more careful. We therefore consider the whole
£681m to £1157m, pre-tax profits from £70m to £321m, and dividends                    subsector undervalued. Other stocks worthy of attention include Amlin
from 7p to 15p. Last year, operating profit rose from 9.3% of revenues to             and Hardy Underwriting, featured in our November 2008 edition.

Review of Past Recommendations
COMPANY                          DATE          RECOMMENDATION      RECOMMENDED             CURRENT         CHANGE*        RELATIVE TO ALL      CURRENT
                                                                        PRICE (p)          PRICE (p)           (%)        SHARE INDEX (%)      RECOMMENDATION

Diageo                           Aug           Buy                          1119             1092               -2                    -4       Buy
Halma                            Aug           Buy                           285               280              -2                    -4       Buy
Marks & Spencer                  Jul           Buy                           332               353              +6                    -5       Buy
Inmarsat                         Jul           Hold                          714               695              -3                   -14       Buy
BG Group                         Jun           Buy                          1063             1095               +3                    -1       Buy
N Brown                          Jun           Buy                           249               228              -8                   -12       Buy
Prices as at 2nd September 2010. Source: Reuters                                                                        *percentage change since recommendation

Aviva (391p) Buy. The management rejected a £5bn bid from Royal                       $12.5bn, below the expected $13.7bn. The management sees the
Sun Alliance for its UK general insurance business citing it not in the               short term outlook for commodities as mixed and is cautious on the
interests of its shareholders. RSA may come back with a higher offer                  global outlook. The Brazilian and Indian economies are back to full
but the offer shows the attractions of the overall Aviva business and                 output and Chinese GDP is slowing towards more sustainable levels.
its shares. Aviva is performing well as seen by the excellent half                    Recent weakness in the BHP Billiton share price offers a long term
year results. Profits rose by a better than expected 21% and the                      entry level into this world class business. The 2011 PER of 8x (at
interim dividend was increased by 6% to 9.5p. The full year yield is                  1900p) is inexpensive.
an attractive 6.5%. We continue to recommend Aviva as a buy and
                                                                                      Standard Chartered (1823p) Buy. Standard Chartered reported
prefer them to RSA, which may decide to launch a rights issue to
                                                                                      record half-year profits of $3.12bn (up 10%) as bad debts more than
make an acquisition.
                                                                                      halved and its key Asian markets fared better than those in the West.
BHP Billiton (1894p) Buy. Full year results were overshadowed by                      The bank, which is based in London but makes about four-fifths of
the hostile $130 bid for Potash, valuing it at $39bn. The market view                 its profit in Asia, said impairment losses on loans dropped to $437m
is that they will have to increase the offer but should see an earnings               from $1.09bn a year earlier as charges shrunk in the Middle East
enhancement up to $160 per share. BHP generated $17.9bn of cash                       and elsewhere. Economic uncertainty had hurt demand for some
in the year and with net debt at just $3.3bn (gearing of 6%) has                      wholesale banking products in May and June. Standard Chartered
plenty of resources for the bid. Full year profits were up 116% to                    continues to be our top pick in the banks sector.                                                                                                                                          5
Balfour Beatty (244p) Buy. The company reported a 32% increase          news that the company is to invest $1200m (a quarter of its market
in half year pre-tax profits to £141m due to strong performances        capitalisation) in new generation high-capacity “Ka-band” satellites.
from its UK, US and Hong Kong construction businesses and a first       As we pointed out in our July article, Inmarsat possesses huge
time contribution from its US acquisition, Parsons Brinkerhoff. The     strength in the form of its legacy of radio spectrum (they don’t make
interim dividend was increased by 5% to 5.05p. The management           it any more!) stemming from its origins as a marine safety
believes that they are well-placed to weather UK government             supranational entity. Recently, news has emerged of a lucrative if
spending cuts. The order book of £14.6bn provides excellent earnings    complex deal to lease spectrum in the US to Harbinger Capital (a
visibility. The balance sheet is strong with net cash of £436m. The     significant shareholder). This will probably proceed to a longer term
shares are cheap on a 2011 PER of 7x and offer an attractive (and       agreement liable to fetch in some $1000m over a small number of
growing) yield of 5.2%.                                                 years so we do not see Inmarsat as being financially stretched. The
                                                                        finance director states that dividend growth can be sustained at
Inmarsat (695p) Buy. Our rating is upgraded to Buy following
                                                                        current rates for the next three years: this year’s estimated yield is
recent weakness. Interim figures were very steady with revenues up
12.2% and the dividend raised 10% but the share fell following

