Battle of the balance sheets: are selectors buying into the cash-rich trend?

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How are fund selectors capitalising on the battle of the balance sheets? From the views we canvassed from leading fund selectors it’s clear there are two opposing attitudes to cash-rich companies. Defence and attack.

David Levy, DiverInvest

Slow economic growth is set to continue into 2013 in developed markets. But emerging markets, especially Asia, will buck this trend.

We are rather more worried about the US fiscal cliff than the eurozone’s government debt issues. While the first problem is being left in the closet until US elections are over, Europe’s big fiscal and financial dilemmas are finally being addressed.

We focus mainly on multinational companies with more than 50% of revenues in emerging markets, strong brand reputation, low P/E
ratios and high dividend yields. In the fixed income markets, we are positive in emerging market debt and local currencies: PIMCO GIS Emerging Local Bond (local currency) and Pictet Emerging local Debt funds (local currency).

We expect the dollar and euro to suffer from a credit crunch because of the over use of quantitative easing. In the stock market, excessive economic gloom translates into depressed and attractive valuations.

However, we believe markets can’t go endlessly up and down simply depending on how much money has been printed by the Fed or ECB. In this context, we believe that European stocks are undervalued against US stocks.

European equity funds such as Allianz RCM Euroland Equity Growth or Henderson Horizon Pan European Equity Dividend, with their focus on undervalued companies, should give interesting returns.

Andreea Surdu, BPI Asset Management

In a low growth/low inflation environment, in which it is difficult to price and predict sovereign risk and government intervention, companies have started to accumulate higher than average levels of cash that allow them to face unexpected stress periods.

This cash is used as protection and companies forgo investment opportunities for the sake of security and independence from other sources of financing. From a shareholder’s point of view this is negative as the equity holder is the direct beneficiary of growth.

On the contrary, the bondholder has a large cushion of liquidity, which boosts the attraction of this asset class. Consequently, and considering the chase for yield and the historically low default rate, we have allocated money to European high yield bond funds whose portfolio managers have the liberty to invest into bonds that offer the best risk-adjusted returns.

We have favoured managers with a thorough credit analysis embedded in their investment process that are not restricted to benchmark names. Managers such as Tatjana Greil-Castro from Muzinich Europe Yield have been in our portfolios for almost a year.

Davide Montaldo, Banca del Piemonte

There are different ways to take advantage of the current situation. It depends on which part of the balance sheet you want to be in and how much risk you are willing to assume in terms of market exposure. Investment in the risk capital of a company with solid finances is good but may expose you to certain levels of volatility.

In this case I would choose a manager with the ability to move away from benchmarks and a bias towards companies working in defensive or growing sectors. Morgan Stanley’s Global Brands fund ticks this box. I have also started to monitor Schroder GAIA Egerton, as an alternative.

Presently, I favour the safest part of the balance sheet. I prefer to be a bond holder of a company in good health and with cash availability. Being a lender to a company with a good cashflow is a wise way to invest my clients’ money especially during years in which you have to contend with market uncertainty.

For a good mix of different kinds of debt I recently monitored Morgan Stanley Global Bond fund; PIMCO’s specialised products also offer good solutions.

In the EM bonds you can find attractive offers from corporates or governments in better shape than developed ones. I favour the Pictet EM Debt team to cover this asset class.

These comments originally appeared as part of the Buyers’ Market feature in the November 2012 issue of Citywire Global magazine.