Figure 1: Employment Rate falls to 74.4% in 3 months to Jan 2007
Source: National Statistics
Consumer price inflation rose for the first time in five months to meet the BoE's target of 2 per cent in February, from 1.9 per cent in January, which analysts read as reducing the chances of a cut in interest rates. The core measure of inflation, which strips out more volatile fuel and food costs, rose to 1.4 per cent from 1.3 per cent.
Figure 2: CPI AND RPI
Source: National Statistics
6.0 Industry Analysis (Sectors selection)
The stage of the industry life cycle has indicated the market trend and a good market performance indicated a good investment opportunity. The sectors selection is based on the industry market performance analysis and industry life cycle analysis.
6.1 Health Care Equipment & Services Industry
6.1.1 Market performance analysis
According to digitallook.com data, the total revenue of this industry has a significant increase by 64.97% in this year. The Earning per Share has high percentage of increase as 62.57% growth compared to last year. The current PE ration is 32.93, which is satisfied ration. As diagram shows, the highest market value of this industry is 3850 and the lowest is 1788. The market price has increased by 28.50% in the past five years. The recent market situation is in bull market, and the bull market trend will continue in the following few months.
Figure 3: HEALTHCARE EQUIPMENT AND SERVICES INDUSTRY
(Source: www.digitallook.com)
6.1.2 Industry life cycle
The PEST analysis shows the external environment has shaped the growth of Health Care Equipment & Services Industry. This has shown as the global warming and pollution have affected human health, and the current social trend show people are becoming more concerned about personal health. Government has put more effort to improve the heath care equipment and service system. The private heath care has increasing rapidly in the past five years. (BBC News) The current situation of Health Care Equipment & Services Industry is in the growth stage of the industry life cycle. (See Appendix A) In depth, it is in the fast growth stage. The market will continue growth with increase in market price in the future.
6.2 Electronic & Electrical Equipment Industry
6.2.1 Market performance analysis
According to digitallook.com data, the growth of Electronic & Electrical Equipment industry was rapid. As the total revenue has a significant increase by 55.71% in this year. The Earning per Share has high percentage increase of 147.78% over last year. And the Dividend per share has increased by 19.15%. The market performance was efficient, as the Return on capital employed rate was satisfied as 18.22%. The market price in past five years has dropped by 43.5%, however, the price has picked up continuously in recent 3 years after the significant drop made in 2003 showing 68% growth in the past three years and 30% increase in the last year. The trends of this market are continuing growth.
Figure 4: ELECTRONICS & ELECTRCAL EQUIPMENT INDUSTRY
(Source: www.digitallook.com)
6.2.2 Industry life cycle
According to BBC, the electronics and electrical equipment consumer market are still struggling, however, the market size is sufficient and the market trend is positive. The firms have invested in new equipments, the market are picking up again. The current situation of this industry is in the maturity stage, it was in decline, and however went into renewal with the maturity stage (See Appendix A) indicating that this industry has good opportunity for investment.
6.3 General Financial Industry
6.3.1 Market performance analysis
The growth of General Financial industry was significant; as the total revenue has dramatically increased by 172.1% in this year. The Earning per share has increased by 54.1% and Dividend per share has increased by 31.6%. The market performance was not efficient as the ROCE has dropped by 20%. However, the market price has a significant increase of 86.1% in the past three years and 61.2% price increase in the past five years indicating the performance was more efficient in the latest three years. The market is in bull market condition since the mid 2004, and the trend is continuing in 2007.
Figure 5: GENERAL FINANCIAL INDUSTRY
(Source from: www.digitallook.com)
6.3.2 Industry life cycle
UK is one of the biggest world financial industry centers; the industry is stable and continuing growth. That has shown as the average 20% ROE rate since 1998, and annually 3% increase in the industry employment. The current industry life cycle position is at maturity stage, but the industry was growing rapidly and the trend will continue in the following several years. (See Appendix A)
7.0 COMPANY SELECTION
The company selection is mainly based on fundamental analysis. It will horizontal analyze the company trading performance such as the annual revenues, net income (profit after tax). It will also adopt DuPont analysis technique such as the Return on Equity ration and growth rate. In some companies, the selection is based on the technical analysis.
