Lloyd's trusts are worth a look

THE INVESTMENT COLUMN

The first investment trusts designed to take advantage of new corporate underwriting rules at Lloyd's were launched almost two years ago. After a strong start, the shares have subsequently been dismal performers, weighed down by a torrent of bad news from Lloyd's, the illiquidity of the market in most of them and the advent of other low-risk ways into the market.

The merger of the Angerstein and Delian Lloyd's investment funds earlier this month suggests a new realism is entering what, in stock market terms, is something of a cottage industry. The new group, boasting net assets of pounds 112m, will rank as number two in the sector behind London Insurance Market Investment Trust. As well as enhanced clout in the market, the combination should give economies of scale, with around 30 per cent expected to be shaved off total costs by 1997.

The merger comes as the market background is showing distinct signs of improvement. Although not out of the woods, the future of Lloyd's is looking more secure than it has for some time, following May's pounds 2.8bn rescue plan for names, the market's traditional backers. From the point of view of corporate investors, the new deal strengthens the "ring fence" between Lloyd's mammoth liabilities up to 1992 and subsequent years. The promise is that new investors will not have to foot the bill for past problems, in exchange for a levy likely to amount to 1.5 per cent of underwriting "capacity" taken on by participants in the market.

Tthe trading environment is also improving. Profits for the market are declared three years in arrears, but 1993 and 1994 are expected to show surpluses of around pounds 1bn. The current year should be similar. Investors looking to cash in on Lloyd's new-found success have the problem that the market's accounting system denies them access to real figures for several years. Figures yesterday from Syndicate Capital, one of the smaller trusts, demonstrate the problem. Pre-tax profits up from pounds 552,000 to pounds 1.44m for the year to June were all derived from the investment of the group's funds.

However, figures from brokers UBS show that most of the funds are standing at a discount to estimated net asset value. Future prospects are heavily dependent on how the Lloyd's rescue plan unfolds and on future claims. Nonetheless, investors could do worse than take a look at CLM Insurance and New London Capital, which combine some of the chunkiest discounts with reasonable size.

City split on market direction

If you are confused about the stock market, currently within a few points of its all-time high, you are not alone. The City has also been split by a barrage of conflicting signals.

Topping the list of bearish signs has been a consistent trend over the summer towards downgrades of earnings forecasts by analysts. Hoare Govett says these have been outnumbering upgrades by two to one. The bad news has been confirmed by a flood of profits warnings from large companies.

Recent economic statistics add weight to the pessimistic view. Unemployment rose in July, unit wage costs increased by 2.5 per cent in the second quarter over a year earlier and input prices increased as last year's commodity price rises fed through the system.

Stock-building has also emerged as a key issue during the summer with some companies seeing demand for their products fall off a cliff after weaker-than-expected domestic spending left retailers with record stocks relative to their sales.

All that said, bulls take heart from a number of fairly compelling arguments. James Capel recently took a heroically contrarian view of earnings prospects, suggesting the full effects of cost-cutting since the recession were yet to show through fully. Consumer spending is also set to receive a boost on two fronts. First the expected shake-up of the building society sector should result in a sizeable windfall. Any tax cuts in the November Budget would further increase disposable incomes.

But the most important factor determining the direction of stock markets is arguably the proportion of cash in institutional investors' portfolios. Inflows into pension funds and life assurance companies will probably exceed pounds 32bn this year, with a further pounds 8bn pouring into unit trusts.

Add to that the proceeds of cash takeovers, which have already exceeded pounds 15bn so far this year, and institutions have record amounts of cash at their disposal. With the new issues market in the doldrums and the public sector borrowing requirement falling rapidly, other calls on insitutional cash are historically low.

The bulls and bears are more finely balanced than for some time - but, despite a yield now below 4 per cent and increasing political risk, the recent run looks to have some steam left in it yet.

COMPANY RESULTS

Turnover pounds Pre-tax pounds EPS Dividend

Anglo United (F) 202m (228.1m) -12.4m (-74.6m) -1.5p (-8.3p) -(-)

A H Ball (F) 9.8m (8.6m) -3.9m (-405,000) -43.44p (-3.87p) - (-)

Mallett (I) 4.9m (4.5m) 584,000 (501,000) 2.8p (2.4p) 1.1p (0.75p)

Norcity II (I) 61.8m (57.1m) 26,000 (24,000) 1.8p (1.7p) - (-)

(Q) - Quarterly (F) - Final (I) - Interim