When just in time becomes just in case

WELCOME TO RUFFER

All-weather investing

Seeking consistent positive returns.

Come rain or shine.

Ruffer provides investment management services for institutions, pension funds, charities, financial planners and individual investors.

London

Ruffer LLP
80 Victoria Street
London SW1E 5JL

Directions | Map +44 (0)20 7963 8100

Paris

Ruffer S.A.
103 boulevard Haussmann
75008 Paris, France

Directions | Map +33 (0)1 88 45 02 54

New York

Ruffer LLC
300 Park Avenue
New York NY 10022

Directions | Map +1 917 947 3003

Edinburgh

Ruffer LLP
31 Charlotte Square
Edinburgh EH2 4ET

Directions | Map +44 (0)131 202 1602

7 May 2020

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.

#debt, #governance, #Japan

GET IN TOUCH

Piers Wheeler

Director – Institutional

T +44 (0)20 7963 8258

Developing and executing asset management strategy for capital raising and strategic relationship management. Coverage includes EMEA, Asia and Australia. Piers joined Ruffer in 2021, having previously worked with asset management firms including Eastspring, AMP Capital and LEK as a strategic consultant. He holds a MA from the Bayes Business School and a BA (Hons) from the University of Oxford.

Annabel Paterson

Senior Associate – Institutional

T +44 (0)20 7963 8123

Joined Ruffer in 2021, having graduated with a first class honours degree in land economics from the University of Cambridge. After two years working with the UK Private Wealth team and completing her IMC and CFA Level I qualifications, she now supports Ruffer’s global business development and client servicing efforts.

Articles by Annabel

Your privacy matters

When just in time becomes just in case