When just in time becomes just in case

Balance sheets show the trade-off between resilience and optimisation

The Green Line
Duncan MacInnes
Investment Director

As we highlighted last month, coronavirus is especially dangerous for patients with pre-existing conditions. This is true as much in the corporate world as it is for human beings.

The unprecedented and unorthodox nature of the shock should not be allowed to disguise the fact it has revealed a shocking level of fragility amongst public and private companies across the globe.

This month’s chart demonstrates one proxy for fragility, the percentage of companies with net cash balance sheets. Debt magnifies the impact of outcomes, cash on hand dampens them. If you came into this with cash, the probability of your business needing life support is reduced.

Unbeknownst to many shareholders, corporate management have been engaged in a previously implicit, but now very explicit, trade-off between optimisation and resilience.

The story of boardrooms for the last couple of decades has been one of globalisation, financial engineering and shareholder value.

Companies have strived for, and investors have encouraged, operating leaner, faster, more efficiently. From complicated global supply chains to the relentless shedding of ‘non-core’ assets or the outsourcing boom.

Management have been highly incentivised to ride this gravy train with incentive plans tied to return on equity and earnings per share. What an easy win – pay out all your cash, borrow cheap, buyback shares. Stock markets loved it. What could possibly go wrong?

Covid-19 revealed all the flaws. To use the major US airlines as an example, they have spent $43bn on buybacks in the last six years whilst increasing their total debt. The four CEOs pocketed $430m between them.1 The industry just needed a US government bailout of $25bn and is raising equity.

Corporates, particularly in the US, have become highly evolved to operate in a globalised, stable economy. But the opposite of efficiency is not inefficiency: it is robustness. Highly evolved for one environment, means less adaptable to another: cockroaches outlived dinosaurs.

In the future robustness will be prioritised. That means holding more cash and inventory on hand. It means shorter, local supply chains, diversified suppliers and re-shoring manufacturing; de-globalisation. Companies will care more about other stakeholders, running with less debt and lower shareholder payouts. In a sentence, as Margaret Heffernan put it: ‘just in case over just in time’.

So what does that mean for investors? All of these things are bad for corporate profit margins, but good for ensuring the business can survive another crisis.

The gold star for prudence goes to The All England Lawn Tennis Club which has purchased pandemic insurance for Wimbledon for 17 consecutive years at a cost of £1.5m per annum. This super conservative policy will net a £115m payout just when they need it.2

Lastly, this is corporate Japan’s ‘I told you so’ moment, having been long criticised for considering a range of stakeholders and for large cash balances, now they look quite clever! At a time when we are seeing unprepared companies make forced dividend cuts across the world, Japan has become a shining beacon of safe income yielding a handsomely covered and growing 2.8%3 which is why it remains a key part of our portfolio.

Markets now and next
April 2020: Duncan MacInnes discusses covid-19: how it has changed the investment landscape, the impact on the Ruffer portfolio and what could happen next.
Modern Monetary Theory | The Ruffer Review | Thinking | Ruffer | Investment Management
Stephanie Kelton, guest speaker at Ruffer’s Family Office Conference in November 2019, is a leading authority on Modern Monetary Theory. She sees MMT as a disruptive force.
Food waste: a triple win opportunity
If food waste were a country, it would be the third-largest emitter of greenhouse gases (8% of annual global greenhouse gases come from food waste).
  1. Ben Hunt ‘Do the Right Thing
  2. BBC News
  3. FactSet

Fig 1   CLSA, FactSet. Data as at 21 April 2020

Past performance is not a guide to future performance. The value of investments and the income derived therefrom can decrease as well as increase and you may not get back the full amount originally invested. Ruffer performance is shown after deduction of all fees and management charges, and on the basis of income being reinvested. The value of overseas investments will be influenced by the rate of exchange.

The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. This document does not take account of any potential investor’s investment objectives, particular needs or financial situation. This document reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered. Read the full disclaimer.

our thinking
Investment Review
July 2021: We have been talking of inflation for well over a decade – which is not the same thing as calling its timing. An impasse was created by the failure of the economy to grow after the 2008 crisis – all the risks (as we patiently explained) were deflationary, and in vain did the central banks and governments try to force an inflationary impulse into a sluggish world.
Audio icon
Bitcoin – the future arrived early
July 2021: The best investments are often the least comfortable ones. This is certainly the case with our decision to add bitcoin exposure to our portfolios in November last year.
Responsible Investment Report
In our latest quarterly report, Investment Manager Rory Goodman examines the global significance of US President Joe Biden's new emission reduction targets announced at the Earth Day summit, and we share our stewardship and engagement activities during the second quarter of 2021.
Navigating information
It’s easy to be overwhelmed by the volume of information aimed at us. Inundated by a daily torrent of headlines, images, messages and data, we can be left feeling unable to process it to a satisfying degree. For investors, navigating information is central to being effective. Insights from information theory and gauge theory can help.
80 Victoria Street
London SW1E 5JL
31 Charlotte Square
Edinburgh EH2 4ET
103 boulevard Haussmann
75008 Paris, France