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UK firms have huge competitive advantage

Monday 30th January 2012

Here James Griffin, manager of Fidelity's MoneyBuilder Growth Fund, considers various investment prospects for UK businesses...

If much of the "noughties" was characterised by easy money and cheap funding from banks and private equity firms, in today's world of scarce capital it is big companies with big balance sheets which now hold the upper hand.

While investors looking for growth may have previously dismissed the UK's largest companies, Griffin believes now is the time to take another look

"In the bull market years a common criticism of large companies was 'elephants can't run'. A large company supposedly had more limited room for growth compared with more nimble, smaller companies. As a result many of these larger companies derated over the last decade. For example, the share price of Glaxo is the same as it was in 1997. The P/E of the FTSE 100 is close to half what it was a decade ago.

"It is very uncertain how things will play out in the euro zone. What does seem certain, however, is that it will take many years before the supply of credit is turned back on. In a world of low growth, those companies with strong balance sheets, the means to fund their own growth and the benefit of having a powerful international businesses built over many years, have a huge competitive advantage."

So what types of companies fall into this category?

"By definition they are the largest companies in the UK, mostly FTSE 100 names. And they also typically have strong global franchises developed over many years with high levels of capital investment. Being able to diversify revenues across geographies with strong market positions around the world is a great antidote to the weakness of the UK economy."

The UK is fortunate to have a large number of these "global champions" including:

* Pearson - digital education;
* Rolls Royce - aircraft engines;
* Diageo - portfolio of beverage brands;
* GlaxoSmithKline, Shire - pharmaceuticals;
* WPP - marketing services;
* BG - oil & gas exploration;
* Johnson Matthey - catalytic converters;
* Rio Tinto, Anglo American - global mining.

"Of course a great company doesn't make a great investment if the share price already discounts a lot of the future growth prospects. Valuations of tobacco companies, for example, are now at significant premiums to historical levels. The good news though is that the FTSE 100 has underperformed the FTSE 250 for over a decade leaving many larger companies at very appealing valuations."

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Editorial Contact Details - Conor Shilling
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