LGIM strengthens its rules of engagement

Robert Churchlow of LGIM talks to Tamsin Brown about his new role, expectations and plans for growth.

Churchlow
ROBERT CHURCHLOW was recently appointed head of active equities at Legal & General Investment Management (LGIM). He joined LGIM from Invesco in 2003, where he was the head of the UK institutional equities team.



Q. Stockmarkets have had a good run since the start of July. Do you think this is sustainable?

A. In the medium term, yes. The corporate sector is in good shape. Balance sheets are strong, cashflows are strong, companies have generally weathered the downturn well and we expect growth next year, albeit not terribly exciting.

The other thing that underpins equity markets is merger and acquisition [M&A] activity. We have seen a number of deals in UK markets over the last couple of weeks to support that and we think this is happening for a good reason.

As well as having strong balance sheets, companies have done lots of cost cutting. Looking ahead to next year, if companies want to grow and find new sources of cutting costs, then buying other companies is the best way forward. We think the M&A cycle has turned and there is further to go here.

Our view is that equity markets can continue to move higher, although we have had a big move up, so maybe we are entering a period of consolidation.

Q. Research shows that dividends have returned to growth after five consecutive quarters of falling payouts. What do you think the outlook for company dividends is?

A. The outlook is reasonably good. If you look at areas where you have had big dividend cuts, there is some prospect we will see a return to dividends next year. The obvious one is BP, which looks as though it will return to the dividend list next year. If companies don’t have a need for capital, to invest or to make acquisitions, we are encouraging them to increase returns to shareholders. (article continues below)

Q. You were recently put in charge of active equities at Legal & General Investment Management [LGIM]. How many billion pounds of funds under management does that cover and do you expect to make any changes to the way the funds are run?

A. I am responsible for about £10 billion of active equities, about half of which are in UK equity mandates and the other half are outside the UK. I think there will be no fundamental change in the way we run money. Each of the desks own their own process and work closely with the other desks and with the rest of the organisation. We have strong fund managers and, for me, it’s simply a question of getting the best out of them.

Q. Your predecessor, Mark Burgess, was a lively critic when he felt companies were not doing the right thing. Will you continue to play such an active role?

A. LGIM has moved towards stronger engagement with companies over the last few years, and certainly Mark Burgess was a proponent of this. The things that hit the headlines tend to be the more contentious issues. The reality of LGIM’s engagement is it is overwhelmingly carried out in a positive way, so it’s either companies coming to us asking advice on various matters or us engaging in dialogue with them to help improve their business and hopefully seeing that reflected in their share prices.

The scope for engagement has increased materially in the last few years and that is something we are definitely going to continue with. This is an important part of our role as one of the major participants in equity markets.

Q. Are the active funds at LGIM positioned for further growth or are there defensive aspects to their holdings?

A. Most of our portfolios are balanced. On the one hand, across the portfolios we have a strong core of companies that generate higher returns and strong cashflows. Now is a particularly good time to be invested in these types of companies as their share prices haven’t benefited as much as some of the more cyclical firms in the market.

I think there is good value in blue-chip names such as Imperial Tobacco, Reed Elsevier and even GlaxoSmith­Kline. In the UK, those types of names provide the core of our portfolios.

But then we are supplementing that with companies where we think there are good growth opportunities, with those where we think a change of management could improve their fortunes.

Q. What impact do you think British public sector cuts will have on listed companies?

A. The market has clearly been concerned about the impact public sector cuts will have, particularly on companies that have the government as a major customer.

Companies that we own such as Babcock International and Logica have been impacted by that. But this is an opportunity for these companies. The way we think the UK government will achieve a lot of their savings is via outsourcing.

In the next phase, once we get the spending review out of the way, increasingly the government will look to work alongside companies that deliver solutions that are much better value. There are opportunities in the medium term for companies in this space.

Q. What are the risks to the recovery?

A. The main risks to the recovery are that global macroeconomic recovery falters. Policymakers also have difficult decisions to make about further quantitative easing – too much risks inflation in the future, but the desire to avoid depression may lead them to think that these risks are worth taking.

Sovereign debt issues in the EU [European Union] periphery have also not gone away.

Q. Standard Chartered recently announced plans for a rights issue. Do you think other British banks will follow its lead?

A. If we look at the reasons for the Standard Chartered rights issue, one is to fund strong balance sheet growth. For other domestic UK banks that is less of an issue.

Standard Chartered has also said it needs to raise money to provide a ­capital buffer. There has been some read-across to other banks in terms of whether they need to raise equity capital as well.

Our view is there is no immediate requirement. Among the UK names, we are not expecting a bunch of new equity raisings.