Samantha Gleave

Picking Quality and Value routes to cash flow growth

Samantha Gleave

Having had a cautious outlook for much of this year, we recently moved to a more neutral view on the prospects for European markets. The investment environment should continue to be one in which high-quality cash-generative stocks are in demand, but there are also pockets of the stock-market offering contrarian value opportunities.

In this blog, we assess the market outlook and look at two holdings which exemplify the contrasting types of investment opportunity we are currently able to identify.

While the MSCI Europe ex-UK has returned over 17% in sterling terms this year (as at 18 October), its local currency return is -2.8%. Most of this negative return was incurred in Q1. The market has since recovered from its 11 February low and, more recently, from the sharp post-referendum drop in June. According to our technical indicators, this recovery in European market levels has been sufficient to end the down-trend which had been in place since December of last year.

Our proprietary measure of market momentum has also turned slightly positive. Another measure we look at is the number of corporates engaging in aggressive investment behaviour. This remains relatively muted and, on this basis, should not be a headwind for markets.

However, offsetting these indicators of a more positive investment environment is the ongoing evidence of low investor anxiety. We look at this metric as it has a good record as a contrarian indicator of equity returns: high levels of anxiety are usually a positive signal for equities whereas low anxiety can equate to investor complacency and the potential for disappointing subsequent market returns. At the moment, we have evidence of relatively low anxiety, which acts to offset somewhat the more positive momentum measure and our muted corporate investment behaviour measure.

On balance, this leaves us with a neutral outlook for European equities, a small upgrade on our prior cautious view. But a neutral view on equities can still be consistent with an upbeat assessment of the prospects for our investment process. Although the market’s performance has been lacklustre so far in 2016, we have found fertile conditions for the application of the Cashflow Solution investment process.

We expect conditions to remain benign for our investment process. We think that the current investment environment will be conducive to investment in high-quality cash-generative companies of the type that our screens generally identify, partly because there is a growing recognition that monetary policy is becoming less effective in stoking investors’ animal spirits. In addition, although valuation spreads within the materials sector have compressed somewhat following a strong rally, there are still some pockets of contrarian value within certain sectors – for example, energy and financials.

If we drill down into the Fund’s financials sector holdings, we can find good examples of both of these types of company: Partners Group Holdings and ING Groep:

Partners Group Holding

Partners Group Holding is a Swiss private equity investment manager. It is typical of the type of high-quality company we often invest in, having consistently generated good returns on capital in recent years. Business momentum has recently been strong: in the first half of 2016 it increased revenues by 26% following a strong rise in performance fees and also received €4.6bn in new commitments from clients, allowing it to raise its full year guidance range from €7-9bn to €8-9bn.

ING Groep

The Dutch banking group trades at a a discount to tangible book value (0.9x) a forecast dividend yield of 6% - which is indicative of its ‘value’ credentials. There are some doubts over the sustainability of this dividend (hence the high yield) due to the prospect of further regulatory provisions hanging over the sector and ING’s commitment to maintaining capital reserves in the form of a CET1 (common equity Tier1) ratio over 12.5%.

Underlying profitability has improved in recent years due to a strong focus on cost reduction which in 2015 took the underlying cost/income ratio down to 55.9% from 58.7% in 2014. Since its current cost-cutting programme began in 2011, ING has rationalised its workforce down to 52,368 full time employees, a reduction of 7,201. At the recent Investor Day, the company announced further cost reduction plans over the medium term. In the nearer term, loan growth trends are more encouraging and margins are stabilising.


• Past performance is not a guide to future performance. • Do remember that the value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Investment in Funds managed by the Cashflow Solution Team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates.  • The European Growth Fund holds a concentrated portfolio which could mean that it will be volatile when compared to its benchmark. • The Global Income Fund's expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation.

• The information and opinions provided should not be construed as advice for investment in any product or security mentioned.  • Always research your own investments and consult with a regulated investment adviser or licensed stock broker before investing.


Originally published on 20 October 2016.  

Friday, November 25, 2016, 3:34 PM