Equities  

‘You don’t pick stocks in a vacuum’

Martin Cholwill mulls how he came to develop an investment philosophy and approach that has served him well as a UK equity income manager at Axa Investment Managers and now Royal London Asset Management.

“My process is very much about the companies that not only pay a decent dividend yield but also where there’s the prospect of dividends growing in the longer term,” he explains. “If you look at any analysis of longer-term equity returns it’s all about identifying those companies that offer both dividend yield and growth of dividend. It’s the combination of those two that leads to longer-term outperformance.”

Mr Cholwill believes fund management is a trade that takes many years to learn. “Certain styles work well in the good times and other strategies work very well in the bad times. It’s finding something that works in a whole range of economic scenarios,” he says.

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Mr Cholwill talks of the early 1990s as formative years for him, when several household names, such as Polly Peck International, went bust in spite of appearing to be profitable.

He continues: “So you end up scratching your head thinking, how can profitable companies go bust? The answer was although they had lots of profit, that profit didn’t convert to cash.

“In the case of Polly Peck it was because it operated in northern Cyprus, which had a high inflation environment, so although it made lots of profit, all that profit was lost in currency translation. The profits were elusive – you couldn’t bring them back to the UK and pay them in the form of dividends.”

These events informed what Mr Cholwill calls his essential philosophy, which is that if profits do not convert to cash they aren’t actually worth anything.

“Because it’s cashflow that pays the dividend, it’s cashflow that gives you the wherewithal to invest in the business to grow it,” he says. “If you haven’t got the underlying cashflow, you are dependent on external borrowing or finance to pay dividends to have the money to invest.”

Mr Cholwill has been applying his philosophy to the Royal London UK Equity Income fund for just over 10 years now. In fact, that is one of the reasons he jumped ship from Equity & Law, which had been acquired by Axa Investment Managers by the time he left, to Royal London.

As he recalls: “What really attracted me to Royal London was two things: I met the people and thought they were a great bunch – people are very important in our business. You spend a lot of time at work.

“The other thing was that I was able to bring my investment process with me. When you join a lot of places you have to basically buy into someone else’s investment process.”

He admits: “When I took over at Royal London the equity income fund had been through a tough period – the performance was bottom quartile. As a fund manager, it’s great to find an opportunity to inherit a fund where perhaps performance has been poor and you can make things a lot better, rather than necessarily taking over a top-performing fund, because then the challenge is to keep things going.”