7.1 Health Care Equipment & Services Industry
7.1.1 Bespak (BPK)
Figure 6
(Source: )
The trading performance of this company was efficient for the fiscal year ended 29 April 2006, Bespak revenues rose 17.3% to ￡93.08 million. Net income (profit after tax) was 4.4 times over last year to ￡10.32 million. The prospects for this company are positive as the revenue growth rate forecast is high as 32.8%. The firm was emphasizing in firm’s growth showing as the high Return on Equity (ROE) (ROE=15.6%) and the high retention ration (RR) (RR=3.36 times). The high growth rate (52.5%) reveals the firm has a continuous growth prospect.
7.1.2 Care UK (CUK)
Figure 7
(Source: )
The net income has only 2.9% increase in 2006. However, the overall trading performance of this company was efficient. The ROE rate was 14.5% in 2006. And there was a 17.0% increase in 2006 to ￡183.35 million. The revenue was consistently increasing for the past five years and the trend will continue in the following 2 years.
7.1 3 Clinphone (CNP)
The company did not operate efficiently in 2005 showing the negative net income (-￡0.09 million). However, the overall performance was better in 2006. The revenue has increased by 32.2% to ￡20.65 million; net income has risen to ￡1.81 million. The prospect of this company in 2007 is positive.
7.1.4 Corin Group (CRG)
Figure 8
(Source: )
The net income of this company dropped by 3.4% in 2006; However, the overall performance was good. The revenue rose by 7.4% to ￡27.86 million. The revenue was consistently growing for the past five years and the positive trend will continue to 2008. The DuPont analysis shows the firm’s growth is fast showing as 11% of ROE rate, 2.28 times RR ratio and 25% growth rate in 2006.
7.1.5 Gyrus Group (GYG)
Figure 9
(Source: )
The current growth of this company is slow showing low ROE rate (4.6%) and negative growth rate. However, the firm’s overall performance is good. The revenue rose by 41.9% to ￡213.34 million and the net income was twice of last year. The revenue was consistently grown for the past five years and the positive trend will continue to 2008.
7.1.6 Nestor Healthcare (NSR)
The company performance was inefficient; the revenue has dropped by 16.1% to ￡172.64 million in 2006. However, this company was profitable. Despite the drop in revenue, the net income has increase by 10.6% to ￡9.57 million and ROE rate was high as 80.4% in 2006. The prospect of this company is positive.
7.1.7 Optos (OPTS)
The overall company performance was efficient. The revenue rose by 40% to ￡67.72 million and was more profitable in 2006 than the previous year showing increase in the net income from -￡2.2 million to ￡10.81 million in 2006.The ROE rate was high as 21.1%.
7.1.8 Smith and Nephew (SN)
The overall trading performance was efficient. The revenue has increased by 8.9% to 2779 million in 2006 net income rising by 30% to 394 million. The Return on Equity rate was 18.1%. Revenue is expected to grow by 14.4% in the following year.
7.1.9 Southern Cross Healthcare (SCHE)
Figure 10
(Source: )
The company performance in 2006 was not efficient. It has made ￡12.1 million lost. However, the technical analysis has shown an opportunity to invest in this company. The market price has an average 2% increase over the past 8 weeks and the growth rate in week 9 was below the average rate. That indicated it is time to invest in this equity.
7.1.10 Whatman
Figure 11
This company was highly profitable in 2006 with slow revenue growth rate of 3.7% increase in 2006. However, the net income has increase rapidly by 62.7% to ￡24.9 million. The DuPont analysis indicates the firm was emphasized in company’s growth. That has shown as the high ROE rate (39.5%), high retention ratio (1.87 times) and high growth rate (73.9%).
7.2 Electronic & Electrical Equipment industry
7.2.1 Chloride Group
Figure 12
(Source: )
The DuPont analysis indicates the firm’s growth was slow as there has only been 0.2% growth rate in 2006. However, the performance was efficient in 2006. The revenue has increased by 18.1% to ￡179.24 million; the net income has dramatically increased by 236%; and the ROE rate was high as 19.5%. The future prospect of the firm is positive.
