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British markets lag continent for investor appeal

Fund manager Greg Gigliotti feels there are more opportunities outside the U.K.

INVESTMENT REPORTER

Britain is not one of global fund manager Greg Gigliotti's favourite markets right now. He feels there are generally more attractive opportunities in continental Europe and Japan.

"We are not that excited about the U.K. market," said the managing partner and senior portfolio manager at New York-based Trilogy Global Advisors LLC. The British market accounts for about 11 per cent of the MSCI World Index, but only about 6 per cent of the portfolio of the CI Global Fund that he co-manages.

The $1.9-billion fund is up 2.59 per cent so far in 2006. It had a return of 6.5 per cent in the 12 months ended Aug. 31 and 8.29 per cent annualized over the past three years. The fund has had an annualized return of 7.26 per cent since inception in 1986. Results in recent years have been affected by the significant appreciation in the Canadian dollar.

"We have just not found the names there that are as compelling," as elsewhere in the financial sector for example, Mr. Gigliotti said. Financials accounts for a very significant proportion of the British market and the financial industry in Britain is "very competitive, very mature and likely to face a difficult interest rate environment," he said. He finds some domestic German and Italian financials more attractive.

Energy and resource issues also play a big role in the British market. He isn't enamoured of that sector of the British stock market either, in part because he expects volatility, judging from recent experience. Furthermore, "after the strength we have seen in these markets over the past few years, we just don't feel comfortable that it is going to be as easy as it has been in the past for those stocks to be up 25 per cent again from these levels versus the likelihood that they will be down 25 per cent," he said.

But it isn't just the valuations and other factors affecting individual stock picking that makes him a little wary of the British market. The possibility of Britain sinking into a recession also is a factor. "We look at the U.K. as very similar to the U.S.," which is a matter of some concern as in-house research suggests that "there is somewhere in the neighbourhood of a 40-per-cent probability of a recession in each of those markets," he said. The risk of a recession in continental Europe or Japan is, in contrast, only about 5 per cent, he said.

So far this year, London's FT-SE 100 index is up 6.27 per cent, compared with the 7.28-per-cent advance in the S&P 500-stock index in the U.S., the 4.84-per-cent rise in the S&P/TSX composite index, the 11.34-per-cent increase in France's CAC index and the 10.74-per-cent gain in Germany's DAX index. The MSCI World Index has gained about 6.2 per cent.

Notwithstanding Mr. Gigliotti's view on the overall British market, the fund does have some British issues. He is particularly drawn to those firms that have opportunities outside of Britain. Smith & Nephew PLC falls into that category. It is one of the world's leading orthopedic device suppliers. Smith & Nephew "is a company whose growth is going to be very much driven by what is going on in the health care space and probably growth in a number of different international and U.S. markets much more so than what is going on with the domestic economy in the U.K.," he said. Smith & Nephew's American depository receipts (SNN-NYSE) closed at $46.07 (U.S.) on the New York Stock Exchange.

Another British stock he likes is British Sky Broadcasting Group PLC, Britain's leading satellite television provider. The company has a "very dominant" market share, Mr. Gigliotti said. And it is in the process of rolling out broadband service to its customer base, "which will give them a whole other channel of earnings growth," he added. British Sky Broadcasting also trades through ADRs on the NYSE. The ADRS (BSY-NYSE) ended yesterday's session at $41.35.

Mr. Gigliotti also finds shares of Prudential PLC appealing. Prudential provides life, accident, health insurance as well as property and casualty insurance. He said one of the main reasons why Prudential is included in the portfolio is that Prudential is a large company whose results are really driven by profits earned outside Britain. A significant portion comes from emerging markets. "We believe that their exposure to emerging markets actually is an earnings driver that we think makes it a very compelling growth story," he said. Prudential's ADRs (PUK-NYSE) climbed from $16.60 last October to above $26 in March. They have since eased back and are currently changing hands at $24.44.

© 2007 The Globe and Mail. All rights reserved.

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