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Whilst this asset class has no real
diversification benefits against
traditional financial markets, an
investment in a diversified portfolio of
Precision Engineering companies does
provide investors with exposure to
the global industries those companies
service. These may range from energy,
infrastructure, defence, automotive
and aerospace to heavy industry
and transportation. However, such
an investment cannot be considered
as a hedge against inflation as it
follows general market conditions
and confidence, as well as costs,
up and down. Nevertheless, there
is an investment case for Precision
Engineering and it comprises a number
of key elements, including supply
and demand, growth potential, and
the availability of significant political
support and goodwill.
Lord Flight is a former Conservative
MP and Shadow Chief Secretary to the
Treasury, and is current Chairman of
the EIS Association, a Director of Metro
Bank, a Director of Investec Asset
Management Ltd and of several other
Funds and financial services businesses.
He is also an investor in Cyrus IM’s first
Precision Engineering EIS Fund.
“UK Precision Engineering is
an area of British skills which
has been undersold, with
significant benefits for those
firms which are willing and
able to enhance their profiles
and profitability. To do this
also needs improved financial,
marketing and business skills.
The specialist nature of the sector
also provides some protection
against emerging market price
competition.”
Lord Flight, Chairman of the EIS
Association and Metro Bank Director
SUPPLY AND DEMAND
Precision Engineering is strongly linked
to the manufacturing industry and in
particular to various sectors including
automotive, aerospace, defence, as well
as a host of energy, transportation and
construction fields. In fact, the scope
for Precision Engineered components
is incredibly broad, particularly in
view of the economic upturn which
provides increasing demand for
new and innovative products from
consumers with more cash to spend.
In turn, the availability of funds drives
developing technologies, parts for many
of which are supplied by the relatively
small number of companies who are
specialised in the skills and equipment
required to build them.
That said, even in times of economic
downturn, Precision Engineering is
liable to benefit from business entities
seeking to reduce costs via greater
efficiencies such as the production of
lighter components to use less fuel
and reductions in running costs and
maintenance or refurbishment of old
machines is still likely to be required. In
addition, most companies across the
sectors require machine maintenance
and overhaul regardless of the
economic outlook.
The supply and demand curve is further
enhanced when you consider the
growing trend of UK manufacturers
bringing production back from
overseas (reshoring), with 15% of UK
manufacturers having done so during
the past year
8
, in great part, for the
proximity and quality of Britain’s world
class engineering industry. In fact,
Britain’s powerful and well-earned
reputation for outstanding engineering
certainly plays a key role in capturing
business.
The capacity for increases in the
number of new Precision Engineering
companies is restricted by the
significant capital outlay of setting
up new competitors, related to the
machinery and expertise required, in a
market which is not generally supported
by the ready availability of bank funding.
New entrants are also significantly
hindered by the long term, embedded
relationships of many Precision
Engineering suppliers with their
customers (including large and
prestigious firms), who prize track
record and proven experience above
short term cost savings for high
value components. These represent
potentially huge costs to the customer
if they are not quickly and effectively
produced or refurbished.
Consequently, there is currently
a growing demand for Precision
Engineering skills for an unchanging
supply of companies. However, in
a market which services so many
specialist needs, linked to particular
sectors of manufacturing and industry,
specific supply and demand factors are
also affected by the state of the relevant
sector.
GROWTH POTENTIAL
As an aggressive investment, the main
aim of investing in Precision Engineering
is capital appreciation, with the majority
of investment products focused on
buying assets and entities cheaply and
building value through increased order
books, (through the introduction of new
products and markets), cost savings,
synergies and customer relationships.
This is currently very much aided
by the presence of undervalued
companies/distressed assets due to
the recent recession and the difficulty
of accessing capital through debt and
equity financing, particularly for smaller
Precision Engineering enterprises.
Other investment products look
to increase value by providing the
funding and tools necessary for taking
advantage of growth opportunities.
It is also assisted by the fragmentation
of the market, with the relatively large
proportion of SME’s which comprise
the market, often having a long history,
specialising in specific activities, but
THE INVESTMENT CASE
