Investments  

An improving economy bodes well for the fortunes of blue chip funds

The initial public offering (IPO) of Royal Mail will be attractive for income investors and likely to be on the watch list of many blue chip equity fund managers.

In an IPO taking place this year, the state-owned postal service could be valued up to as much as £3bn, according to analysts.

Analysis from State Street Global Advisors (SSgA) reveals strong returns from UK publicly listed companies in the past 18 years, delivering a total return of 266 per cent between June 30 1995 and June 30 2013.

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Bill Street, head of investments for EMEA at SSgA, added: “In spite of the UK having experienced two damaging bear markets since 2000, UK Plc has still generated a high return, which illustrates the benefits of compounded returns.

“The UK has turned a corner. The economy is growing, unemployment is down and there is greater certainty about interest rates staying low. By investing in UK companies, savers not only support this domestic growth, but have the opportunity to cover significant costs they may face in the future, such as tuition fees.”

But the latest Profit Watch report published by The Share Centre shows a 0.7 per cent fall in revenues for 23 of the UK’s 100 largest companies. This, according to the report, was a result of weakness in the telecoms and utilities industries, where net profits fell 37.3 per cent. Helal Miah, research investment analyst at The Share Centre, explains: “If sales are vanity and profits sanity, then UK Plc is neither vain nor sane at present. The Profit Watch UK shows just how tough conditions have been for UK Plc in the past year.

“It’s true that some big one-offs have made profits seem worse than the broad spread of results would show, but even at the top line, sales growth of 1 per cent, well behind inflation, is meagre at best, and margins have been under pressure across the board.”

Tesco is one example of a company that has had a difficult 12 months. In April the supermarket announced a fall in pre-tax profits of more than 50 per cent, following £2.4bn of writedowns as the firm withdrew operations in the US.

However, bad corporate results can be beneficial to investors and Sheridan Admans, investment adviser at The Share Centre, recommends the stock as a ‘hold’.

“Although investors will have been looking for a positive update, we remain confident in the management and their ability to turn the UK operations around,” he says. “However, we believe the implementation of its new strategy and the regain of market share will take some time. Given the slow pace of global economic growth… as well as fierce price competition and promotions, we continue to recommend investors ‘hold’ for now.”

THE PICKS

Investec UK Blue Chip fund

Jonathan Parker has been at the helm of this fund since 2007 and although the name suggests a focus on the largest UK companies, the fund actually invests across FTSE 350-listed firms. The manager runs a realtively concentrated portfolio of 45 holdings and in five years to September 12 has returned 56.82 per cent. By compariosn, its FTSE All Share index benchmark delivered 55.33 per cent in the same time period.