Amvescap one to watch in market recovery

AMVESCAP ranks high amongst the FTSE 100 stocks most likely to benefit from an equity market recovery.

One of the world's largest independent fund managers, with $323bn in assets under management, Amvescap offers a full range of global investment products, including equities, bonds, fixed income, money market and property products. Some 55% of funds under management are invested in equities, making the stock extremely sensitive to market movements.

It is estimated that a 10% increase in equity markets boosts the company's profits by around 20%. As a result, Amvescap's share price generally moves twice as far as the underlying move in equity markets, both up and down, making it an ideal stock for trading.

In line with its strategy of developing its position as one of the leading global fund managers, Amvescap has been an active acquirer over recent years.

Major purchases include AIM and LGT in the US, Prudential in Britain and Trimark in Canada. While in hindsight, the price paid for these acquisitions looks high the value of these deals now exceeds the current market capitalisation of Amvescap they have advanced the company strategically, giving Amvescap both the scale and marketing capability to compete in the global funds business. In addition, they have added diversity, both in terms of style and geography.

Initially slow to cut costs in response to declining equity markets, the company has now started to take action. Until late last year, little had been done to integrate the various companies acquired through the late 1990s. Then the company announced plans to restructure itself into two operating entities: AIM and Invesco. The retail distribution forces of both AIM and Invesco are to be merged in the US, resulting in a more flexible and cost effective retail distribution operation.

In addition, management have announced plans to reduce costs by $150m per annum, which should provide support for earnings forecasts and go some way towards offsetting the negative impact of continued weak investment performance in Amvescap's US equity mutual funds. Both AIM and Invesco funds have been experiencing outflows recently, having seen strong inflows in the late 1990s andearly 2000s.

While 45% of funds under management are in money market and bond funds, which provide an element of defensiveness, revenues derived from the 55% of funds under management invested in equities, are clearly impacted by stock market levels.

Market movements and fund flows impact the value of funds under management, on which fees are charged. Earnings downgrades, a feature since equity markets peaked in March 2000, will continue should stock markets continue to decline.

In addition, with 80% of profit generated in the US, the stock is very sensitive to movements in the dollar/sterling exchange rate.

Definitely not a stock for the risk averse, Amvescap is one of the most attractive in the British market. On 14x current year earnings, the company is trading well below its historical trading range of 17 to 37 times earnings. Looking at the market capitalisation as a percentage of funds under management, a valuation tool traditionally used for fund management companies, Amvescap trades at 1.3% of FUM.

This looks very compelling when compared with benchmark multiples paid for acquisitions within the sector, highlighting the attractions of Amvescap as a target for any financial institution looking to bulk up its fund management operation. Merrill Lynch, for example, paid 3% of FUM for the institutional fund manager MAM in 1997, while Prudential paid 10% of FUM for the retail asset manager M&G in 1999.

Amvescap is one of a number of stocks highlighted in Goodbody's recent report Better Days Ahead, which aims to identify a number of Irish and British stocks expected to respond positively to an improvement in equity markets.

* For a copy of this report, contact Goodbody Stockbrokers. Phone [phone] or [phone].