COMMENT
More Fund Manager Favourites

By Ed Bowsher (TMFArkle)
November 8, 2005

Two weeks ago I wrote about three interesting smaller companies favoured by some of the UK's best fund managers.

Using the same approach, I've been looking for some of the most promising larger companies on the London market.

Once again, I visited Trustnet. This time I looked for the best-performing UK Growth and UK Income funds. I then scanned these funds' portfolios, and noted the companies that kept cropping up. I was especially interested whenever I saw a fund manager who was heavily invested in a share compared to its weighting in the FTSE-100 index.

Here are three shares that caught my eye.

Xstrata (LSE: XTA)

Mining has been one of the big investment themes of the last two years, and Xstrata has benefited from the market's increasing excitement about resources.

Xstrata concentrates mainly on mining coal, copper and zinc. Its share price has jumped by more than 160% over the last two years, and the company is now valued at £8.4bn (£13.33 a share).

Bulls think there is more to come. The current mining boom is linked to rapid growth in China, and if it lasts as long as the previous Japan-inspired boom (1945 to 1970), Xstrata looks attractive.

The company is expected to generate earnings of 156p this year, so it's still trading on a price/earnings ratio of less than 10 - pretty impressive given all the recent hype.

On the downside, there's no certainty that the current mining boom will keep running.

There are also concerns about long-term growth prospects for Xstrata. The company failed to buy WMC earlier this year, and justifies its miserly dividend yield (less than 1%) on the grounds that it's hoping to buy another mining player. In this kind of market, there's a risk Xstrata might over-pay.

Standard Chartered (LSE: STAN)

Standard Chartered's big attraction is that if offers an easy way to gain some exposure to fast growing Far Eastern economies and some other emerging markets.

The bank's roots are in Hong Kong, but several takeovers have diversified the business. The biggest recent deal was April's acquisition of Korea First Bank. But even if you exclude acquisitions, the bank still delivered a 15% rise in first half pre-tax profits to $1.1bn. Not bad for a business worth almost $28bn (£16bn in real money).

Standard is also developing a bank from scratch in China and would like to make an acquisition there if possible.

Standard is not just a predator. It's often touted as a potential bid target on the grounds that banks in Europe and North America want more exposure to Asia.

That said, Standard's status as a bid target could become a problem. If the market decides that no bid is coming, some investors may decide to sell out.

Rolls-Royce (LSE: RR.)

Rolls-Royce is a terrific British success story. Thirty years ago, its main business was in engines for the military market and its civil aerospace division was small.

Heavy investment in commercial aviation since then has paid off, and last year Rolls overtook GE Aircraft Engines to become the No 1 player in the global civil aero-engine market.

Rolls-Royce's great strength is that it has a much more predictable revenue stream than you might think. 55% of last year's revenue came from after-sales services. So even if the commercial aviation market became less buoyant, Rolls could still generate decent revenue by servicing the engines it has sold over the last twenty years.

If demand for commercial aviation stays high, Rolls then creates an ever-larger fleet of engines for its after market business.

The problem is that much of this good news is already in the price. Rolls is currently trading on a price/earnings ratio of 16. I wouldn't expect spectacular share price growth from here, but there's a good chance the shares will deliver a solid performance over the next few years.