Good quality companies will outperform those with high leverage as borrowing becomes more difficult, says Aaron Barnfather, a European fund manager at Lazard.
The manager of the £152m Lazard European Alpha fund says he looks for stock ideas among companies with strong balance sheets and high profit margins. “Quality companies were as lowly valued as they have ever been by the end of 2007, and by the end of 2008 they clearly differentiated themselves in the marketplace,” he says.
Barnfather suggests that the lack of liquidity in markets will reveal which companies are really the strongest, and which simply borrowed themselves out of trouble.
“Quality companies were not outperforming in the last bull market because money was becoming much cheaper. You can see how much money was being pumped into the system by looking at bank balance sheets today. Low quality companies could borrow their way out of any situation and look as if they were doing as well as the higher quality companies,” he says.
Barnfather says that Carrefour, a French supermarket chain, lost market share because its competition could borrow money easily in such a liquid environment. Ryanair, the budget airline, was also unable to take as much market share as he would have expected, for the same reasons.
However, Ryanair is now taking market share from Alitalia, its main rival. “Alitalia issued convertible bonds and raised money from the government and equity markets. It took Ryanair a very long time to grind through that. But now Alitalia has had to back away from many airports in Italy including Venice, and is flying at 40% less capacity not because of the downturn but because Ryanair is increasing its market share, by 17% last year,” Barnfather says.
Other holdings in the fund include Nestlé, a food producer, Roche, a Swiss pharmaceutical firm, and Total, an oil company.