Graham Ashby thinks IROs should be as knowledgeable as the CFO or CEO. ‘I don’t want them to adopt the usual corporate line; I want them to be able to go off-point a bit and really address the issues,’ says the head of equity income and UK equities at London-based Sarasin Chiswell. One of his pet peeves is when IR says, ‘Let me get back to you on that.’ It gives him the impression that IR is not informed enough on the company’s business.
Ashby joined Sarasin in January. He came from DWS Investments, where he ran one of the firm’s top-performing equity income funds. He is now co-manager of the recently launched £12 mn ($22.85 mn) Sarasin International Equity Income Fund. He chooses stocks based on whether the company in question is run efficiently in a competitive industry – Tesco and GE appeal to his sensibilities, for instance. ‘I also look for companies that have a great track record in intellectual property and innovation,’ he says.
‘Our approach is pragmatic, based on neither growth nor value,’ he adds. ‘The focus is on the underlying sources of competitive advantage that lead to good performance – although I’m aware that’s pretty dreadful MBA speak.’
Ashby thinks Steve Webb of Tesco has mastered IR. He recently met with the supermarket empire’s IRO and talked through a range of issues, from the Competition Commission’s investigation into food retailers to the high levels of freehold property on Tesco’s balance sheet.
‘He was spot-on with all these subjects, which means I didn’t need to try and contact [Tesco CEO] Terry Leahy as well,’ says Ashby.
Playing favorites
One stock Ashby particularly rates today is UK FTSE 100 heavyweight Wolseley. The company recently switched sectors from construction and building materials to support services, resulting in volatility as a new group of sell-side analysts began comparing the company to different peers. ‘It was absolute nonsense,’ comments Ashby. ‘The business hadn’t changed one bit.Wolseley has a great business model that is about improving efficiency, so the volatility brought us buying opportunities.’
He’s also impressed with LSE-listed Intermediate Capital Group, a Londonbased business supplying mezzanine finance in Europe and Asia. ‘A lot of people in the private equity industry use Intermediate when doing management buyouts,’ he says. ‘The company is just in a fantastic position to benefit from growing private equity deals. There’s also an interesting fund management arm dealing with high-yield debt, smoothing out group earnings and cash flow. And Intermediate has a conservative balance sheet, which I like.’
At the other extreme, Vodafone has been a particular disappointment for Ashby and legions of other fund managers. ‘In the last three years it’s gone nowhere,’ Ashby observes. ‘It has done some restructuring, but not fast enough, and it’s been too slow to react to margin pressure. The shares have reflected this.’ Despite Vodaphone’s grim record, however, CEO Arun Sarin remains at the helm, with just 10 percent of shareholders voting against him at the company’s recent AGM.
More is better
In terms of disclosure, Ashby notices distinctly poor levels from overseas companies. Some European issuers, for example, report their sales numbers but then wait a month for the profit and loss numbers. Ashby insists he would rather get the whole lot together. ‘Some issues that shareholders may wish to address, such as management remuneration, can only be analyzed in detail by looking at the annual report and accounts,’ he says. ‘It would be great if these were available shortly after the prelims.’
While some fund managers are increasingly ambivalent about annual reports, Ashby thinks they remain useful in the evaluation process. ‘They give a sense of what management thinks and tell you how much management is paid,’ he says. ‘This can be very revealing.’
The style of the annual can also be telling, Ashby notes. Before Morrisons took over Safeway, its report was a pared-down affair with no photos, which Ashby thinks reflects the frugal way the business was run at the time. He compares this to another UK-listed company (the name of which he refuses to divulge) that spent loads on pictures but whose annual provided little insight into the business. ‘I know this because I knew the photographer!’ he says.
When it comes to financials, cash is king in Ashby’s world. He once worked with current UBS fund manager Richard West, who emphasized the importance of cash flow and return on investment. ‘It’s about cutting through the accounting shenanigans,’ he says. ‘It’s not foolproof, but it’s sensible.’
Bending the rules
Ashby is flexible when it comes to corporate governance. He sees it as important but finds the endless fine-tuning of standards cumbersome. Similarly, governance shouldn’t necessarily follow a one-sizefits- all model, he says. ‘Several companies have quite quirky board structures that don’t necessarily comply with Higgs [the UK governance code],’ he points out. ‘A few years ago, for example, Ultra Electronics moved their CEO to the chairman position. Under corporate governance rules this would be frowned upon, but Ultra did well in explaining the rationale behind this decision.’
In terms of where he’s looking to buy, it’s only natural that Ashby’s new international fund is leading his criteria. At the time of this interview, the FTSE All-Share Index is trading at a P/E of 13. ‘Corporate profitability is very high, so the ‘E’ part of it is also high,’ Ashby says. ‘Big companies dominate the index, and oil, mining and bank stocks are on quite low ratings. But if you take the median P/E, it’s quite a bit higher. This means you’ve got to be very selective, and it’s one of the reasons why we’ve launched the International Equity Income Fund.’
Ashby is pleased to be dipping into a wider world of shares and is positive about European disclosure. ‘Overseas companies are waking up to the demands of shareholders,’ he says.
