Summary of recent fund managers presentations

Dear Reader,


Today I had the pleasure of meeting a number of fund managers who came to present their investment thesis to our bank.

This blog aims to summarise some of the more interesting points raised:-

1. There was an argument presented that European banks are under capitalised and UK banks are over capitalised (they are short the former and long the latter). The former are likely to be under pressure to raise equity to build core tier 1 over the next 6 - 12 months. This could develop into a competition of who will issue first, leading to a discount to appear for the late comers

2. Lloyds was presented as a UK bank that was over capitalised. When questioned, their principal metric was equity to debt, which had fallen significantly from past rights issues. There was also a belief that writedowns were over estimated to get the damage out of the way last year. There is a belief they will be buying back their shares from the government over the next 2 -3 years due to the fact they hold excess capital

3. Drax was seen as a company with irreplaceable assets in the UK. The cost of making another Drax is higher than the current market cap. We could not agree more. A similar argument has been presented by Potash to explain the reason for the BHP Billiton bid in the directors circular recommending rejection of the offer

4. There is a fear companies like Microsoft will use cash on the balance sheet to purchase another company. Fear arises from the current trend in the market for large IT companies to need to buy a smaller, but faster growth company to make it look sexier. Recently, we have seen Intel and Dell embark in such "red light" activities. Though this is a possibility, for the moment we give management the benefit of the doubt. They refused to overpay for Yahoo, hence seem to possess some discipline in empire building

5. As always, there was positive talk on emerging markets. Debt and equity securities were mentioned. Some mention was made of inflation protection, which was pursued by purchasing the stock of companies with pricing power (i.e. the creators of inflation as we know it)

6. Currency hedging for stock purchases was deemed unnecessary by one fundmanager. His answer to this question is that a currency will benefit a company by increasing its exports if it weakens, and punish you by the opposite if it strengthens. Though on paper, when read quickly, this makes sense, this argument may not be equally valid for industries with different market structures. It is, however, an interesting view

7. Corporates have too much capital on hand. They are likely to spend this in emerging markets (as we emphasised in the last two blogs where we discussed equity financing) or on merger and acquisition activity

8. There seems to be a strong belief that emerging countries will grow considerably faster than developed econmies, which will hardly grow at all in the next few years. Mention was made of a "bubble" in credit markets, and that inflation fears are many years into the future.

9. It was refreshing to see a fundmanager recite values I personally abide by: never lose money. Simple mathematics indicates that by dropping 50% in any period of time requires you to gain 100% to be where you started! Couple this with the power of compounding, and it is vital that you miss investments that lead to permenant loss of capital. These can only be avoided by doing your research and sticking to what you understand.


Yours sincerely,

Alessandro Sajwani