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Change at the top: a good time to invest?

River & Mercantile UK Dynamic Equity manager Will Lough highlights how chief executive changes can flag a buying opportunity.

Change at the top: a good time to invest?

A new chief executive often signals a company turnaround and River & Mercantile says investors should be on the lookout for boardroom shake-ups that signal a buying opportunity.

This year has already witnessed a number of high-profile chief executive changes, with mainframe computer specialist Micro Focus (MCRO) being the latest company to lose its boss as Chris Hsu resigned just as the group slashed revenue forecasts.

Will Lough, manager of the River & Mercantile UK Dynamic Equity fund, said when a company was in difficulty there was more opportunity for ‘radical moves’ and a new chief executive could be the catalyst for those.

Lough said a change at the top was ‘an opportunity to make a clean break’ and for shareholders to reappraise a company’s prospects.

‘This is what creates the platform for equity value outperformance,’ said Lough. ‘No two turnarounds will be the same…[but] there are some common factors.’

The most pressing of these is the financial situation the business is in. Whether this is ‘depressed versus distressed’ will determine how much ‘firefighting’ has to be done, said Lough.

‘Ultimately, this will include some combination of cost reductions, release of working capital, and reduction in capital expenditure to improve profitability and cashflow in the short term,’ he said.

‘It is also generally the case that strong near-term gains can be made by re-examining pricing, sales strategies, and the effectiveness of marketing.’

Introducing ‘greater internal competition for capital’ to improve near-term cashflow is typically part of a successful turnaround, and Lough said miner Anglo American (AAL), which is held in the fund, was a good example of this.

‘Under new chief executive Mark Cutifani, the management team introduced plans for the "new Anglo American" in early 2016, which was nearly three years following Cutifani’s appointment and at the share price’s nadir of around 450p,’ said Lough.

He said the ‘continued self-help’ at the company had seen the share price move back to trading at around £17.

Lough also noted the changes made at Lloyds (LLOY) thanks to Antonio Horta-Osorio taking the helm in 2011.

‘In the subsequent years, we’ve witnessed the group execute and continue to build upon all the self-help that you could possibly want: cost cutting, focusing on areas of competitive advantage, deleveraging, improving capital ratios, dealing with legacy issues including the government stock overhand, and ramping up distributions back to shareholders,’ said Lough.

While the short-term impact may be beneficial to shareholders, it is not enough just to change the chief executive and a long-term strategy of ‘fix and reinvest’ needs to happen with recovery stocks.

‘It is not in investors’ best interest to own a company that simply becomes the victim of the next downturn,’ said Lough.

Lough said ‘many fail’ but the ‘successful ones can become worth many times the original investment and so are always worth trying to find’.

‘Critically, at this point in the cycle, with economic cycles quite long in the tooth in some parts of the world and valuations high in particular regions and asset classes, the self-help element that these investment cases offer is an attractive diversifier within portfolios,’ he said.

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AA delivers boost to Woodford as shares soar

by Daniel Grote on Apr 17, 2018 at 15:55

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