Collectives & Managed Funds: Polar Capital Technology Trust
The Polar Capital Technology Trust is an actively managed investment    growing usage of LED lighting and its potential usage in buildings
trust which invests in a broadly based, diversified international       housing IT equipment, the growth of mobile computing and “cloud”
portfolio of technology stocks. It was restructured in 1996 and has     computing (accessing data and software via the internet rather than
been managed by Ben Rogoff and Craig Mercer since 2006. The             own storage and ownership). Over the last two decades the technology
fund is currently invested in approximately 110 companies and has       sector has been one of the most rapidly growing segments of the
£353 million of assets, over 70% in the U.S. The largest holdings in    global economy and this is likely to continue. Technology companies
the fund include companies such as Google, Microsoft, Apple and         offer the potential for substantially faster earnings growth than the
IBM. Over the past 5 years the fund has produced an annualised          broader market, reflecting the accelerating rate of adoption of new
return of 6% compared with the 2.8% annualised return of the S&P        technology. Technology is transforming the competitive position of
500 Index in Sterling terms.                                            companies and entire economies, which is fuelling a secular increase
                                                                        in spending. As the economic recovery continues, companies are
The shares are traded on the London Stock Exchange and currently
                                                                        likely to increase their IT budgets, resulting in stronger demand and
trade at a 2% discount to net asset value; it was wider in the midst
                                                                        driving further earnings growth.
of the credit crunch but has narrowed as the technology sector has
out-performed the market. The average discount over the past five       The sector has already performed well this year owing to its continued
years has been approximately 10%. There is also a unit trust version.   revenue growth and the emergence of new opportunities but the
                                                                        secular story remains under-appreciated and we expect the sector to
The managers select companies for their capital growth potential, not
                                                                        maintain its market leadership. Polar offers a ready-made portfolio
on the basis of technology for its own sake. They believe in rigorous
                                                                        of attractively priced stocks around the globe at a small discount to
fundamental analysis including the focus on the quality of the
                                                                        asset value which it would be expensive for most private clients to
management, identification of new growth markets and recognising
                                                                        assemble directly.
technology trends. Themes they have been following include the

Performance returns in £                                                Top Holdings

                       Year to Date      1 Year   3 Year     5 Year     Apple                                  8.3%

Polar Cap Tech Fund    11.1%             37.85%   25.99%     32.87%     Microsoft                              4.2%

DJ World Tech Index    -8.3%             13.56%   8.58%      22.56%     Google                                 4.0%

S&P 500 Stock Index    -3.1%             15.86%   2.86%      13.87%     Cisco Systems                          3.7%

Source: Bloomberg, 2nd September 2010.                                  IBM                                    3.1%

                                                                        Intel                                  2.9%

                                                                        Oracle                                 2.6%

                                                                        Source: Bloomberg, 16th August 2010.                                                                                                                        6
Bond Pick of the Month - Lloyds Banking Group (High Risk)
Issuer                       CCY              Coupon         Maturity         Offer Price             Yield to Maturity      Current Yield   S&P         Min Size

LBG CAPITAL NO.2 PLC         GBP              15.00          21/12/2019      128.75                   10.16                  11.65           BB          100K
LBG CAPITAL NO.1 PLC         GBP              11.04          19/03/2020      110.73                   9.32                   9.97            BB-         50K
LBG CAPITAL NO.1 PLC         GBP              7.5884         12/05/2020      90.69                    9.04                   8.37            BB-         1K
LBG CAPITAL NO.1 PLC         GBP              7.869          25/08/2020      91.15                    9.24                   8.63            BB-         50K

The business and finances of Lloyds Banking Group (LBG) have been             The effect of this ‘option’ on the yield of the bonds is significant. For
covered in the share recommendations section. With a core Tier 1              example, in comparing the yield on a May 2020 ECN to a traditional
ratio (under Basel II) of 9.0%, Lloyds is amongst the best capitalised        fixed rate LT2 bond of a similar tenor, we see a yield ‘pick up’ of
banks in Europe yet its fixed income issues offer good value. In              approximately 2.6%. In price terms, this is worth circa 18 percentage
particular, we favour its Lower Tier 2 (LT2) issuance. The structural         points when looking at the Lloyds 7.588% 05/20, for example.
features of LT2 give comfort to debt investors through the legal
                                                                              An investment in an ECN would attract all the usual risks associated
commitment to guarantee timely payment of coupons and principal
                                                                              with any subordinated financial fixed rate bullet bond. The risks
at final maturity. The recent tender offer for LBG Tier 1 and Upper
                                                                              most specific to the ECNs is that, whether as a result of renewed
Tier 2 resulted in the creation of a variant of the traditional LT2
                                                                              recession or poor management, Lloyds is required to take significant
structure in Equity Convertible Notes (ECNs). These notes include a
                                                                              further losses, reducing the Core Tier 1 ratio below the level that
trigger that converts the notes into Lloyds equity in the event that
                                                                              would trigger the conversion of the ECNs into equity. In these
the Core Tier 1 ratio falls below 5.0% under the May 2009 definition
                                                                              circumstances, the share price would be significantly lower and so
by the FSA.
                                                                              the bondholder would realise a significant capital loss.

