Oil exploration and production company Cove Energy has put itself up for sale.  Its Africa based assets include the 8.5% stake in the Rovuma Area 1 offshore Mozambique. The partners have discovered 15-30+ trillion cubic feet (“TCF”) of gas already with plenty more prospects to drill in what is shaping up to be a very significant liquid natural gas project.

This move is likely to see interest from both oil majors looking to add new resources and Asian utility companies seeking security of supply of gas.

Cove Energy is held in both the F&C UK Equity Income and F&C UK Alpha Funds, so both have done well from their holdings and are set to benefit from any further rise in the Cove share price now that the announcement has been made.

This is just the result we look for from companies in the E&P sector and is in line with Cove’s stated strategy since the Funds bought into the stock some time ago.  We have worked closely with the company and helped fund their exploration activities through a series of equity fund raisings.  This was on the clear understanding that there would come a point when they would look to realise the value of the assets they had discovered, leaving it to the larger players with deeper pockets to fund the final development and production phase of their assets.

Equity markets are clearly being driven by macro factors and this looks set to continue for some time to come.  So looking for capital growth potential through bottom-up fundamental analysis has been difficult.

In such an environment though, bottom-up research still has a lot of value in identifying strong sources of income potential for my UK Equity Income Fund.

I have been looking at the listed Lloyds syndicates and recently added Amlin to and increased holdings in Beazley in the portfolio.  The outlook for insurance rates is positive and both organisations have a conservative approach to investment in the business.

Both companies also have an attractive dividend yield around 7%  for Amlin and 6% for Beazley, which I believe should be sustainable.

London Mining with its iron ore assets in Sierra Leone is a favourite of both Peter Lees and myself and held in our UK Alpha and UK Equity Income Funds.  We both own the equity and I also own the convertibles in the income fund aiming for the best of both worlds.

Having visited the London Mining operations in Sierra Leone a few months ago I was keen to attend last week’s seminar on investing in the country hosted by the High Commissioner to the UK and the Ministers of Finance and Economic Development, and Trade and Industry.  Henry Bellingham MP, the Africa Minister in the Foreign and Commonwealth Office was also there. 

As an existing investor in London Mining I wanted to hear what was said about foreign investment into the country, as their overall approach in this area would likely impact on the value of my holding.

The news was very positive with the government making clear its intention to promote foreign investment in three key areas, agriculture, tourism and mining.

What was also reassuring to hear was the progress the country is making in terms of transparency and corporate governance.  In a recent World Bank Report* Sierra Leone was identified as one of the most improved areas for doing business as a result of economic reforms put in place across the country now that the civil war is over.

Iron ore is the key asset for London Mining and the development of this resource is also crucial to the GDP and health of the domestic economy.  The start of production from two iron ore projects (including London Mining’s Marampa asset) in December 2011 will likely see the country’s GDP increase from $2.1bn to $3.4bn, over 60% in 2012.  If only George Osborne could engineer such growth all our debt problems would be over!

* World Bank – Doing Business 2010 - Doing Business in a More Transparent World

I’ve just come back from visiting a company that both Peter Lees and I own in our UK Alpha and UK Equity Income Funds.  The visit involved a very early start as I joined the regular commute to work of some 20 specialist workers.

Though I must say I felt somewhat disconcerted as I pulled on my special dry ‘ditching suit’ and listened intently to a 30-minute safety briefing before getting on a helicopter flight to an oil rig way out in the North Sea currently working for Hurricane Exploration.

An absolutely fascinating trip though, watching the extremes of drilling with a 2.5 kilometre pipe hanging from the rig, housing hugely powerful drill bits and ultra-sensitive electronic measuring equipment.  All in all a very successful and highly educational trip.

Hurricane is a private company that is looking to float in the near future. The breadth and depth of the team’s contacts across the market means we are quite often offered the chance to invest in private companies ahead of their intended flotation on the market.

The current size of our two Funds means we can both get meaningful exposure to a small number of these exiting opportunities - something just not possible for much larger funds.

I must say though, I now look at the train in an entirely new light – even when it’s late.

The results season is in full swing and most companies are largely in line with expectations.  However, we are beginning to see some modest downgrades to expectations for 2012, but that is largely to be expected at this stage of the cycle.

The downgrades are being driven by a squeeze on margins from increased costs and investment, though the latter should in most cases be regarded as a long-term positive.  We currently see no reason to change to our growth expectations, but feel that the market may be expecting a bit too much at the moment.

That said, as an income manger, strong corporate results means I am bullish on the outlook for dividends.

Looking beyond the US’s budgetary issues, which I expect to go right to wire and possible a little beyond before resolution, I have begun to build a holding in Schroders.  I feel that once the current headwinds abate the market will be in a much better position and Schroders is a potential beneficiary from a broad market rise.

I’ve sold Northumbrian Water now that the bid is in place as it’s effectively ‘dead money’ and can be better used elsewhere. We are not expecting a counter bid.

