An interesting recent report from Goldman Sachs shows that share buybacks have been the largest source of U.S. equity demand during the last five years. Apparently, since 2010, net corporate buybacks averaged $420 billion annually, compared to only $10 billion each from households, mutual funds, pension funds and foreign investors.
According to a Bloomberg report, Goldman studied stock performance during earnings blackout periods, when discretionary buybacks are restricted beginning about five weeks before a company releases earnings, and then for two days afterwards. During the past 25 years, return dispersion and volatility during blackout windows have been higher compared with non-blackout periods: 16 percentage points versus 14 percentage points, and 16.4 points versus 15.8 points, respectively. Meanwhile, since buybacks have bolstered earnings per share by reducing the total stock outstanding, blocking repurchases would hurt growth in EPS. Over the past 15 years, the gap between EPS growth and earnings growth for the median S&P 500 company averaged 260 basis points. According to Goldman Sachs “In a world without buybacks, forward EPS growth could be trimmed by 250 bp,” a reduction that has historically corresponded to a 1 point decline in forward price-earnings multiples.
Ali Miremadi is an investment director, who runs global equity funds and a US-focused fund. Miremadi was one of the principal partners at THS Partners, (acquired by GAM in 2016). He joined THS Partners in 2007. Previously, Miremadi worked at Goldman Sachs. He started his career in 1994 at Baring Securities. Miremadi holds a first-class degree in English Literature from Wadham College, Oxford and is also a CFA charter holder.
GAM is an independent asset manager, providing active investment solutions and products for institutions, financial intermediaries and private investors. GAM employs over 900 people in 14 countries. Headquartered in Zurich, it is listed on the SIX Swiss Exchange. The Group has assets under management of CHF163.8 bn ($165 bn) as at 30 June 2018. CHF84.4 bn ($88 bn) is managed actively in-house. Continue reading
James Seddon is one of the Founding Partners of Hosking Partners. He previously worked with Jeremy Hosking at Marathon Asset Management from 2006 to 2012. Prior to that, James spent 19 years at Rowe Price-Fleming and T. Rowe Price International where he was a Senior Portfolio Manager of European equities for the European and International Equity strategies. James began his career at Schroder Capital Management and holds a degree in Physics from Oxford University.
Hosking Partners is an investment management partnership that started in 2013. The firm has around $9 billion of assets under management through one global equity strategy. The investment team of five seeks long-term investments using a fundamental contrarian methodology. Their differentiated approach has a long-term investment horizon through a diversified portfolio of stocks with a high active share. The investment philosophy incorporates a capital cycle analytical framework: the tendency of industries with high returns to attract new capital and more competition, which over long periods of time drives down industry returns until capital withdraws, returns recover and the cycle begins again. This is combined with a behavioural approach that uses mental models to assess companies and industries. The strategy aims for alpha generation over the long term.
Amsterdam, Netherlands-based Kempen Capital Management was established in 1991 and today manages €59.8 bn ($73 bn), of which €16.3 bn is in investment strategies and €43.5 bn in investment solutions. The firm has offices in Amsterdam, London, Edinburgh and Paris. The investment strategy is stable outperformance over the long term with ESG fully integrated into the investment process. Kempen’s investment strategies division has a number of equity strategies: small caps, high dividend, sustainable value creation and sustainable equity.
Mark Oud joined Kempen in 2017 as a senior portfolio manager for sustainable value creation. Before this he was a senior portfolio manager at Delta Lloyd Asset Management and head of Delta Lloyd’s Cyrte Investment. He previously worked at Main Capital Partners and Deutsche Bank.
Since August 2016, Richard Klijnstra has been head of sustainable value creation, having previously been head of Kempen’s credit team from 2006 to 2016. Prior to this, he worked at Fortis Investments in Paris and the Netherlands, and at Nationale-Nederlanden. Here he discusses Kempen’s approach to sustainable growth.
Many market participants expected MiFID II to start slowly as the regulations rolled out over the course of this year. Many companies also have been talking about ‘business-as-usual’ with many in ‘wait-and-see’ mode. Now that a quarter has passed, what is the reality? Particularly from the buy-side’s perspective.
To help answer this question, we interviewed a sample of 50 European-based portfolio managers during the 11th week after MiFID II (March 19-23, 2018). Their answers painted a picture suggesting more revolution than evolution. The buy-side is clearly experiencing significant change already and it’s clearly not ‘business-as-usual’.
The results show:
- Access has been negatively affected
- Investors have already reduced the number of brokers they are dealing with for both equity research and Corporate Access
- Cutbacks in research providers is already leading to restricted access to conferences and non-deal roadshows
- Price discovery for research is evolving quickly
- The risks of companies and investors ‘missing’ each other during roadshows has increased
- Interesting (and worrying) divergence appearing between the communication lines issuers-to-shareholders and issuers-to-non shareholders
- Buy-side is contacting more companies directly and would like company IR teams to also do more themselves
- Investors are strongly in favor of an independent model for providing Corporate Access
- Bureaucracy has increased with all interactions being logged
- Surprisingly, some buy-siders are reporting poor responsiveness from some IR teams
The changes started pretty immediately in January with many buy-siders issuing “cease and desist” style emails to the sell-side asking them to stop sending research unless they have a contract in place. For example, typical emails were as follows:
Our research sample was as follows:
Has the number of meetings changed?
The Hambro name has been closely associated with the investment world for more than 200 years. Founded in 2010, James Hambro & Partners LLP (JH&P) is an Independent Private Asset Management Partnership with assets under management, advice and administration of £2.8 billion (US$3.8 billion). The partnership offers institutional-quality investment management to HNW families, trusts, individuals, charities and associated portfolios.
William Francklin joined JH&P in July 2017 and has over 30 years’ experience managing portfolios. He began his career in investment management in 1981, working at Morgan Grenfell Asset Management (in both London and New York) and latterly at Waverton Investment Management. William has also managed assets for American clients for a number of years. As JH&P has SEC authorisation (as of July 2017) he will continue to manage global portfolios for US clients based in the US and overseas. Continue reading
Larry Fink, the founder and CEO of BlackRock has written his annual letter to the CEOs of the companies in which the world’s biggest institution owns shares. In it he urges CEOs to consider the societal implications of their business decisions and to focus on their long-term plans. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”
He highlights BlackRock’s responsibility to engage with companies because index investors have become the ultimate long-term investors and he reaffirms his belief that companies are overly focused on the short term.
He calls for companies to articulate their strategy for long-term growth and explain their strategic framework for long-term value creation. “This is a particularly critical moment for companies to explain their long-term plans to investors.”
The letter, available below in full, is well worth reading…
Mike Fox of Royal London Asset Managers.
Royal London Asset Management (RLAM) was established in 1988 and is a wholly-owned subsidiary of the Royal London Group (founded 1861). The Group consists of the Royal London Mutual Insurance Society Limited (RLMIS) and its subsidiaries, and is the UK’s largest mutual life, pensions and investment company.
RLAM also manages assets to external clients, notably corporate pension schemes, local authorities, insurance companies, charities, endowments, universities, wealth managers etc. It has AUM of £106 billion/$140 billion (June 30 2017).
Mike Fox is Head of Equities and Senior Fund Manager of the Sustainable World Trust and Sustainable Leaders Trust, the latter role he has fulfilled since November 2003. During this time he has been awarded Citywire Top 100 UK Growth Fund Manager of the year (2007) and has a 4* Morningstar rating.