7.2.2 Domino Printing (DNO)
Figure 13
(Source: )
The company’s overall performance in 2006 was good. The revenue rose by 8.5% to 208.38 million; Profit margin has achieved 10%. The return on equity rate was as high as 18.0%. The revenue was consistently growing for the past five years and the trend will continue for the following years.
7.2.3 E2V Technologies (E2V)
Figure 14
(Source: )
The firm’s overall performance was efficient as revenue rose by 11.7% to ￡112.28 million; the net income increased by 240% to 8.15 million in 2006. The revenue was continuing growth for the past five years. The DuPont analysis indicated the firm was emphasized on firm’s growth. That has shown as high ROE rate (18.6%), high retention rate (1.63 times) and high growth rate (30.3%). The performance reveals a positive prospect for the company in the following years.
7.2.4 Halma (HLMA)
The firm’s overall performance was good as revenue rose by 15.6% to ￡310.77 million; the net income rose by 18.2% to ￡39.61 million in 2006. The DuPont analysis indicates the firm was highly emphasized on firm’s growth. That has shown as high ROE rate (21.1%), high retention ratio (3.36 times) and high growth rate (70%). The firm’s future prospect is positive.
7.2.5 Laird (LARD)
The firm’s overall performance was efficient as revenue rose by 24.1% to ￡608.3 million, the net income rose by 98.4% to ￡50.2 million in 2006. The DuPont analysis indicates the firm was fairly emphasized on firm’s growth. That has shown as high ROE rate (12.3%), high retention ratio (3.09 times) and high growth rate (38.0%). The analyses reveal the firm’s future prospect is positive.
7.2.6 Oxford Instruments (OXIG)
Figure 15
(Source: )
The company’s performance was not encouraging in the last year. The revenue has increased by 8.0%; however it still made a loss of ￡3.4 million in 2006. The profitability situations are likely to be changed in the following year. The forecast of the net income for the coming year will be ￡4.6 million. The technical analysis indicates the company is in bull market condition and the trends are likely to continue for the following period.
7.2.7 Raymarine (RAY)
Figure 16
(Source: )
The company’s performance was good as revenue rose by 12.0% to ￡136.49 million, the net income increased by 28.3% to ￡10.34 million. The diagram above shows the company’s revenue was grown for the past five years. The trend is going to continue in the following years. The DuPont analysis indicates the firm has highly emphasized on firm’s growth showing as high ROE rate (45.7%), high retention rate (1.67 times) and high growth rate (76.3%). The analyses reveal a positive prospect for the company in the following years.
7.2.8 Spectris (SXS)
Figure 17
(Source: )
The company’s performance was efficient despite the low increase in revenue by 4.4% to ￡684.5 million, the net income has increased by 74.4% to ￡61.4 million. The diagram above shows continuous growth since 2003. The trend is going to continue in the following years. The DuPont analysis indicates the firm has emphasized on firm’s growth. That has shown as high ROE rate (20.9%), sufficient retention rate (1.10 times) and high growth rate (23.0%). The analyses reveal a positive prospect for the company in the following years.
7.2.9 TT Electronics (TTG)
Figure 18
(Source: )
Good company performance as revenue rose by 6.2% to ￡600.3 million, increase in net income by 53.0% to ￡28 million. The diagram above shows continuous growth in revenue since 2003 with trend to continue in the following years. The DuPont analysis indicates the firm has highly emphasized on firm’s growth showing as sufficient ROE rate (45.7%), highly retention rate (4.34 times) and highly growth rate (78.6%). The analyses reveal a positive prospect for the company in the following years.
7.2.10 Xaar (XAR)
Figure 19
(Source: )
Despite drop by 1.3% to 42.21 million in revenue, the company was still profitable with 11.5% profit margin generated in 2006. The diagram above shows continuous growth in revenue for the past five years with trend to continue in the following years. The DuPont analysis indicates the firm has highly emphasized on firm’s growth. That has shown as high ROE rate (14.6%), high retention rate (3.54 times) and high growth rate (51.7%). The analyses reveal a positive prospect for the company in the following years.