Fixed Income Model Portfolios
Eden’s Model Bond Portfolios are developed for three risk categories:         The Model Bond Portfolios performed well during the recent market
High, Medium and Low. Each of these portfolios presents a diversified         volatility; our picks have remained largely stable despite a broader
mix of credits, with underlying fundamentals that compare well to             correction in the bond market.
the peer group.

Issuer                             Coupon %       Maturity      Price £    Yield to         Rating        Industry                            Min Piece
                                                                           Maturity %                                                         Increment
Low Risk GBP
METLIFE                                5.25       Jan-14           107.5        2.87        Aa3/AA-       Insurance                           50k / 50k
ROCHE                                   5.5       Mar-15           113.0        2.42        A2/AA-        Pharmaceuticals                     5k / 5k
E.ON                                 5.125        Jan-14           109.8        2.09        A2/A          Electric Utility                    50k / 50k
GENERAL ELEC                           5.25       Dec-13           108.4        2.52        Aa2/AA+       Diversified                         1k / 1k
CIBA                                    6.5       Apr-13           110.2        2.45        Unrated       Specialty Chemicals                 1k / 1k
RWE                                  6.375        Jun-13           112.5        1.67        A2/A          Electric Utility                    1k / 1k
Medium Risk GBP
CLOSE BROTHERS                          6.5       Feb-17           107.2        5.18        A3            Banking / Broking                   50k / 1k
INTERCONTINENTAL HOTELS                  6        Dec-16           107.2        4.65        BBB-          Hotels                              50k / 1k
LONDON STOCK EXCHANGE                6.125        Jul-16           109.5        4.26        Baa2/A-       Financial Services                  50k / 1k
GAZPROM                                6.58       Oct-13           107.1        4.12        Baa1/BBB      Oil & Gas                           50k / 1k
IMPERIAL TOBACCO                        5.5       Nov-16           109.5        3.75        Baa3/BBB      Tobacco                             50k / 50k
KPN                                    5.75       Mar-16           111.8        3.37        Baa2/BBB+ Telecommunications                      50k / 1k
High Risk GBP
GLOBAL CROSSING UK                   11.75        Dec-14           102.7      10.93         B3/B-         Telecom Services                    50k / 1k
VIRGIN MEDIA SECURED                    7.0       Jan-18           104.4        6.25        Ba1/BB+       Cable                               50k / 1k
INVESTEC                               7.75       Mar-16            99.4        5.52        Ba1           Banking                             1k / 1k
THOMAS COOK GROUP                      7.75       Jun-17            94.5        8.84        Unrated       Travel Services                     50k / 1k
IRON MOUNTAIN                          7.25       Apr-14            99.7        7.35        B2/B+         Commercial Services                 75k / 1k
WILLIAM HILL                         7.125        Nov-16           101.9        6.75        Ba1/BB+       Gambling                            50k / 1k

