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THE INVESTOR
THE INVESTOR CENTRE
All information correct as at 31 December 2015
A
strange thing is happening in corporate
America, an indirect e ect of so-called
‘unorthodox monetary policy’ (quantitative
easing).A consequence of low interest rates is
to make saving seem like a poorer choice than
spending.We believe that this has driven the
large returns in stock markets since the
nancial crisis in 2008. It has also manifested
itself – rather than in the purchase by
companies of capital goods such as factories
or equipment – in increased spending in two
areas that are unlikely to deliver positive
returns: share buybacks and acquisitions.
The remuneration and time horizons of
senior management in the US create powerful
incentives to deliver earnings per share
growth, as it forms part of the yardstick by
which the performance of most is measured.
Two easy ways to grow earnings per share are
decreasing the number of shares (buybacks)
or increasing earnings (through acquisitions).
If shares are expensive, buying them back, or
acquiring other expensive companies, results
in the destruction of shareholder wealth.
The largest change in the portfolio
over the last year is the result of one of
these acquisitions. Chubb, a wonderfully
conservative insurance company, is to
be acquired by Swiss insurance company
Ace.We believe that in all companies,
but particularly nancial ones, corporate
culture is an important driver of long-term
performance.We are concerned that the
merger of two di erent cultures will not
result in satisfactory returns for shareholders
in the future.
FIRST STATE
Joint manager: Worldwide Managed
and Worldwide Opportunities
Merger of Chubb and Ace may not be
good news for shareholders
US sees increase in
share buybacks and
acquisitions
Jonathan Asante
W
hile volatility subsided in the fourth
quarter, we continue to see low oil
prices and a persistent economic slowdown
in China as potential sources of uncertainty
for the foreseeable future.While the fall in oil
prices has impacted businesses with exposure
to the oil industry, we believe the market has
overreacted in certain cases. Regarding
China, the economic slowdown has added a
headwind to many global industrial-related
businesses.We see the resulting fear besetting
nancial markets as an opportunity with
attractive risk/reward potential.
Earnings multiples of global equity
markets have moved higher this year, but
we continue to characterise the current
environment as a stock-pickers’ market. It
is interesting to note that, with respect to
valuations, there is currently no‘average’
company – as a large number of stocks are
trading much higher or much lower than they
were at the start of 2015.The portfolio has
seen signi cant activity as we have sold out of
names whose valuations have increased, and
bought, or added to, names that are trading at
prices that we deem signi cantly below their
intrinsic value.We have increased our weight
in names with low exposure to the oil and
gas industry and the Chinese economy, but
which have, nonetheless, been caught in the
downdraft of fear and uncertainty prevailing
in global equity markets.
EDGEPOINT
Satellite manager: Global Equity
Fluctuations in the market create
informed stock-picking opportunities
Market drops due to
oil prices provide risk/
rewardopportunities
Tye Bousada and Geoff MacDonald
O
ne topic we are regularly asked about by
clients concerns the results of recent
elections and the impact on our portfolios.
Our approach is to seek out companies that
operate as far away from governments and
regulators as possible and that objective does
not change, regardless of who is in power or
the strength of their mandate.
Financial markets and their commentators
routinely overestimate the ability of
individuals to in uence companies and
economies, be they Mario Draghi (President
of the European Central Bank),Mauricio
Macri (recently elected President of
Argentina) or Narendra Modi (Prime
Minister of India).The reality is that even
controlled economies have too many moving
parts and self-interested agents for one
person to greatly a ect them.Moreover, it is
worth remembering that politicians are rarely
aligned with foreign investors.Any alignment
between their objectives and our own as
investors is likely to be eeting at best.
When we invest in companies, we look for
evidence of checks and balances on the CEO,
be it by board members with reputations to
protect or nance directors prepared to ask
di cult questions.We also try to invest in
companies that aim to recruit the best talent
and empower that talent to make decisions,
rather than those that try to convince us that
their leaders will get every decision right.
FIRST STATE
Global Emerging Markets
Approach is focused on finding
companies that invest in talent
Investment shouldn’t
be basedon individual
government policies
Jonathan Asante
