Fresh Faces Inspire New Ideas

Source of investment opportunity in Europe is coming from new CEO company leadership

Executive Summary

  • New management can be a great trigger for shareholder returns and the opportunities are increasing
  • Sweden has produced some excellent returns with its younger managements
  • France has an elderly cohort of management ready for change

New management can mark a turning point for a company. As part of our investment process the Waverton European equity investment team continuously monitors changes of management as well as their actions. Management change alone is not a panacea.  Nevertheless change at the top is a stimulus for:

  • Strategic review
  • Better shareholder alignment
  • Improvement in industry behaviour
  • Increasing value creation and share price performance

Each of these can contribute to companies  achieving  more of the five “Key Attributes” we seek in our investments namely; Shareholder Interests Aligned, Pricing Power, Earnings Visibility, Cash Generation, Return on Capital. In our view only around one third of European companies can be considered fully aligned and shareholder friendly currently. Europe is full of excellent companies that could benefit massively from management change.

Management change has been increasing across Europe in recent years, but the opportunity for more change in coming years is also significant. The chart below shows that the proportion of new CEOs has generally been increasing, but so is the proportion of long serving CEOs. Thus the wind of change is blowing with positive effect, but more importantly the potential opportunities continue to increase too.

Waverton European Funds Universe (Europe ex UK) with new CEOs

Source: Bloomberg/ Waverton analysis as at 29th December 2017.

Our analysis of CEO tenures and ages highlight numerous interesting observations. For example:

  • The average age of CEOs has been increasing. This is the result of the proportion of young CEOs (under 56) declining and proportion of older CEOs (56 and over) increasing.
  • Since 2011, as the chart below shows, the average CEO tenure (now over 6 years) has increased more rapidly than the average CEO age (now nearly 56). Not entirely coincidentally the continental European market has recovered back to its pre-crisis peak.
  • How long will this trend continue? Will accelerating economic recovery and synchronised growth mean CEOs ride the wave of earnings growth, or be encouraged to “retire on a high” while the going is good, or will they be forced to do so involuntarily as takeovers (or mergers) become more commonplace during the last leg of the cycle?

European CEO Average and Average Tenure

Source: Bloomberg/ Waverton analysis

  • The comparison of CEO tenure and average age by sector and by country show some diverse developments.
  • Of the major EU countries/regions, Portugal & Spain, France and Netherlands have the highest average CEO tenures (see chart below). It is in these countries that labour reforms, improvements in corporate governance and shareholder alignment are most urgently required.
  • Conversely, it is in the countries with the lowest and declining average tenures of Denmark, Sweden and Switzerland where shareholders have enjoyed some of the most consistent and strongest returns. CEO’s in Sweden and Switzerland also have youngest average age -where our funds have a significant bias.
  • By sector, the youngest CEOs operate in the Telecom Services, Financials and Consumer Staples sectors.
  • The proportion of new CEOs (tenure less than 2 years) has been particularly high for the Energy, Utilities and Telecom Services. Clearly, the companies in these sectors are under pressure from shareholders and have tried to address poor historic returns with new managements and strategies.
  • For the Energy (e.g. oil majors) and Telecom Services sectors the changes have yet to bear fruit, given these were the worst two performing sectors in 2017, although we detect improving trends and sentiment for some select stocks. However, there appears to be more traction among Utilities, one of the best performing sectors in 2017, although the second worst (after Real Estate) so far in 2018 as a result of fears of future higher interest costs.
  • The sectors with the longest average CEO tenure are Information Technology and Consumer Discretionary.
  • This raises a number of questions for the Information Technology sector in particular. Does management need to change despite the recent strong performance (best of any sector in 2017)? Is there a danger of complacency amongst investors as well as CEOs? Has the risk reward balance tipped to the downside relative to the market? The Info Tech sector aggregate valuation has been rerated the most in 2017 and is now the highest amongst all sectors again and has remained so through the recent market volatility (2018 PER of about 21x) despite falling earnings expectations. This compares to the MSCI Europe ex UK Index 2018 PER of 14x.

Proportion lof Long Tenure CEOs by country

Source: Bloomberg/ Waverton analysis

In conclusion, we continue to see many opportunities for change, for improving shareholder alignment and for experienced astute stock pickers / active investors to add value. The Waverton European Funds have concentrated portfolios with stocks operating in different sectors (but not all) with a spectrum of CEO ages and tenures, which we believe are creating shareholder value, or will do so over the next two or three years. New management in a good business can be an excellent trigger to improve investment returns, which we follow closely.

John Buckland

European Funds Equity Analyst

 

Risk Warnings

The views and opinions expressed are the views of Waverton Investment Management Limited and are subject to change based on market and other conditions.  The information provided does not constitute investment advice and it should not be relied on as such.  All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed.  There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.

Changes in rates of exchange may have an adverse effect on the value, price or income of an investment.

Past performance is no guarantee of future results and the value of such investments and their strategies may fall as well as rise.  Capital security is not guaranteed