7.3 General Financial Industry
7.3.1 Ashmore Group (ASHM)
Figure 20
Despite 0.3% increase in revenue and 2.0% increase in net income (profit before tax), the firm was profitable and efficient showing as 81.5% profit margin and 39.0% ROE rate. The market price has an average 3.3% increase over the past 8 weeks. The growth rate in week 9 was below the average growth rate. The technical analysis indicates a good opportunity for investment in this equity.
7.3.2 Evolution Group (EVG)
Figure 21
(Source: )
The company’s performance was efficient. The revenue rose by 14.0% to ￡71.97 million, the net income increased by 34.3% to ￡59.07 million. The diagram above shows continuous growth in revenue for the past five years. The trend is going to continue in the following years. The DuPont analysis indicates the firm has highly emphasized on firm’s growth. That has shown as high ROE rate (37.7%), sufficient retention rate (1.30 times) and high growth rate (49.0%). The analyses reveal a positive prospect for the company in the following years.
7.3.3 F&C Asset management (FCAM)
Figure 22
(Source: )
The revenue has dropped by 6.07% to 261.34 million, and the company has made a loss of 22.53 million in 2006. The fundamental analysis indicates the firm’s performance was not efficient. However, the market price was experiencing growth from 901.7p to 1018.0p, at an average 1.56% over the past 8 weeks. It indicated there is a positive prospect of this equity.
7.3.4 Henderson Group (HGI)
The firm’s overall performance was good as revenue rose by 16.5% to ￡308.3 million, the net income rose by 37.9% to ￡63.3 million in 2006. The DuPont analysis indicates the firm was fairly emphasized on firm’s growth showing as high ROE rate (12.8%), high retention ratio (3.46 times) and high growth rate (44.3%). The analyses reveal the firm’s future prospect is positive.
7.3.5 Intermediate Capital Group (ICP)
Good overall performance as revenue has significantly increased by 54.0% to ￡343.4 million, and net income increased by 203.4% to ￡125.10 million in 2006. The DuPont analysis indicates the firm was fairly emphasized on firm’s growth showing as high ROE rate (25.4%), high retention ratio (2.37 times) and high growth rate (60.2%). The analyses reveal the firm’s future prospect is positive.
7.3.6 Investec (INVP)
Figure 23
(Source: )
Good trading performance for the fiscal year ended 31 March 2006, Investec revenues rose 27.2% to ￡934.39 million. Net income was 3.1 times over last year to ￡329.37 million. The revenue was growing rapidly and continuously since 2003. There is a 31.9% growth forecast for the following year. The ROE rate was as 26.9%. The prospects for this company are positive.
7.3.7 IP Group
The company was booming in the last year as revenue increased 4 times over the previous year. The net income increased 6 times. DuPont analysis indicates the firm was emphasizing on firm’s growth showing as high ROE rate (22.4%), sufficient retention ratio (1.73 times) and high growth rate (38.7%). The firm’s prospect for the future is positive.
7.3.8 Provident Financial (PFG)
Figure 24
(Source: )
For the fiscal year ended 31 December 2006, revenue decreased by 11.7%; however the firm was still profitable showing as 10.6% profit margin achieved that year. The revenue has a regular fluctuation for the past five years. The trend has switched to growth stage for the following year. The DuPont analysis indicates the firm was emphasizing on firm’s growth showing as high ROE rate (35.3%), sufficient retention ratio (1.69 times) and high growth rate (59.6%). The firm’s prospect for the future is positive.
7.3.9 Schroders (SDR)
Efficient performance as revenue rose by 19.7% to ￡967.2 million, net income increased by 114.8% to ￡221.9 million. The DuPont analysis indicates the firm has highly emphasized on firm’s growth showing as sufficient ROE rate (15.4%), high retention rate (4.90 times) and high growth rate (75.4%). The analyses reveal a positive prospect for the company in the following years.
7.3.10 Shore Capital Group (SGR)
Figure 25
(Source: )
Good performance as revenue has increased by 52.2% to ￡42.06 million, net income has increased by 52.1% to ￡14.08 million. The diagram above shows continuous growth in revenue for the past five years. The trend is going to continue in the following years. The revenue forecast for the following year is 63.8%. The DuPont analysis indicates the firm has highly emphasized on firm’s growth showing as sufficient ROE rate (18.7%), high retention rate (3.43 times) and high growth rate (64.14%). The analyses reveal a positive prospect for the company in the following years.
