Following on from Battle of the balance sheets, we ask the next round of selectors their views on capitalising from cash.
Chris Neunkirchner, Valartis Bank
Business model and management form the leading edge of our selection process. On the company side we consider buying business models where there is a clear competitive advantage. The second step is to know more about the corporate leadership. Managements with a true, sustainable long-term horizon fall into our focus.
Our investment philosophy is based on a core/satellite approach. We screen for attractive investment cases on the satellite level. For example, one of our recent ideas was the investment theme ‘global security’ on the equity side which encompasses house locking systems, advanced entrance systems for buildings, surveillance systems, IT security and even the hospital space – disposal of toxic waste.
As a lot of such companies work in very specialised niches, the generation of higher margin business will lead to alpha creation over time. On the fund manager side, we concentrate on the track record not only of the lead manager but of the broader team as a whole. Team spirit is key. We don’t favour companies where there is a single star manager making all the decisions. Funds with strong teams that we like include the Pictet Security fund run by Yves Kramer and Frédéric Dupraz.
Marianne Rameau, ISGAM
Cashflow returns on capital compared with cost of capital has always been our main focus in asset management and stock selection. The sustainability of these cashflow returns, and the way management uses cashflow to build (or destroy) shareholder value, is equally important.
We currently see quite large divergences within sectors between value creators and value traps – for example, Apple vs Nokia respectively – but also in relation to how the market values sustainable cashflow creation. Some ‘safe haven’ sectors such as consumer staples look quite fully valued whereas other more cyclical areas look undervalued.
Although the gap has closed a little over the summer, there are some great opportunities in Europe, especially the unloved periphery and the UK. Funds that focus on sustainable cashflow returns on capital include Oddo Avenir (European small cap) and Liontrust (UK all cap) in the long-only space. Interesting long/short funds where the managers successfully exploit divergences in cashflow creation and relative valuation include Alken Absolute Return Europe and Marshall Wace Global Opportunities.
Benjamin Caron, Invesco
$2 trillion! This is the estimated amount of cash on the S&P 500 companies’ balance sheets. During the recession, many companies reacted by building up cash reserves and paying off their debts.
The IT industry has been at the forefront of this trend. For instance, Apple, Qualcomm, Google and Microsoft have more than 16% of their market value in cash and securities. This situation clearly creates opportunities. Cash brings flexibility and power: easing access to capital, boosting dividends, providing share buyback potential and preparing future growth by purchasing competitors or investing in R&D.
To sum up, we like technology companies because they are partly immune to the difficult global economic context. They are driven by innovation, have wide earnings power and large cash balance sheets. All of these could reward investors and keep the tech sector at the top for the coming year, especially if they start paying good dividends. Funds like Henderson Horizon – Global Technology or PowerShares EQQQ are a good way to tap this sector.