London. Paris. Frankfurt. Norwich. A possible L47 bn additional stop-off on a European roadshow
Norwich isn't going to figure too highly on many international roadshows, even for those companies taking in Europe's secondary financial centers. But, for UK companies seen as a good value investment play, it may well be worth dropping into NU Investment Management, the investment subsidiary of life insurer Norwich Union. Other stocks on their playlist - North American companies included - could do a lot worse than give them time for a one-on-one every once in a while.
With some £47 bn under management, Norwich Union Investment Management is certainly no spring chicken. The firm also warrants attention for its devotion to corporate governance issues: it is among the few UK institutions that take their proxy voting role seriously at home and abroad and aims to vote on all its holdings in the UK and North America.
For those readers not clear on the UK's provincial geography, Norwich is a small city located some 100 miles north-east of London. Peter Baynham, NUIM's strategy and commercial director, notes that having the fund management team located away from the noise of the City can have its advantages: 'We stand out from the crowd.' It's also fairly difficult to fall victim to a herd-like instinct when there's no-one else around to lead a charge. In any case, NUIM does have representation in London for when it's needed.
The bulk of NUIM's funds come from Norwich Union's own life and pensions businesses but recent times have seen a shift in emphasis toward picking up external UK mandates. Currently the £47 bn in assets are invested around 41 percent in UK equities (including a small chunk in index-tracking funds), 11 percent in international equities, 27 percent in UK fixed-income, 3 percent in international fixed-income, 8 percent in property and 10 percent in mortgages. Baynham admits to 'background plans' to sell NUIM's expertise in other markets, thinking principally of the US and Japan, 'where, for instance, an institution may want greater exposure to UK equities.'
But that's in the future. For the time being, Baynham and his colleagues are focused on keeping current clients happy. 'Trustees are taking their role more seriously and want to understand their duties in a more professional way,' he says, noting the impact of the Maxwell pension scandal and other corporate governance issues. And that means making client reporting a great deal more transparent.
Regular pattern
Asset allocation at NUIM follows a fairly normal pattern with monthly meetings between the various investment heads bashing out a strategy and global overview of the markets. The meetings are used to check on asset preferences and evaluate alternative investment opportunities. Asset classes are then ranked according to the different scenarios and strictly implemented into portfolios.
Cherry Bishop, head of fixed-income investment, says that the whole of her team are involved in the process behind the final bond asset allocation meeting: drawing on economic input, quantifying forecasts on each market, asking what the impact would be on portfolios if they were wrong and, above all, keeping a watchful eye on risk levels combined with the need to outperform the various benchmarks. Daily meetings involving the heads of all asset types allow the teams to respond rapidly to market shocks as well as covering business issues.
UK corporate bonds are of growing importance in the portfolio. Bishop notes that the market is now half the size of gilts: 'So it is mature and has developed into a proper trading environment.' She also believes that the recent advance corporation tax changes might encourage UK finance directors to turn to debt capital rather than equity in the coming months. And she has no complaints regarding the level of information flowing out of companies to her fund managers. Although the debt and equity teams do swap information back at base, they visit companies independently and are usually looking for a different slant in their meetings.
Shared belief
Stock-picking follows a slightly different approach for each regional equity team but one aspect reigns supreme: the investment philosophy stems from a shared belief in the benefits of fundamental research. NUIM's portfolio managers and analysts dedicate time and effort to sorting the wheat from the chaff themselves.
'We're looking for two things,' says Terence Webb, head of North American and Latin equities. 'First up comes the generation of excess cash flow or the ability to generate excess cash flow. That gives an enterprise tremendous financial flexibility. Number two is a conservatively structured balance sheet - not necessarily debt free: there are some businesses which have consistent revenues where a certain level of debt is desirable. But there are other businesses in cyclical industries where we don't want to see too high a level of debt as their viability may come into question during a downturn.'
He believes that these criteria call for a good level of judgement and are not really things you can readily screen for. 'In various industries, excess cash flow may be very different. For instance, in breakfast cereals you'd expect little capital expenditure but large marketing and advertising expenditure. But that's of a discretionary nature. In forest product companies, you'd expect high levels of capital expenditure and that isn't discretionary. So screening doesn't necessarily reveal excess cash flow.'
Webb is keen to stress that NUIM's equity teams are not value investors in the strict sense, although he admits they can be quite contrarian in response to market movements. 'We don't always buy low-rated shares or stocks with high dividend yields. We do own growth stocks but we won't pay outlandish prices for them. We're trying to act counter to consensus because that's where you can make the money.' Further discussion leads to a final definition of what NUIM's fund managers and analysts are really searching for: 'I suppose we're essentially trying to capture growth at a reasonable price.'
Proxy probing
Corporate governance is taken very seriously at Norwich Union Investment Management, according to Anita Skipper (right). And she should know: Skipper has been NUIM's full-time corporate governance officer since 1993, which is long before many other UK institutions had really begun to consider the issues.
Indeed, NUIM has been a considered voter on its UK holdings since the 1970s and has had a dedicated corporate governance function dating back to the mid-1980s. It started voting its larger US holdings in 1993 and Skipper reports that the intention is to expand the process to other countries at some point in the future. The US was chosen as the first foreign market in which to vote due to the relative size of NUIM's holdings there and the relative ease of voting compared to some other markets. Speaking the same language also helps, of course.
Skipper flags issues of corporate governance concern by using NUIM's own governance guidelines combined with reports from outside associations, such as the Association of British Insurers and National Association of Pension Funds in the UK and the Investor Responsibility Research Center for the US. NUIM's own guidelines have not been made public but are available on request. They are largely based on Cadbury and Greenbury and will be amended to take the Hampel committee recommendations into account. Skipper stresses that they are applied flexibly rather than in a box-ticking fashion. Once an area of concern has been noticed at a company, she will sit down with the relevant fund manager and obtain their expert opinion on the issue to decide if it is worth pursuing.
'If there is any concern over an issue, we'll always write to the company and give them the opportunity to come back to us - either in writing or in a meeting - before we vote. If we're happy with their explanation then we'll vote accordingly. Everything is flexible and approached quite pragmatically.'
NUIM votes every one of its actively held UK stocks and as many as it can among its US ones - even if there is no issue of concern. Last year that meant considering the issues and voting at some 600 companies - Skipper says that number is likely to increase this year.
So what is her response to the recently released Hampel committee report? 'I must admit that when the draft came out I wasn't completely happy. Now I feel a lot better, more because of the change in emphasis than the change in content. I think certain things [such as the separation of the roles of chairman and chief executive] have been tightened up and there are some very good suggestions in the final report.'
And she's pleased that Hampel has thrown down the gauntlet to institutions to take their governance role more seriously - although she's not sure that it will have the desired impact. She thinks it will only be effective if both companies and investors play their part. In particular, members of the NAPFand ABI respond to their associations' advice to vote. Whatever the outcome, Skipper is not in favor of mandatory voting and believes it would be a mistake if the government chose to go down that route. 'Those that aren't interested in voting would just tick a box and swamp the votes of those who were really considering the issues.'