The index of Britain's elite companies stood at 5,855 when we made our last quarterly visit in March. It ended last week 284 points lower (down 5%) at 5,571, and has been below 5,300 several times during the period.
So, what have our pro pickers, who generally invest with a long-term view, been doing while the Footsie's "Offers Galore" signs have been up?
I was surprised to find that there have been a number of notable blue-chip sales or partial sales by some of our managers during the period, including British American Tobacco, Burberry, Imperial Tobacco, and Whitbread. These follow on from sales of BG Group and Royal Dutch Shell toward the end of the previous quarter.
However, what is striking about these disposals is that they have been made mainly by managers of "unconstrained" funds -- funds that invest across the market-cap range.
In total, our Expert Eight managers run 12 funds between them that I track. Of these, four funds are unconstrained but tend to have a small-cap bias. In the past year, as many as 10 of their combined 40 top 10 holdings (25%) have been FTSE 100 companies; currently, the number stands at just two (5%).
So, what we are seeing is an asset-class call. Those managers with the freedom to invest across the market-cap range have taken some money out of selective blue chips that have done well for them in order to invest in small caps that have really suffered in the market's latest bout of volatility.
Meanwhile, the managers of funds with a large-cap focus have been less active, but also appear to have been embracing risk -- by directing some money toward blue-chip companies in beaten-down, economically sensitive sectors. Thus, while one of our unconstrained stock pickers was a seller of Shell when the shares were riding high in the spring, one of our blue-chip specialists was a buyer after they tumbled in May.
Last quarter, I noted that just four blue chips figured in the top 10 holdings of more than one manager, compared with seven the previous quarter and six the quarter before. This time it's four again, but with British American Tobacco dropping out of the table after the partial sale by one of our managers, and Rolls-Royce entering on the relative strength of its share performance.
No. of Managers Holding
This quarter I'm going to highlight two companies for you that look interesting for very different reasons. The first has been a blue-chip buy for a manager of an unconstrained fund, going against the trend of large-cap sales among such managers. The second is in the table above, but the target buy price is below where the shares are currently trading; the target could possibly be reached by a particular outcome to corporate activity that's currently in play.
1. ARM Holdings (506p)
Nick Train (Lindsell Train U.K. Equity and Finsbury Growth & Income predicts a multidecade boom for consumer technology, equivalent to the era of the railroads in the 19th century -- but doesn't own British microchip designer ARM Holdings (LSE: ARM.L ) .
Richard Buxton (Schroder U.K. Alpha Plus) has taken a long, hard look at ARM in the recent past but concluded there was insufficient upside.
However, John McClure has been a buyer of ARM this year for his Unicorn Freespirit fund -- a fund whose success has come largely from stock picking specifically in the tech sector.
McClure, who puts a lot of emphasis on assessing the strength of a company's intellectual property, first bought ARM in January, when the shares were trading between 567 pence and 640 pence. He's bought more shares since, and the company entered his top 10 holdings at the end of May -- the only FTSE 100 giant amid a host of small-cap and AIM firms.
At 506 pence, ARM continues to be on an eye-watering forward price-to-earnings (P/E) ratio of 32. But that's significantly less than McClure has been prepared to pay.
2. Xstrata (target price 640p)
Mark Sheppard (Manchester & London (LSE: MNL.L ) ) has been a holder of miner Xstrata since 2009. Richard Buxton has held even longer -- since well before the credit crunch.
In the second half of last year, Buxton added 1.4 million Xstrata shares to his Schroder U.K. Alpha Plus fund's long-standing 7.5 million shareholding. I estimate the average price he paid was above the current 800 pence.
However, Xstrata has become the subject of an all-share merger attempt by fellow FTSE 100 firm Glencore (LSE: GLEN.L ) . In a surprise turn of events last week, Xstrata's second-largest shareholder, sovereign-wealth fund Qatar Holding, joined Buxton's company Schroders and Standard Life (LSE: SL.L ) in opposing the deal -- explained in detail by my Foolish colleague Alan Oscroft.
Qatar Holding and Buxton think Xstrata has great assets and a great long-term future alone and that Glencore has undervalued it. The merger is now up in the air. I'm told Buxton would prefer it not to go ahead and understand he would be an aggressive buyer of Xstrata if the deal collapsed, and a to-be-expected heavy drop in Xstrata's shares ensued.
I can't tell you what price Buxton would be looking for to be a buyer in that eventuality, but a 20%-25% fall has been mooted by analysts if the deal collapsed, which would put the shares in the 600 pence-640 pence area. As Buxton was a buyer last year above the current level and is bullish on Xstrata's long-term standalone prospects, I'm suggesting 640 pence is a reasonable target price. That would represent a forward P/E of 5.8 and dividend yield of 4.5%.
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