Managers in anglo irish agreement

What is it about Anglo Irish Bank? With St Patrick’s Day approaching, the Association of Investment Trust Companies has put out a note on Irish holdings, and it reveals that just about every trust has a stake in Anglo Irish. It doesn’t have a branch network and if you ask someone about it they’ll probably confuse it with Allied Irish Bank. Yet its market capitalisation is E6.7bn (£4.6bn), while the rather better known Ryanair is valued at E3.9bn.

Since 1986, when Sean Fitzpatrick became chief executive (he has recently moved up to be chairman), it has transformed itself from a niche lender into Ireland’s fifth-biggest company and third-biggest bank. It specialises in lending to small and medium-sized businesses, both in Ireland and the UK, but it has also expanded into Switzerland and Austria.

Gervais Williams, manager of the Gartmore Irish Growth investment trust, says Anglo Irish is “probably the most successful bank in Europe over the last 15 years. It’s highly innovative in the way it lends, it is much quicker to respond than other banks, and it is far more flexible in its approach.”

Obviously he is not the only one to have spotted it. But Williams says Anglo Irish is still decent value, and in the last few weeks its directors have been buying – in large amounts.

Don’t just take his word for it. Lots of other senior fund managers who are much less likely to be cheerleaders for the Irish growth story are fans too.

Richard Pease has Anglo Irish as the biggest holding in his New Star European Growth fund. He says: “It has averaged 40% earnings growth over the last five years. Prospects remain excellent, with the company continuing to follow its successful model of ‘relationship lending’.”

Over at Jupiter Financial Opportunities, Philip Gibbs says: “Ireland is a fast growth economy and the banks are very well-managed businesses. They are, in addition, trading on low price/earnings ratios. The combination of these factors makes them attractive investments.”

Overall, P/Es for the Irish market are relatively good, considering this is an economy that is growing at 6-7% a year. For 2005 the market is on 13.7x, compared with 13.1x for the FTSE 100 and 12-14x in France, Germany and Spain.

Of course, high economic growth doesn’t automatically translate into strong equity growth, but Gartmore Irish Growth’s record is pretty spectacular nonetheless.

Over the past year it is up 53.8%, over three years it is up 186.9% and over five years it is ahead 142%. It doesn’t have many peers to compare with, but it has comfortably outperformed both the Davy MidCap index and the ISEQ index. Its discount has also narrowed – largely as a result of buybacks – from 8% last year to a premium of 4% this year.

The problem for many prospective buyers is just how long the Irish “Celtic tiger” story can keep going. I am a regular visitor to Dublin, and after September 11 I was convinced we would see the economy come to a shuddering halt. It is hugely dependent on foreign direct investment, and most of it has come from America.

Sure enough, big investors such as Intel either withdrew investment plans or scaled them back. And the property market, Europe’s frothiest, began to show signs of waning.

The economy slowed to a 1-2% growth rate, but it has bounced back remarkably since then. Last year it notched up 6% and most forecasts are for growth of that order again this year. Inflation, which had shown signs of accelerating, has also been pegged back to the European Union norm.

“Ireland is still coming up,” says Williams. “Growth isn’t so easy to find as it was, but it is still running around the 6% level. The demographics are very different from the rest of Europe and the developed world. You still find German banks wanting to relocate there and it has still got one of the most favourable tax regimes. I am confident that the country’s sustained and rapid growth will continue to underpin prospects for its equity market this year.”

Over at New Star, Richard Pease has an extraordinarily high weighting towards this small economy. “Ireland’s ‘tiger’ economy is particularly attractive,” he says. “The Irish government’s business-friendly fiscal policy and the flexible labour force has created an excellent business environment and this continues to attract foreign direct investment.” The New Star fund currently has a 22% exposure to Ireland.

Crispin Longden, manager of European Assets investment trust, adds: “We are big fans of Irish companies. Put an open economy that encourages inward investment together with astute company management and you have a winning combination for delivering long-term shareholder value. Numerous Irish companies meet the prime criterion we demand for our stocks – namely the ability to replicate a successful homespun formula on the wider European stage.” He is yet another manager who loves Anglo Irish Bank.

One problem with investing in Ireland is that a relatively small number of stocks dominate the market. Bank of Ireland, Allied Irish Bank and Anglo Irish Bank make up around one-third of the market’s total capitalisation.

But in Gervais Williams’ portfolio financials make up only 15% of the total. Kingspan is his single largest holding, at 8.8% of the fund. It is a building materials supplier which had a superb year in 2004, its share price rising 66%. But Kingspan doesn’t just rely on the Irish market; it is rapidly expanding in Poland and other Eastern European markets.

His second largest holding is Viridian, the Northern Ireland-based energy group, which is building a new power station in north Dublin. A feature of the Celtic Tiger economy is booming demand for energy and the need for further generation capacity. There is also renewed commitment in both North and South to create an all-island electricity market.

The major worry for any investor in the Emerald Isle must be inflation. It beggars belief that the economy can keep expanding at breakneck speed without inflation spiralling out of control. Dublin is already one of the most expensive cities in the world, and wage demands are rising. But for the time being the genie is being kept in the bottle (probably a Guinness one). Happy St Patrick’s Day.

PATRICK COLLINSON
The Guardian Personal Finance Editor