Bid for Cadburys puts focus on recovery funds

Brian Dennehy

The takeover bid for Cadburys earlier this week was very encouraging for the stock market.  Yet one attempted takeover isn't much of an M&A trend (the flakiest kind of trend).

And before everyone dashes into small and mid caps it's worth remembering that this is a US-led takeover of a UK multi-national in a very defensive sector.  So those looking for funds that might exploit continuing M&A potential should focus on those with an acyclical approach to buying stocks, and a lot of patience e.g. not those managers turning over stock every 6 months (the crumbliest kind of performance).

The classic fund of this kind is undoubtedly M&G Recovery, typically holding period for a stcok about 3 years.  Though the manager Tom Dobell is at pains to point out that he doesn't buy stocks to benefit from M&A, the very nature of his seeking out hidden value means that M&A is a distinct possibility as the cycle unfolds.  Even since end-2006 he has benefitted from half a dozen takeovers e.g. Scottish and Newcastle, British Energy.

Artemis Special Situations is a fund in a similar mould.  The manager has a large overweight in Cadburys, 2% of the fund compared to 0.6% index weighting.  There are a few more potential M&A candidates hidden away in the fund such as Mitchells and Butler, Chloride and Rotork.

You probably don't want to buy funds that have topped the performance tables in the last few months if you want to exploit M&A activity.  For example the Artemis fund has nothing in miners - though takeovers are continually mooted, there is little obvious value after the strong run of recent months for long term value investors. Similarly, banks have been in the vanguard of the markets advance, but how would you value them now? 

So you probably need to looking at funds that have underweighted banks and miners, such as these M&G and Artemis funds, and not the crumbliest flakiest funds that have led the charge in recent months.

A more widely spread takeover trend might emerge next year - but don't bank on it.

Apologies for silly puns!
 

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