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Schroders’ Kirrage: why I don’t back IPOs

Schroders’ Kirrage: why I don’t back IPOs

Schroder Income manager Nick Kirrage has questioned why investors would back an initial public offering (IPO) right now, as valuations start to look stretched.

The Citywire AA-rated manager’s comments are all the more pertinent as airline Wizz Air followed Fat Face in pulling its listing. Fashion website MySale, backed by Topshop owner Philip Green, also dived after it was wrongly priced during its market debut.

Kirrage (pictured) said: ‘I have never invested in an IPO. My central view is that if someone thinks it is a great time to be selling, why would I be buying? They think it is a good time to IPO because they can get the best price.

‘Having said that, there are some opportunities. For example, in banking there may be some interesting opportunities coming out of this.’

He points out the volume of IPOs tend to correlate with markets, meaning the time is not necessarily right to buy from a valuation perspective. He and co-manager Kevin Murphy prefer to concentrate on undervalued companies rather than second-guessing market moves.

They have increased positions in Morrisons and Tesco in their Schroder Recovery fund, despite profit slumps from both in recent months.

‘We don’t have a silver bullet and can’t say it is naïve of everyone else because they have missed this or that,’ Kirrage said. ‘There are challenges posed by hard discounters and the internet, but there are opportunities as well as threats. The fact there are challenges to Tesco and its shares have gone down means at some point you take the view that it is overly discounted.’

He believes investors should not lose sight of the power of big branded businesses in the sector and the high barriers to entry. He is bullish on banks, where the fund has had an exposure since 2009, pointing out they demonstrate why you buy a sector for its valuations and not the macro view.

Since 2009, banks have suffered at the hands of deleveraging, low rates, PPI and Libor scandals, yet stocks such as Lloyds are up over 200%. Having benefited from this broad rise, particularly through top 10 holding Barclays, he believes there is still plenty of value in banks on a medium-term view.

However, he admits he is currently finding more to sell than to buy in UK equities.

‘We are not at nosebleed valuations yet. I would be a bit nervous being a harbinger of doom over the next two months, but we are certainly trending in the direction where eventually valuations can’t continue to grow.’

Over three years the Recovery fund is up 60.2% versus the UK All Companies sector’s 31.4% rise. The Income fund, a Citywire Selection pick, is up 48.7% versus a sector average of 37.7%.

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