Builders on firmer foundations as hedge fund snaps up Barratt shares

BRITAIN'S beleaguered house builders staged a dramatic recovery yesterday after a hedge fund moved to increase its bet on debt-laden Barratt.

Shares in Barratt Developments soared by as much as 34 per cent yesterday morning after it was revealed that Boston-based Polaris Capital Management had reached a share holding threshold of 6 per cent.

The house builder, which has taken a stock market pummelling on the back of the economic slowdown, closed up 23.6 per cent at 158.25p, its highest level in more than two months.

Despite recent surveys showing the UK housing market continues to slow, Barratt's FTSE-250 rivals also soared on the news, with Persimmon shares closing up 11 per cent, Taylor Wimpey adding 14 per cent and Bovis closing up 9.6 per cent.

Yesterday's movements were a dramatic reversal in fortunes for house builders.

In June, Barratt led the UK listed housing sector downwards as hedge funds "shorted" the company – making profit by borrowing shares to sell immediately, buying them back at a later stage when they hope the price has fallen and pocketing the difference.

The bets were sparked by fears that sales at the company had slowed to such a degree that it would have to renegotiate its banking covenants, placing the company in risk of administration or swapping debt for equity.

Analysts at Dresdner Kleinwort withdrew the bank's target price on Barratt, saying it could not value the shares without further clarity on the value of its assets.

But the interest of Polaris, which only stands to gain if the shares rise, shows investors are increasingly betting the sector is undervalued.

Bernard Horn, a portfolio manager at Polaris, was quoted last week saying he believed the risk of bankruptcy at Barratt was "extremely low", and that "hysteria and panic have overtaken calm analysis of the valuations of UK house builders".

Separately, analysts at Goldman Sachs yesterday slightly upgraded their view of the UK house building sector yesterday, changing the rating on Bellway from "sell" to "neutral" while Bovis Homes was removed from its "conviction sell" list, and increased target prices across the sector.

Polaris is not the only investor to snap up Barratt shares in recent weeks.

Phoenix Asset Management, a London-based investment company, has also built its stake in Barratt from 8 per cent to more than 11 per cent since the start of June. The City will receive a clearer indication of current trading when FTSE-250 builder Bellway provides a trading statement on Thursday.

Persimmon, which was thrown out of the FTSE-100 earlier this year as its shares tumbled, releases its interim results next Thursday.

Barratt declined to comment on the movement yesterday.

BACKGROUND

POLARIS Capital Management describes itself as a "global and international value equity manager".

In financial parlance, that means it is a hedge fund.

Unlike some of their fellow "hedgies", who are obsessively secretive, Polaris is open about its investment methods.

Its "global value philosophy" is "a disciplined combination" of "investment technology and traditional fundamental research … to identify the most undervalued companies worldwide".

The firm manages $3.6 billion for institutions, retirement plans, insurance companies, foundations, endowments, and "high-net-worth individuals".

Bernard R Horn jnr, who founded Polaris in 1995, takes all final investment decisions.