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Large cap M&A can power next leg of the bull market

Large cap M&A can power next leg of the bull market

Pfizer’s failed bid for AstraZeneca was a significant turning point for the UK market this year, according to AXA Distribution manager Richard Marwood.

He said the bid by the US group, which was partly motivated by the UK’s favourable corporate tax rate, is likely to signal a move towards further large cap mergers and acquisitions.

‘It made people appreciate that there aren’t really companies in the UK that are too big to be bid for,’ Marwood said, highlighting the tax inversion trade for any potential US bidder.

‘It could lead to bids for some of the larger better quality companies, which would be a helpful tailwind for performance.’

The manager, who runs the £912 million fund alongside veteran Jim Stride, is backing industries that tend to have high margins and low staff costs.

‘We tend to look at large cap oil, miners, pharmas, utilities and tobacco,’ he said.

He targets the best industries and sticks with them through business cycles. Large cap oil is an example of a sector he has persevered with, noting the changes in management teams that have ultimately led to more disciplined capital expenditure.

‘The positive dynamic of these companies is that they are not looking at getting bigger and are more sensible in the way they deploy cash. From a long-term point of view, there is a mindful necessity to protect against inflation and this can come from rising commodities prices and exposure to commodities,’ he noted.

Marwood is less keen on gold as an inflation hedge, however.

‘I am not really sure that it should be as good a hedge as it has been traditionally. If you go back, all currencies were hedged to gold, but now no currencies are pegged to the gold standard. Gold is not really that useful,’ he said.

The manager is keeping the fund’s equity weighting near the top of its range at 60%, and has trimmed positions to lock in profits on BP and tobacco stocks. He does not expect to see an imminent correction.

Marwood participated in the IPOs of retailers Poundland and B&M, but said that he has not been tempted into others as he felt pricing was unrealistic.

The fund, which can also invest in bonds, has a 35.7% allocation to index-linked paper, with a 1% position in conventional UK government debt. Marwood expects the index-linked exposure to fare well if interest rates rise.

Over the three years to the end of June, AXA Distribution has posted a 21% return versus 16.9% by the average fund in the Mixed Assets Balanced sector, according to Lipper. The fund has an underlying yield of 2.8%.


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