8.0 ASSET ALLOCATION
The asset allocation is based on the computer asset allocation technique – Optimization Program, used to determine the optimal asset allocation by fully analyzing the relationship between the risk and return, and then justify the best portfolio asset allocation by fully referring to the industries and companies’ performance.
8.1 Risk and return
The sectors’ mean return rate and standard deviation were calculated on the basis of total sector value (total of 10 companies’ market capital (market price x share issued)) on monthly base. (See Appendix B) The annualized sector return was calculated based on the mean return rate.
Table 1
(See appendix B)
The diagram above shows the sector A (Health Care Equipment & Services Industry) has the highest annualized expected return (73.5%) with highest risk (6.9%); Sector B (Electronic & Electrical Equipment Industry) has the lowest annualized expected return (63.3%) with the lowest risk (4.2%); and the sector C (General Financial Industry) has medium rate of expected return (65.9%) and medium rate of risk (6.1%). All three sectors have high expected return and low risk.
9.0 Correlation of the sectors
Table 2
The diagram above shows there are all negative correlation between three sectors. Sector A and B has the highest negative correlation (-0.57) and sector B and C has the lowest negative correlation (-0.29).
10.0 Optimization program
Figure 26
The diagram above shows portfolio risk and return relationship by computing Optimization Program. According to the investment objective, the diagram above shows any option of portfolio with 63.3% to 72.7% expected return will achieve the objective (Minimum 20% annualized expected return and maximum 6% risk). The optimal portfolio will adopt the highest expected return, which is the portfolio with 72.7% expected return and 5.9% risk and allocate 89.35% asset in sector A, 0.1% asset in sector B and 10.4% asset in sector C. (See Appendix C)
However, based on the industry analysis and company analysis, the preferred asset allocation will be 55.6% weight in sector A, 16.3 weights in sector B and 28.1% weight on sector C. That is the portfolio with 69.7% expected return and 2.9% risk. (See Appendix C) The reasons of this decision are: the sector A is in fast growth stage (See Appendix A) and most of selected companies within this sector have good performance, so the decision has made to heavily invest in this sector; the sector C is in maturity stage (See Appendix A) but is still growth rapidly and most of selected companies within this sector have high growth rate and good performance, so the decision has made to invest 28.1% asset in this sector. The sector B is in decline stage (See Appendix A), however the firms’ performance were sufficient, so the portfolio still invest more than 10% in this sector.
Figure 27
11.0 CONCLUSION: PORTFOLIO PERFORMANCE
An eight-week trading period is a very short time to determine how good a portfolio really is. There is no perfect formula for guaranteed investment success, the principle behind asset allocation is simply to diversify, and not to too many industries as the benefit of diversification will only diminish, rather it is concentrating on related areas of any economies that are bound to move or outperform the market.
With this in mind, macro economic variables will continue to be watched closely in order to pin point the right time to switch asset classes as deemed necessary.
The assets in interim should remain on hold till the macro economic variables move against the selected sectors that have been chosen.
12.0 BIBLIOGRAPHY
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Francis, J C and Ibbotson, R (2002) Investments: A global perspective, Prentice Hall, New Jersey.
Appendix A- Industry Life Cycle
Health Care Equipment & Services Industry Life Cycle
(Source: )
Electronic & Electrical Equipment Industry Life Cycle
(Source: )
General Financial Industry Life Cycle
(Source from )
Appendix B: SECTOR INFORMATION
Health Care Equipment & Services Industry
Electronic & Electrical Equipment Industry
General Financial Industry
Appendix C: Optimization Program
Appendix D: GDP Data
Appendix E: Sector A Information
Appendix F: Sector B Information
Appendix: G: Sector C Information
The Business, “Cheers as world economic growth stages strong recovery” by Allister Heath, 5/6th February 2006, page 1
http:/ (Date accessed 18/02/2007)
(Date accessed: 20/02/2007)
(Date accessed 20/02/2007)
The continuous cut down in manufacturing jobs could be off-setting the overall picture of unemployment in the UK economy.
