Fund managers define UK general industrial companies in differing terms, with some seeing them as cy...
Fund managers define UK general industrial companies in differing terms, with some seeing them as cyclicals and some pointing to growth attributes.
Crispin Finn, director of UK equities at Credit Suisse Asset Management, who is generally overweight industrials, veers to the growth side of the argument.
He says: "Some investors think these are purely cyclical stocks and the upturn we have seen in their fortunes is easing off. But there are those, including myself, who see scope for these businesses to recreate themselves and generate reasonable growth in a reasonable economic environment."
Finn said as far as UK-domiciled companies are concerned, most have had to compete with low-wage-driven competition for many years. However, the better ones have retained those operations that add value and transferred out those that do not.
He believes there is reasonable scope for continued growth in these stocks, effectively driven by a continued increase in manufacturing investment.
He gives engineering business IMI as an example. "It has looked to push most of its lower value-added work to low-cost areas but keep higher value added work in-house. The company has particularly focused on areas where it can see growth coming through in investment terms."
However, Nigel Lanning, UK fund manager at Allianz Dresdner Asset Management, says that, industrials can be generally classified as cyclical stocks, although there are exceptions to this rule.
He adds: "I don't think some of the defence companies would be described as cyclical, but then on the other hand something like GKN, with its exposure to the motor industry, would meet this classification"
Lanning concentrates on blue chips in his selection of industrials, pointing out a whole host of mid-caps in the engineering and machinery arenas that are underperformers in their sector.
On the subject of low wage foreign competition, Lanning thinks UK companies have already exited those parts of their business that were most at risk. He says: "By international standards, the UK economy has a very small manufacturing base. The proportion manufacturing represents in GDP has been in a long process of decline over the last 100 years.
"While there is much tougher competition from, say the Chinese today, UK manufacturing companies exited such commodity-oriented products a long time ago."
Lanning notes: "In many cases these are cyclical businesses. For all sorts of historic reasons the UK is not good at manufacturing."
Specialisation is the key to success for UK industrial firms, he says, using as examples GKN - world leader in constant velocity joints, which allow a rotating shaft to transmit power through a variable angle - and motor component firm Tomkins. Lanning judges companies in terms of their management and particularly likes Smiths Group, and Tomkins.
"Another reason for buying an industrial stock is either where there is a recovery going on, which is where I would include BAE Systems, or where the valuation looks modest, like GKN," he says.