EquitiesJun 1 2015

‘You don’t pick stocks in a vacuum’

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“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.

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.”

Not only had the fund seen a succession of managers but there were holdings in the portfolio that Mr Cholwill remembers were not paying a dividend. He calls it a “straightforward restructuring” in that the fund had enough critical mass to be able to sell some investments in order to reinvest in what he recognised as better opportunities.

So how did he come to specialise in UK equities? It all started in the 1980s, when, having begun working at Equity & Law as an actuarial trainee, he moved into the investment side.

“You had the North Sea oil boom just starting in the 1980s, so there was a lot of money coming into the UK – the UK had a lot of wealth to recycle,” he says. “It meant that essentially the money coming into UK equities was quite large and was very much a growing market.

“Of course, in recent years there have been fewer fund management opportunities than perhaps 20-30 years ago – just far fewer people working in UK equities [and] mandates have broadened a lot more. [There is] a lot more money in fixed interest these days and a lot more in international equities.

“The good thing about the UK stockmarket, of course, is it’s always been very international by nature. So although a lot of companies are quoted in the UK, UK companies are very diverse. Whether investing in large-cap or mid-cap [stocks], there are always a lot of opportunities to invest internationally.

“That’s how I started out and I have essentially been working in equities ever since. I stayed at Equity & Law for just over 20 years and joined Royal London just over 10 years ago.”

Mr Cholwill is also very aware of the political environment when investing, suggesting “you don’t pick stocks in a vacuum”. Having started his career in Margaret Thatcher’s Britain of the 1980s, this is no surprise.

He remarks: “Certainly over the past 30 years I’ve seen a range of economic environments. The pre-credit crunch period is very different from the post-credit crunch period. Pre-credit crunch, we had a lot of economic cycles. We’ve seen a lot of shades of politics.

“As a broad generalisation, the Thatcher era and post-[Thatcher] free market economics reigned supreme. People believed in free markets and that was the best thing for everyone in terms of creating wealth.”

But he concedes: “What’s changed, of course, is governments have become far more interventionist since the credit crunch. Banks are the most obvious example. Before the credit crunch it was very much light-touch regulation; now we’ve had a reaction to that after the credit crunch with a lot more focus from government and a lot more regulation.

“That’s a fact of life for quite a few industries and understanding that dynamic is quite important.”

Mr Cholwill sold out of his domestic bank holdings in light of the financial crisis a number of years ago, continuing to hold only HSBC. He also tries to avoid companies that have become “political footballs”, such as energy suppliers and rail companies.

The popularity of UK equity income funds has endured, in part thanks to star managers such as Neil Woodford and now Mark Barnett at Invesco Perpetual. Mr Cholwill remembers it as a popular sector even when he was starting out in the business, although he has seen its appeal to investors change over the years.

He observes: “If you look back, typically equity income funds were outperforming all company funds and there was an element [of thinking equity income] strategies worked very well as total return strategies.

“But post credit crunch there’s been an extra dimension to the attractiveness of income strategies: that obviously we’re in a world of very low interest rates where income is much harder to come by.”

Turning to how he spends his time outside work, Mr Cholwill is adamant being able to “switch off” is vital. “The key thing about fund management is not allowing yourself to get stale,” he says. “You need to continue to have fresh ideas and fresh thinking.

“Creativity and inspiration are important too – it’s not all spreadsheets. Spreadsheets are good but being a judge of people is important as well in investment.”

CV

Martin Cholwill

2005 – present

Senior fund manager, UK Equity Income fund, Royal London Asset Management

1996 – 2004

Fund manager, UK Equity Income fund, Axa Investment Managers

1994 – 1998

Fund manager, General Trust, Axa Investment Managers

1991 – 1996

Fund manager, UK Growth Trust, Axa Investment Managers

1983 – 1991

Investment analyst, Axa Investment Managers

1981 – 1983

Actuarial trainee, Equity & Law (later became Axa Investment Managers)