The British recovery will start here

I’m an old-school investor. That means I like to get up close to the companies I value – to see their products and their processes and meet their leaders. I like to call it investing by car… as opposed to investing by broadband.

I think it might have started when I was a nine-year old whippersnapper. Taken on a school tour of Fry’s massive old Keynesham plant, I still vividly remember rivers of melted chocolate, the pungent smell and the roar of the machinery. The factory is long gone, but I still feel a lot of that mix of curiosity and excitement I felt on that visit when I see a company ‘in the flesh’. That is why I strongly believe that to know the world, you have to get out and see it for yourself.

I took great pleasure from touring the carpet-making factory of Victoria Carpets (LSE:VCP) in Kidderminster; Tricorn’s (AIM:TCN) pipe bending operation at Malvern; Robinson’s (LSE:RBN) packaging factory at Chesterfield ; the wheel-making works of Titan Europe (AIM:TSW) in the Black Country, complete with water-wheel and a nineteenth century temperance notice warning of the demon drink; and Chamberlin’s (AIM:CMH) casting works in Walsall – another relic of the industrial revolution.

At all of those locations I found UK manufacturing alive and well. Processes are highly automated; innovation is continuous and quality standards are high. We have some great businesses, well capable of competing in global markets.

And there is one place in particular where I regularly find great companies. Call it the ‘new cradle of British industry’. Because over the next year, I reckon some of the best investing prospects in this country will come from here…

This where the great ideas will come from

I would like to be able to say that all UK manufacturers can expand and provide jobs for our unemployed. The truth is that many run on lean lines and staff numbers are nothing like they once were. 

When I go on my travels around the country, I increasingly find myself in university business parks. Universities have been trying for years to make money out of the brilliant work that is done in their laboratories, but it has been a struggle. The mind of the academic is not always well attuned to the demands of business. Finance has been hard to come by, and sporadic. Relationships with wealthy business partners have sometimes come to nothing as the latter have dragged their feet.

None of these problems have disappeared, yet I sense that the situation is fast improving. I’ve visited so many universities down the years that I feel like I know them well. And I’ve seen them change. Academics are animated by commerce in a new way. It’s like the institutions themselves have a whole new attitude to business.

Part of this is to do with the climate that surrounds higher education. The imposition of tuition fees is not only making young people think seriously of the value of UK education. It is also forcing universities to consider the real value of their courses and of their research work. The government is keen to sharpen their commercial focus. From the end of next year, universities will have to submit their entries for every subject in which they intend to undertake high-quality research with an ‘impact statement’, designed to distinguish research that might have real commercial value from the playthings of sheltered academics.

The government is throwing its full weight behind this

The government is keen to help and at the end of last year produced an ‘Innovation and Research Strategy for Growth’ led by David Willetts and Vince Cable. “The strength of UK universities and the wider knowledge base is a national asset”, it began. But ‘to succeed in the global innovation economy, the UK must strengthen its ability to accelerate the commercialisation of emerging technologies, and to capture the value chains linked to these.’

The government has several ideas for how to push this process along. They’re going to offer tax breaks and extra funding , as well as directing public procurement to look favourably on University businesses. They’ll introduce ‘innovation inuducement prizes’, or cash prizes to whomever solves a designated research problem. A recent example of this approach is the Ansari X Prize to promote private space travel. Finally they’ll support the linkages between academia and business by rebranding the Technology and Innovation centres as ‘catapult centres’, which will focus on the commercialisation of new technologies.

This all sounds a tad gimmicky, and may make little real difference. But my sense is that things are already moving in the government’s desired direction. UK businesses know that they cannot compete on price alone. Adding value through innovation is key, and the stock market provides plenty of examples of what can be achieved by harnessing the brain power of universities.

One of the best performing shares of the last two years, Oxford Instruments (LSE:OXIG), has its origins in Oxford University; Arm Holdings (LSE:ARM) and CSR (LSE:CSR) emerged from Cambridge; Ilika (AIM:IKA) (see my article from 26 January) is a spin-out from Southampton University; Corac (AIM:CRA) was established on the science park of Brunel University; and Toumaz (AIM:TMZ) is based on the work of Imperial’s Dr Chris Toumaz.

If you do not fancy picking yourself, there are a number of stock market vehicles designed to do it for you – Imperial Innovations (LSE:IVO); IP Group (LSE:IPO) which has recently struck lucky with Oxford Nanopore; Fusion IP (LSE:FIP) and Frontier IP (LSE:FIPP). I expect many more success stories to emerge from our universities in the coming years… and no doubt the government will claim the credit!

Finally…

I hope this is the first of many

As you know I have been complaining about discounted share placings that exclude private investors. I find it galling that small companies looking to raise fresh capital often offer new shares at knock down prices to carefully City institutions. I consider it a stitch up by the City. 

Today I am pleased to report that Digital Learning Marketplace (AIM:DLM), a penny share company that I described on 16 February, is raising money through a placing of shares at 0.20p (which compares to the current market price of 0.235p).

If Digital Learning Marketplace is one that appeals to you, and you would like to apply for shares in this placing, you could ask your broker about setting up the deal for you. Apparently the placing is closing on Friday 30th March.

It’s refreshing to see this kind of opportunity being made available to penny share investors. But really it should happen a lot more.

In the meantime, I’ll keep travelling the length and the breadth of the country for new ideas. As you know I’ve found some great biotechnology companies to invest in for my Red Hot Biotech readers. And a great new story that could deliver serious returns for penny share investors this year.

Stay tuned for that.

• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.

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