You can tell a lot about a company by the way it manages its cash, says fund manager
James Henderson, a fund manager who invests £1.1 bn ($1.8 bn) at Henderson Global Investors, is a bull who has placed his biggest bet on industrials. In the oil and gas sector, he has backed BP, which he believes did what it could to communicate with investors during and after the spill in the Gulf of Mexico.
A shareholder who put £100 into Henderson’s Lowland Investment Trust 10 years ago and reinvested the dividends would have £233 now, compared with £180 from the average fund in the UK growth and income sector, according to the Association of Investment Companies. Investor relations executives are likely to care about Henderson’s views on cash, given that he aims to increase his fund’s payout by investing in equities that usually have a reasonable dividend yield and prospects for dividend growth.
What is the best evidence that you are bullish?
Among other funds, I run the Lowland Investment Trust, which has borrowed money, given my belief the returns will more than pay for the cost of the debt. The company has net gearing – the ratio of assets, less cash, to shareholders’ funds – of 13 percent. That compares with my decision to hold 1.4 percent gearing at the September 2007 year-end. The higher the gearing, the more sensitive the shares will be to rises or falls in the portfolio.
Why have you bet more than one third of your portfolio on the industrials sector?
Because I believe industrial companies are best placed to add value for shareholders by using commodities. These businesses have growing order books and good operating margins, and are generating cash.
How should companies that generate cash best use it for shareholders?
It will depend on the business. I’m in a minority among investors when I say this: if a company has too much cash, it lowers its investment criteria – there’s been a move against that view, because it was hard to get finance after 2008.
When directors have cash, how should they decide between dividends, share buy-backs, capital expenditure and acquisitions?
It depends on the opportunities they see. But when it comes to the return of cash, I prefer the commitment to dividend growth, rather than share buybacks. Too many companies bought back shares five years ago. But in 2008, when the financial crisis hit and banks stopped lending, the companies that had started buybacks had less flexibility. If they had chosen to increase dividends, they would have had money on the balance sheet to help ride out problems. The dividend route smoothes cash payments over time.
What are the biggest changes investors have seen in the health of financial statements?
We’ve seen companies’ debt coming down and interest cover going up, and we should see a commitment to good dividend growth. And I think we are seeing that. For example, Interserve, the support services and construction company, which I hold, surprised the market recently. The dividend looks much safer, given that the debt came in far lower than expected. While Interserve’s UK business is slowing because of reduced demand for its services in Britain, the Middle East operation is growing.
These changes at many companies have been possible because the level of conversion of profits to cash has been good since 2008. Businesses have shortened their credit terms, and some have put on hold capital expenditure plans. We’ve seen a step change.
What can investor relations executives learn from BP’s oil spill in the Gulf of Mexico?
Companies must communicate what they can to manage crises, and must be as transparent as they can be in difficult circumstances. And I think BP was as open as it could be.
How do you want investor relations executives to talk to you if they work for specialist companies?
My 10 biggest bets include Senior, the aerospace group, and Croda International, the chemicals business. The latter, in particular, is highly specialized, and Croda’s executives are particularly good at explaining what they do, and the access to decision takers is good.
What do you respect most in investor relations?
Openness and transparency. It’s about companies being as open as they can be with fund managers, without giving away information to their competitors. Investors want the real drivers of the business – what’s the strategy to take it forward? – and they insist on knowing the link between debt and that strategy.
You’ve been running Lowland since 1990. What have been the biggest changes in investor relations since then?
The willingness of companies to talk to investors. They used to talk only to analysts, but things have got easier.
Fund snapshot
Name: Lowland investment trust
Assets: £258 mn
Top five holdings: Carclo, Senior, Royal Dutch Shell, BP, Meggitt
Details correct as of December 31, 2010
Source: Morningstar, BNP Paribas
