John Bennett, Co-Manager of Henderson European Focus Trust, discusses what he believes are the important factors to focus on in times of market turmoil and highlights the importance of ‘sticking to the knitting’.
- Experience counts and with the COVID-19 crisis being the fourth significant market crash in John’s career, he highlights the importance of not panicking, focussing on franchises with proper funding and robust balance sheets, and that despite the challenge everybody faces this situation will come to pass.
- Maintaining due diligence and an ongoing dialogue with companies is a key focus for the European Equities Team.
- It is in times of market volatility that so-called ‘quaint’ factors, which include cash generation, cash flow and low leverage, become the most sought-after company fundamentals.
So I think the first thing I'd like to talk about is just, is the very important thing which is the functioning of the team during this period - the remote working. It goes without saying that connectivity is very important and that is working very well. So team communication, team connectivity - crucial, obviously, in any business especially at this time and that is functioning one hundred percent. Very happy with that.
The team is focused on talking to, I guess you would say, two groups. One are companies, our investments. I’ll come on to what they're talking about and it won't surprise anybody watching this or listening to this. And two, our clients. You know I'm doing a lot of conference calls with clients understandably and the team, throughout the team, that is happening as well. When we're talking to our companies and then we share, we share the outcome of those, of the conclusions of those conversations among each other. When we're talking to our investee companies it wouldn't surprise anybody to hear this. The one ‘word’, factor that we're focusing on is cash. Every single business on this planet today is managing for one thing and that is cash. So you know it's a sort of follow the cash. Where is the cash.? How is the cash? How are you getting cash in? What is your liquidity? What is your balance sheet? What are your covenants on that balance sheet? It's not as though these are new questions but these are questions that we double up on when you are talking to your investee companies. So it is no surprise that when the team comes back and we talk to each other, we communicate with each other, it is no surprise that that is front and centre of the updates on companies – cash.
In terms of how the team does communicate that and other things obviously our daily chat room that we have day to day as we go through the day and we monitor our funds, we monitor our stocks, we're looking at markets, how are we reacting. That is all day every day that we're doing. But we then have two biweekly meeting like this actually. One is audio and one is, and one is video that we get together as well. And that just distils everything. So, from my perspective the team is functioning as perfectly as it can in this environment and important thing is we just don't miss a trick as much as we can. And that is, again, being all over your companies all over and doing your due diligence and talking with them and the companies are very, very open at this stage to those conversations. They want to reassure their investors, understandably.
This is my fourth crash in my career. Everyone is different but they have similarities and the word panic is one of the similarities. You try not to make sure you don't join the panic is what I would say and that's a message throughout the team, and I don't think we have. The number one thing again is cash. I do think that one of the fallouts from this will be a regulator, that was already looking at illiquid investments in funds, will possibly double up, double down if you want on that. So I think where we are perhaps there's seem to be too many unlisteds, for example within a fund that might offer apparent liquidity such as daily dealing, I would watch out for that. I think that you might see the regulator get a bit tougher on that sort of stuff. It is a challenging time but it's a good time to be in a liquid investment strategy. And I always want to make sure through every period of panic or crash or challenge our investors can get access to their money if they should want access to that money.
I've never been a fan of high leverage in a business. And again, going into this if you were a company and operating business I see one of our investee companies, any business, you don't want to go into this leveraged and it's, in a sense some ways it's been a decent place to be as a fund manager going into this with , a portfolio of on the whole relatively lowly leveraged businesses. This doesn't mean to say we're in any way complacent. Not at all. But those are the sort of tried and tested old fashioned things that you might say, old fashioned factors that I think never really go away. They get ignored in bull markets they get perhaps shunned as ‘quaint’ in bull markets ie, cash generation, cash flow and lower leverage. But it's at times like this that these are exactly the factors that you want.
But that's really it, you know we haven't sort of been introducing new names to the portfolio at all. I don't actually think this is the environment that we should be doing that but where we see panic, extreme panic in some of our names, this sort of double-digit declines in stocks one day, two day, three days then we have been, where we've had cash or the ability to use gearing, we have been quite tactical in those names. But again, it's been tactics it's not any change in strategy.
Coming to how we see the outlook for this. And you know I think everybody in the world should be should have learned by now that the short-term market forecasting is absolute is an absolute mug's game. Nobody knows. So, it's guesswork. Here's my mug's game guess. I wouldn't be surprised to see markets test them lows again. I mean if you take the lows at an index level was 35 percent almost regardless of what index you looked at, Dow and Europe. And then we got back to, say, into the 20s from year to date, minus 20 odd. I wouldn't be surprised to see us revisit those lows don't mean to say it's going to happen but I wouldn't be surprised to see us do that just looking at the template of previous crashes.
And then of course, we will come through this. You know this is sadly in real life, very sadly in real life terms, a moment for survival. That's the most important thing. We're all trying to survive this. And then at business terms you're trying to survive this and having been fortunate enough to come through and survived and then gone on to thrive in three previous crashes. I think that's what we look forward to in this one and we will. This will pass, all recessions pass, all market crashes pass, and this whole thing will pass. That is not to underestimate the challenge absolutely everybody faces, the authorities face in rebooting the economy. I mean, this was a colossal control-alt-delete of the global economy. Quite extraordinary. And so I don't want to get into guesswork of a V-shaped recovery, an L-shape, a U-shape or whatever. But if you’re in liquid businesses, liquid businesses with strong balance sheets and great management teams and strong franchises, I wholeheartedly believe that is what we are in and that's what we’re about, you come through this. You don't panic and you don't panic at the lows. You stick to the knitting. And I talked earlier about some of that knitting. Knitting in itself I guess it's quaint. It’s seeing a comeback incidentally. There’s been a run on knitting wool I've been reading, but maybe that's just my local newspaper. But anyway, stick to your knitting even if it's quaint in terms of cash flow or seen as quaint. Focus on cash flow. Focus on balance sheets and that's how you build a compound. You don't build a great compound growth for your investors by panicking when everyone else is panicking and panicking at the lows. You do it by holding your nerve and being in good, solid, franchises with proper, proper funding, proper balance sheets.
Cash generation – The money produced by a company after all its costs have been paid
Liquidity - The ability to buy or sell a particular security or asset in the market. Assets that can be easily traded in the market (without causing a major price move) are referred to as ‘liquid’.
Leverage - The use of borrowing to increase exposure to an asset/market. This can be done by borrowing cash and using it to buy an asset, or by using financial instruments such as derivatives to simulate the effect of borrowing for further investment in assets.
Bull market - A financial market in which the prices of securities are rising, especially over a long time. The opposite of a bear market.
Gearing - A measure of a company’s leverage that shows how far its operations are funded by lenders versus shareholders. It is a measure of the debt level of a company. Within investment trusts it refers to how much money the trust borrows for investment purposes.