Investment Strategies

INTERVIEW: Cut Out The 24-Hour News Cycle Din To Make Sustained Returns

Tom Burroughes Group Editor London 27 March 2017

INTERVIEW: Cut Out The 24-Hour News Cycle Din To Make Sustained Returns

In these turbulent times, when the airwaves are dominated by Trump, Brexit and French elections, the smartest investment course might be to switch off from the news flow and focus on what drives company performance, a fund manager says.

Shutting out the constant noise of social media channels might hold the key to unlocking long-term returns for investors, a firm says.

AllianceBernstein, the US-based asset management house, thinks investors should get off the frantic news cycle and look at what actually drives firms instead. This approach is what animates Tawhid Ali, manager of the AB European Equity Portfolio, a UK-registered open-ended fund. And he argues that, while geopolitical stories provide some useful background information, in all too many cases the noise stifles relevant information on corporate developments from coming through. Investors are being blinded, he said.

“We realise that many companies have pathways to success that have little to do with Brexit or who is going to be in charge in France after its elections,” Ali told this news service in a recent call. “Resolutely investing in strong companies is a very profitable enterprise,” he said.

Turning off Twitter and other feeds is not, in his view, enough to make money, however. It is important to invest in companies with the mindset of a business owner, which is what a holder of equities actually is, Ali continued.

Ali’s portfolio, launched on 29 May 2001, is relatively concentrated, with around 40 stocks. It is fully invested with no spare cash. Net assets under management of the fund, as at 28 February, were €279.72 million. The investment approach requires heavy due diligence work on the firms in question, comprising a hard look at cash flow, balance sheets and management. Ali examines the potential internal rate of return across the firms he considers, aiming to buy companies’ cash flow at the cheapest price he can. Importantly, he examines the three broad drivers of return: rises in valuation, cash-flow/earnings growth, and dividends.

In many cases, Ali said, investors do not pay enough attention to dividends.

Over the past five years, the fund has been able to achieve market-beating alpha of around 2.4 per cent, pleasing clients that include wealth management houses and private banks, he continued. (AllianceBernstein has $2.3 billion of assets in European portfolios.) According to the factsheet on the fund for February 2017, the fund has achieved a three-year alpha of 2.64 per cent.

Screening out political noise leaves plenty of information to cover, Ali said. For example, he hunts for companies well positioned to benefit from positive trends in specific markets around the world; he seeks what might be dubbed “global leaders”, and searches for firms looking to boost cash flow by improving operations, restructuring management and making more efficient use of capital.

And the core message is that many European firms that are ticking many of the right boxes in terms of performance have shares that trade at a discount because the markets are fixated on politics.

To illustrate the point, Ali points to how at the end of January this year, the MSCI Europe Index of equities traded at a price/forward earnings ratio of 15x, which is an 8 per cent discount to global developed stocks and a 14 per cent discount to US stocks. High-beta stocks, which are generally considered riskier, trade at very deep price/book discounts versus low-beta stocks. In other words, many investors are still paying over the odds to be safe, which gives the value hunters plenty of opportunity.

Positive trends in Europe
“Today, European stock markets offer abundant opportunities for investors who are willing to focus on company fundamentals rather than being distracted by political noise,” he said. “Take stocks in the European chemicals and energy industries, for example, which are attractively valued against global peers and their own history. In chemicals, some European players are well positioned to benefit from improving global supply and demand dynamics for specific products such as polyethelynes, used in plastics. Take Arkema, the leading international specialty chemicals company that is headquartered in France. The company produces technical polymers and is benefiting from growing demand as auto manufacturers accelerate their efforts to make vehicles lighter. Trends like these should be resilient to the broader European economy.”

Ali said that select European commodities groups might benefit as rebalancing supply and demand fuels price increases for products such as zinc sooner than expected. Zinc demand already outstrips mine supply, Ali said, with inventories being drawn to bridge the gap.

“Assuming modest demand growth, the world needs new mines to be built and yet there are very few firm projects. Boliden, the Swedish-based mining and smelting company, is a clear winner from zinc market dynamics, in our view,” he said.

Turning to energy, Ali continued: “In the energy sector, some oil majors are still attractively valued, even after the 2016 rally. Companies that cut costs dramatically during the oil-price slump should enjoy more profitable business in the coming years. Royal Dutch Shell is a good example of the corporate transformation trend in play in Europe. Management have confirmed their goals on cost savings, disposals and focus on shareholder returns over capex growth. Recent earnings reports confirm that the company should be able to continue to pay its dividend to investors, even at current oil prices.”

As a result of the decisions Ali makes, his biggest single holding, as at the end of February, was Royal Dutch Shell, at 4.6 per cent. Financials, meanwhile, is the largest sectoral holding, at 17.31 per cent. The single largest country holding is the UK, at 23.79 per cent.


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