Prices as at 1st September 2010; Source: Bloomberg; Ratings: Moodys.                                                                                                                                           7
Pensions – all change again!
With pension legislation in a constant state of flux, it has been                     we do not know what the new limit is but figures of between
a confusing time not just for clients but also for many advisers.                     £30,000 and £45,000 are being quoted, a significant reduction from
David Goodfellow, of our affiliated company Eden Financial                            £245,000!
Advisers Limited, has been monitoring the proposed changes
                                                                                      There is also a suggestion that the higher rate relief will be capped
and in this article he considers a couple of issues that have
                                                                                      at 40%, even for 50% taxpayers. We await full details on exactly
been highlighted in the press recently.
                                                                                      how the new regime will work, particularly with regards final salary
It was only four years ago (6 April 2006) when “A day” introduced a                   occupational schemes.
considerably more flexible and simplified pension regime. Henceforth,
                                                                                      There is currently an opportunity for those who will earn less
the majority were to be governed under the same legislation rather
                                                                                      than £130,000 during the current year to utilise the current
than the previous confusing scenario of approximately 12 different
                                                                                      regime and contribute 100% of their net relevant earnings and
regimes. The basic tenets of the new world were that people could
                                                                                      receive 40% tax relief, prior to the new rules being announced.
make significant contributions, receive higher rate tax relief, but with
a cap placed on the maximum size of the accumulated fund (the                         Compulsory annuitisation
lifetime allowance). Some were disadvantaged post “A day” but                         As they promised before the election, the Government has announced
there seemed to be clarity and a relatively level playing field, while                proposals to bring to an end the rules that effectively force a pension
the increased use of the Self Invested Personal Pension (SIPP)                        holder to purchase an annuity at the age of 75. Whilst it is not strictly
offered the investor greater control over their fund.                                 compulsory, the alternative to annuitisation is very unattractive.
Three years after introducing this welcome flexibility, the last                      It is hoped that from April 2011 there should no longer be a deadline
Government started to take it away in their April 2009 budget which                   by which people have to annuitise and in the recent consultation
hit anyone with earnings in excess of £150,000 with yet another set                   paper it states individuals will be able to choose how much to draw
of complex rules. From 23 April 2009 to 5 April 2011, transitional                    throughout their retirement, subject to a capped limit, or whether to
rules were introduced for high earners, but from 6 April 2011 the                     draw any income at all. The current income limit (120% of the value
intention was to reduce tax relief on all higher earner pension                       of an equivalent annuity) will be reviewed as there is an increased
contributions, both employer and employee, to the basic rate of                       risk of running out of funds in drawdown with advancing age. This
20%, but retaining the annual allowance at £245,000. Anyone looking                   proposal is to be welcomed, but the tax position on death is also
to pensions as a way of extracting cash from their business in a tax                  being reviewed. Currently the remaining fund on death (in income
efficient way realised that a £245,000 employer pension contribution                  drawdown) suffers a tax of 35% if taken as a cash sum. This may
might result in a £49,000 personal tax liability.                                     increase to 55% which would be very unwelcome.
The coalition is considering scrapping these proposals, although the                  Pensions during the accumulation stage and when drawing benefits
complex anti-forestalling rules will remain until the end of the tax                  remains a complex one, and the investment management is crucial.
year. In the Emergency Budget they confirmed their intention to raise                 Eden can assist in all aspects. Those who wish to receive advice
£3.5bn (the same as Labour’s proposal) but by reducing the annual                     should contact David Goodfellow on 020 7509 7475 or by e-mailing
allowance for all tax payers before a change is triggered, thereby          
affecting more people but without the additional complexity. As yet

For further information please contact:                Recommendation Guide
Lawrence Peterman Investment Director                  Buy +20% expected absolute price performance over next 12 months
                                                       Hold +10% to -10% expected absolute price performance over next 12 months
                                                       Sell -20% expected absolute price performance over next 12 months

                                                       Eden Financial Limited            phone +44 (0)20 7509 7000                             Member of the London
                                                                                                                                               Stock Exchange
                                                       Moorgate Hall                        fax +44 (0)20 7509 7010
                                                                                                                                               Authorised and regulated
                                                       155 Moorgate                       email                    by the Financial Services
                                                       London EC2M 6XB                                          Authority

RISK WARNING This document has been prepared, approved and issued by Eden Financial Limited on the basis of publicly available information, internally developed
data and other sources believed to be reliable. Whilst all reasonable care has been taken to ensure the facts stated and opinions given are fair, Eden Financial
Limited offers no guarantee as to the accuracy or completeness of any such information or data. This publication is not intended to be an offer to buy or sell any
securities of any of the companies referred to herein and any opinions expressed are subject to change without notice. The view expressed are as at the date stated
and are subject to change. At any time, Eden Financial Limited (or its directors and employees) may have a position or holding in any of the above investments or
in a related investment. This publication may not be reproduced or copies circulated without authority. Past performance of investments referred to above is not
necessarily a guide to future performance and the value of the investment may go down as well as up. Some investments are not readily realisable and investors
may have difficulty in selling or realising the investment or obtaining reliable information on the value or risks associated with the investment. If you are in doubt
please contact your financial adviser. Where any reference is made to tax, it should be noted that tax reliefs or rates assumed are those currently applying, whereas
their value will depend on the individual circumstances of the investor. Levels and bases of, and reliefs from taxation, are subject to change. Eden Financial Limited
is a member of the London Stock Exchange and is authorised and regulated by the Financial Services Authority. Registered address: Moorgate Hall, 155 Moorgate,
London EC2M 6XB.                                                                                                                                                  8

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