For every twenty sensible small ‘bolt on’ purchase made by a typical company’s management, who seek to steadily evolve into a stronger more sustainable business, there’s typically only one transformational corporate deal. But when one of the latter does come along – such as AIM listed payment processor Optimal Payments’ (OPAY) Eu1.2 billion acquisition of the privately owned Skrill this week – it makes the pulse of both Sell side analysts and existing investors beat faster.
When board members buy or sell shares in their own company, canny investors take note. Such action, which can only be carried out in ‘open’ periods (ahead of a company year-end, and after the announcement of trading results) is perhaps the best indicator that one can expect when discerning how a listed company is performing. Such director purchases or sales, however small, have to be reported to the wider market in order that all existing and potential investors become aware. Call them ‘insiders’ if you wish. Although there can be good reasons for a senior executive director to sell shares (for instance a divorce settlement or property purchase), such transactions merit scrutiny to see if investors should have concerns and follow the insiders’ lead.
As promised in the previous blog, entitled ‘Choosing a collective investment’, this article seeks to illustrate some of the suggested strategies by highlighting a few collectives of the writer’s choice. The first is an actively managed closed ended fund (not subject to in or outflows of investors’ monies) enabling investment into large global blue chip companies. The second collective facilitates ownership of the FTSE100 – which represents almost 80% of the UK equity market – delivering this index’s returns in the most reliable fashion, and at the lowest possible cost. The third selection features another actively managed fund, but this one is open ended (and so impacted by the movement of investors’ subscriptions) but its bid and offer prices will more accurately reflect the worth of the underlying assets than an investment trust whose (share price) valuation could differ significantly from the net asset value of its portfolio of investments.
It took a long time to arrive, but this week the index of the 100 largest (as measured by total worth of their equity – market capitalisation) companies listed on the London stock exchange finally broke into new ground. As at the point of writing this (the close of business on 26 February 2015), the FTSE100 stood at 6,949 - surpassing its previous closing level of 6930 reached on the last day of the previous millennium. In the following decade – the so-called ‘noughties’ have been termed the ‘forgotten’ decade – company profits and dividends significantly increased overall, but the index of mega cap stocks failed to make progress as these earnings were de-rated by investors. Of the 100 constituents of the FTSE as at 31 December 1999, 61 disappeared over the next ten years; falling prey to predators or merging with rivals, and today less than half of the companies featured when the index enjoyed those (technology-media-telecommunications induced) heady heights of 1999. Then, the average price/earnings multiple of the FTSE100 was in excess of 30, by contrast the current valuation of the UK’s blue chips is – at 14 times calendar 2014’s profits – very close to its longer term historic level. And given the exceptionally low yield currently on offer from long term yields (UK equity’s natural ‘risk-free’ comparator), the FTSE100 appears fairly, rather than fully, valued. Per 29 December’s blog, the writer maintains the view that the FTSE100 will reach 7,100 by the end of 2015.
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