I mentioned previously that Cheung Kong Infrastructure was considering a bid for Northumbrian Water and this has duly arrived.  The figure of 465p per share, plus the final dividend of 9.5p, represents a fair price and locks in a strong profit for the Fund, where average price paid for our holding was around 300p.

Australian Prime Minister Julia Gillard’s announcement of a new carbon tax on the resources sector, which will land heaviest on the coal producers, while disappointing was not really too much of a surprise. She is following a clear theme of governments looking to raise funds from the resources sector – UK, Chile and Tanzania – and I am sure she won’t be the last.

Rio Tinto is a significant coal producer and my biggest mining position in the Fund, though I also have positions in Xstrata and BHP Billiton.  All three will be modestly impacted, though the reality is that the current strong demand globally for resources shows little sign of slowing in any material way, so the impact on profitability should be limited.

The announcement that Cheung Kong Infrastructure are considering a bid for Northumbrian Water has breathed new life into the utilities sector and provided a boost to my F&C UK Equity Income Fund.  This announcement was quickly followed by engineering group Melrose approaching Charter with a view to an acquisition and while I only hold a very small position in Melrose, Peter Lees does have a significant position in his F&C UK Alpha Fund.

The important point here though is that it indicates that M&A activity remains in rude health and there are two main reasons why I believe this will continue. 

The first is the strength of company balance sheets and the need to put capital to work or return it to shareholders in a low interest rate environment. The second is that with growth starting to wane in certain areas margins are beginning to come under pressure, which seems to be the case with Charter deal.  Any corporate activity that enables costs to be taken out of a combined business is likely to be attractive to shareholders.

While potential M&A activity is not a key driver of investment decision making within my Fund, it is something we need to be aware of when conducting our analysis.

With the Fund I am aiming to deliver a strong and rising income with the potential for capital growth. This week the portfolio has seen activity in both areas.

Laird Group, which has been trading in a range of 130-140p with an attractive yield of around 4.8%, received a bid approach from Cooper Industries of the US at a level of 185p.  This gave the Fund a nice boost against a difficult macro-backdrop. The Laird management immediately rejected the offer saying that it undervalued the company. We now wait with interest to see Cooper’s response.

The recent profits warning from Dutch telecoms group KPN sent a shiver through a number of European telecoms groups. This gave me the chance to top up on Vodafone, which I like for a number of reasons. We believe the benefits of the portfolio restructuring are starting to come through and the headwinds of European termination rate cuts are subsiding.  In addition, we believe dividends from its holding in US mobile operator Verizon are about to start coming through again all of which is good news from an income perspective. It also has good defensive qualities in a difficult market.

This weekend sees the merging of the F&C UK Growth & Income Fund into my F&C UK Equity Income Fund.  The portfolios of both Funds have been brought into line so this should be a smooth transition with dealing set to start again on Monday 27 June.

Too many analysts, and indeed investors, think of Tesco as a very large UK grocery retailer. While this is certainly true, the most interesting part of the business is non-food, services and overseas.  These now account for around half of the operating profits of the group.  As a result, it is one of the few large UK companies that offer genuine growth potential.

The most recent set of figures showed that already 31% of sales and 22% of profits are generated overseas.  The expansion in Asia is the most interesting and offers the greater potential. South Korea is currently the largest overseas market but its China where the real potential is on offer and the scale of the opportunity is mind boggling.  The investor trip to South Korea and China has seen some further interesting details emerge.

It is estimated that there is the potential for between 1,400 and 2,100 new shopping malls, each with a hypermarket, and scope for some 8,000 hypermarkets in all, to be constructed by 2020.  To put this in context, Tesco and its four largest competitors currently own a total of 83 shopping malls.

Tesco tell us that they are currently assessing the potential of around 90 cities with an aggregate core population double that of the UK and that they aim to have some 50 malls trading by the end of 2015.

Importantly from an investor’s perspective, Tesco will be working closely with a number of local partners both in terms of expertise but also financing.  So this expansion should not put too much strain on the balance sheet.  By 2015 it is estimated that Tesco’s Chinese operations could be delivering some £4billion in sales.

For this reason we see it as a core holding in the high alpha F&C UK Equity and F&C UK Opportunities Funds.

We have for some time being saying that the better quality companies have been very successful in strengthening their balance sheets since the worst of the credit crunch and deep recession.

In the last few weeks we have seen this balance sheet strength being put to work through a series of takeovers.  Today (21 July) saw the announcement of a £2.5 billion deal whereby household products group Reckitt Benckiser is set to acquire SSL, the maker of Durex and Scholl footcare products.  The F&C UK Equity Fund is a clear beneficiary of this move as SSL has been a long-term core holding.

This follows fast on the heels of the bidding war which saw power systems group Chloride agreeing to be acquired by Emerson Electric for £997m. Elsewhere the discussions between International Power and France’s GDF Suez seem to be back on, while BP has struck a £4.6 billion deal with Apache of the US for the sale of gas assets.

What this seems to demonstrate is a degree of confidence in the global economic outlook amongst companies across a range of industries but also a recognition that organic growth is hard to achieve. It also underpins our view that many companies remain attractively valued and we expect the increased level of M&A activity to continue.