THE INVESTOR CENTRE
THE INVESTOR
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35
J
ust as in 1999-2000 and 2007-08, extreme
behaviours are at work. Investor behaviour
is corrupting management behaviour, with
dangerous consequences for the capital base
of UK plc. In a low-yielding world created by
demi-god central bankers running economic
lab experiments on the real world economy,
investors’ desperate search for yield has
turned equity income managers into masters
of the universe, in turn heaping pressure on
corporate managers to prioritise dividends
and share buybacks at the expense of
self-investment in future growth. Largesse
towards noisy City and Mayfair shareholders
comes rst, even if it impairs the balance
sheet; investing in people, technology and
plant for long-term future growth comes a
distant second.Meanwhile, 2015 sawM&A
activity levels surpass those of 2000 and
2007. Deals are done, advisers paid and
management teams rewarded for hitting
short-term earnings targets; and then,
inevitably, these awed deals unravel, leading
to the dreadful destruction of capital.
With poorly structured long-term
incentive plans for senior management that
are triggered by short-term earnings-per-
share growth and total shareholder returns
targets, it is little wonder that we nd too
many management teams behaving badly.
Discovering management teams who will act
as sensible long-term custodians of capital
is challenging in an environment of warped
investor behaviours.
J O HAMBRO
Joint manager:
UK & General Progressive
Challenge is to identify management
teams running firms in the right way
Market shows signs
similar to 1999 2000
and 2007 08
John Wood
T
he speculation over the likely timing of
an interest rate hike by the US Federal
Reserve was a major theme in 2015. In
December, the Federal Reserve removed
the cloud of uncertainty by raising short-
term interest rates by 0.25%, ending an
extraordinary seven-year period at the
lower level.
The nal quarter of the year initially
began with a distinctly‘risk on’ avour,
which was bene cial to our equity ideas.
However, threats to global security and
the ensuing reaction soon dominated
the headlines after the terror attacks in
Paris, and markets remained relatively
subdued.The focus then shifted to the
increasingly diverging paths taken by the
dominant central banks.While the US
has now embarked on a tightening path,
there are expectations of an expanded
monetary stimulus, courtesy of the
European Central Bank.The widening yield
di erence between German and US notes,
particularly after the Federal Reserve’s
rate hike, serves as a stark reminder of the
chasm that exists between the two central
banks, and this is re ected in the global
equity markets. Consequently, we have
seen our German and Japanese equity ideas
produce good returns over the quarter.
We always take a two- to three-year
view of markets, and as we approached the
end of 2015, we added more ideas to the
strategy that we believe will contribute.
INVESCO PERPETUAL
Joint manager: Multi Asset
Good German and Japanese equity
ideas have led to positive returns
Increasinglydivergent
paths being takenby
major central banks
A
nticipation of future central bank policy
dominated market sentiment during
much of the nal quarter of 2015.
Through October and November,
European bond markets rallied strongly as
expectations that the European Central Bank
(ECB) would further ease monetary policy in
December intensi ed.The measures actually
announced by the ECB – a cut in the deposit
rate and extension of asset purchases – failed
to the market’s arguably in ated expectations
and, as a result, European bond markets
gave back some of their previous strong
performance. Focusing on the high-yield
bond market, there was also an increase in
volatility within the bonds of some issuers.
The more favourable market backdrop
helped the supply of European high-yield
bonds to increase during October and
November. Barclays estimates that, over
the two-month period, €5.9 billion of
European high-yield bonds were issued.
Across theAtlantic, the US Federal
Reserve began the normalisation of US
interest rates, raising the federal funds rate to
0.5%.The move was widely expected, with
the initial market reaction muted.
We remain defensive and hold high levels
of liquidity in the portfolio. Our focus is on
well-established high-yield names in which
we believe default to be remote. One part of
the market that we think continues to provide
a reasonable balance of risk and reward is
subordinated nancials.
INVESCO PERPETUAL
Corporate Bond
Portfolio remains defensive with a
focus on high-yield businesses
ECB announcement in
December dampened
market spirits
Paul Read and Paul Causer
David Millar, Dave Jubb and
Richard Batty
