In his 1989 Chairman’s letter to the shareholders of Berkshire Hathaway Inc., Warren Buffet rationalised how “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. Today, we ask wouldn’t it be even better to buy a wonderful company at a wonderful price?
With this in mind, New Ireland Assurance is delighted to announce the launch of the Bloxham Geared Megacap Fund, probably the best investment opportunity you can offer your clients this year.
Megacaps – “Big is beautiful”
We all know that the ideal investment opportunity is a top quality asset, that is known to deliver, but which has experienced under performance in more recent times, and is therefore undervalued in relation to its peers and its intrinsic value. We believe that “Megacaps” are exactly that – a quality asset that is significantly undervalued.
By definition, megacap companies are the very largest companies in each stock market region, by stock market valuation. They are well-established companies with strong track records known to us all – the kind of companies with large market share and strong brand names.
Traditionally “Megacaps” were the hallmark of a safe, steady grower. But something unusual has been taking place in stock markets over recent years. These older, well established companies have experienced very pedestrian share price appreciation, in spite of consistent profit growth. Instead, it is the smaller to medium sized companies that have outperformed.
There are many possible reasons for this anomaly, including increased levels of takeover, mergers & acquisitions and management buy-out activity, which can all drive share prices higher. Differences between megacaps and smaller companies in terms of where they are in their earnings cycle can also be a cause of this inconsistency.
As a result of this anomaly, however, New Ireland together with Bloxham believe that a medium term investment opportunity has arisen, and that megacap stocks now represent significant value.
The Opportunity
Current valuations of megacaps are compelling from an investment perspective – they are currently at 20-year lows! For example, the 20 largest companies in Europe currently trade at a 23% discount to their historical average (post 1989), while the average earnings growth rate for megacaps is forecast to be ahead of the expected growth rate for the market overall.
The graph below illustrates the % share of the overall S&P 500 index that the largest 25 companies have made up over the last decade. As you will see, in recent years the size of this share has fallen dramatically from its highs of the late 1990s.
Research confirms that heightened market volatility such as that of recent weeks increases investor appetite for large companies at the expense of smaller ones. The rationale is easy to understand. Market volatility focuses investor attention on liquidity and quality. Megacaps offer investors the ability to trade quickly and in size, while also satisfying the desire for quality investments due to their higher credit ratings.
Key features
- Bloxham will actively manage the investment to ensure diversification across sectors, stocks and countries.
- By their nature, the universe of megacaps is small and the fund will invest in between 25 to 35 stocks.
- In an effort to manage the risk associated with investing in this small number of stocks, Bloxham will invest in equities in the US, UK, Europe and Japan, typically between 15-35%, in each market.
- Stocks selected will also be spread across a broad number of sectors to reduce both stock specific and sector specific risk.
- Investors’ capital will be supplemented with borrowing to increase exposure to the equities selected.
- The fund will aim to outperform the FTSE World Index over its lifetime.
- Encashments (full or partial) will not be possible while the fund is invested in megacaps.
Geared Megacap is available through the New Ireland Special Investment Bond as a lump sum investment product:
- Open for investment from 21st September until 14th December 2007
- Minimum investment of €40,000
- Investment time period of 3 years (with Bloxham’s having discretion to dissolve the fund early in the event of achieving exceptional returns for investors)
For more information on the Bloxham Geared Megacap Fund, please contact your New Ireland Broker Consultant.