The manager of the £909m Royal London UK Equity Income Fund conceded he has held the view for some time, but remained confident accelerated M&A is on the cards, especially given the higher level of IPO activity in the UK stock market.
As such, he expects his mid-cap bias – currently around 40% of the fund – was set to benefit the fund’s performance.
While unwilling to bet on exact target names, he said the characteristics sought by acquirers were those shared by favoured holding AZ Electronic Materials.
He cited companies operating in growth markets, like AZ Electronics – recently bid for by Merck – which supplies essential chemicals to a range of industries, including Apple in its customer list. Cholwill said by only producing in small quantities chemicals that industrials needed in order to manufacture their products, the company offered a high degree of added value, which led to its attractive selling price, reported as £1.6bn.
Ripe environment
He added there were a lot of mid caps that shared such attributes.
“Over the course of this year I expect takeover bids for a number of mid caps and hopefully I might own a few of them, which will allow me to then recycle the money into other companies. At that stage, the large caps, which might have been the laggards, could present an investment opportunity, but it will, as always, depend on the share prices.”
The availability of cheap debt was also a ripe environment for mega-cap companies to improve their prospects.
“Given the anaemic growth they are experiencing, if they look towards the faster-growing parts of the economy and work within that, they can significantly improve their growth rate.”
Royal London UK Equity Income has beaten the IMA UK Equity Income peer group over one, three and five years, the latter of which saw it return 160.7% against the sector’s 116.2%, according to FE data.
