Henderson's de Bunsen warns low rates create zombie firms

Henderson's de Bunsen warns low rates create zombie firms

Interest rates at fresh lows could see companies shelve bold decisions on where to allocate their capital, according to Henderson’s James de Bunsen, making them less attractive investment options.

Rival David Miller, fund manager at Quilter Cheviot, said he expected growth and investment returns will come from innovation as opposed to “financial engineering”. 

“Activities such as share buy backs, efficient balance sheets and the financing of long term infrastructure projects will continue to matter, it’s just that there are limits," Mr Miller said.

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But Mr de Bunsen, who is a fund manager in the multi-asset team at Henderson Global Investors, forecast low interest rates - which in August were halved by the Bank of England to 0.25 per cent - mean companies which are not innovative or trying to grow can just “limp on”.

He warned of zombie companies which are “propped up” by being able to borrow cheaply, which can in turn dampen the prospects of newer companies which are trying to break into new areas.

Mr de Bunsen, who is lead manager of the £154m Henderson Multi-Manager Absolute Return fund, said low growth encourages chief executives to engage in things like share buybacks, rather than invest for the future in the hope growth will pick up.

“It takes a braver chief executive at the moment to spend £5bn investing in their company, than to buy back £5bn in shares,” he said, adding some companies are “reticent” about making bold decisions on where to allocate their capital.

But he said share buybacks have their limits because company debt levels have increased to such a high level that companies will start to be punished for high leverage ratios and for having inefficient balance sheets.

While he admitted there is a need for more innovative companies, he said: “Unfortunately it is the bigger companies which are perceived to be safer that are soaking up the capital.”

“It’s harder for new companies to grow because they have no historic earnings track record,” he said, pointing out it is more difficult for new firms to get a loan to get their business off the ground.

Mr de Bunsen said if interest rates were to increase then those companies which limp along and rely on access to debt markets will go out of business, while “leaner, more energetic” companies will step in and “clear out the dead wood”.

But the Henderson manager said low rates force fund management groups to be innovative in terms of what they offer investors.

Firms are increasingly turning towards alternative income investments, such as renewable energy and peer-to-peer lending, and placing them inside closed-ended investment trusts, Mr de Bunsen said.

Alternative asset classes have been in higher demand as investors hunt for some form of return, but Mr de Bunsen warned this trend could reverse if government bond yields start to go back up, as investors return to simpler and more liquid government-backed fixed income.