COMMENT

Fund Manager Favourites

By Ed Bowsher (TMFArkle)
April 25, 2006

Last November I highlighted three larger companies that were popular with top UK fund managers. I'm delighted to say they're all in profit.

Xstrata (LSE: XTA) has been the most successful -- shares in the mining giant have soared 60%. Rolls-Royce (LSE: RR.) is up 34% while Standard Chartered (LSE: STAN) has risen 16%.

Given that success, I thought it was time to dig up some more fund manager favourites in the FTSE 350. Once again, I looked for the best-performing fund managers on Citywire, and then looked at their portfolios on Trustnet or on the websites of individual fund management companies.

Here are three shares that caught my eye:

Royal Bank of Scotland (LSE: RBS)

Royal Bank of Scotland is the UK's second biggest bank. Only HSBC (LSE: HSBA) is larger.

RBS has become a giant via acquisition. Its best known purchase was the Natwest takeover in 2000. Since then RBS's boss, Sir Fred Goodwin, has bought businesses in Europe and the US, and the group as a whole delivered a strong performance last year.

Dividends jumped 25% to 72.5p a share, while pre-tax profits climbed 21% to £7.9bn.

Critics worry that Goodwin will get carried away and launch one takeover bid too far. A recession in the UK or US is also a possible worry as bad debts could rise.

However, at £17.91, RBS is trading on a current price/earnings ratio of just 9.5. I think that's too low for a business of this quality.

Corus (LSE: CS.)

Shares in steelmaker Corus have soared 47% this year, but there should be more to come.

Corus has prospered thanks to rising demand for steel and the company's status as a possible takeover target. Last month's sale of an aluminium business means that Corus is now more digestible for any buyer. Evraz, a Russian rival, is often touted as a potential purchaser.

That said, Corus is now debt free so it could be a buyer if it wished. Or it might form an alliance with an emerging markets steel company. The partner could provide cheap "slab" steel which Corus would then use to manufacture higher value-added steels.

On the downside, energy costs will probably continue to rise, and it's always possible that China's thirst for steel could tail off.

Still, the positive outlook for the steel market and the prospect of further cost savings from restructuring mean that Corus looks attractive at 88p.

Charter (LSE: CHTR)

Charter was in dire straits in 2003. It looked like it might go bust. Three years on, it's become a successful specialist engineer which looks set to benefit from continued growth in global industrial markets.

Last year's results were excellent. Sales rose 22% to £1.07bn and earnings were even more exciting. Adjusted earnings per share soared 117% to 43p and analysts expect a further 21% rise this year.

What's more net debt has fallen to just £6m, a tiny figure for a £1.3bn company (800p a share.)

A p/e of 15 suggests that a fair bit of good news is already in the price, but Charter still has the potential to be a decent medium-term performer.

More: A 2,296% Return In Three Years

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Ed is a former employee of Citywire and owns shares in the website's parent company.