The compounding effects of share buybacks, since the 1980s, have been identified as the critical factor enabling the US equity market to outperform Europe on a 100+ year basis – a significant view, given the announcement by BP to boost its buyback programme by a further $2.5 billion.
With the largest proportion of European companies in history set to pursue buybacks, investor returns from the region may start to outperform the US in coming years, according to analysis presented at the latest quarterly investment meeting of The Group of Boutique Fund Managers (GBAM)*.
Outlined by Hlelo ‘Lo’ Giyose, CIO & Deputy Executive Chairman of GBAM member Johannesburg based First Avenue Investment Management, the analysis sought to establish the primacy of share buy backs (capital allocation) in stock selection in a world where global investors are obsessed with tactically switching between US and European equities.
While comparing the Stoxx 600 and S&P 500 indices for those considering tactical switching, the analysis referenced both longer and nearer-term time periods: 1900-2011, 1988-2011, and 2010-19.
Factors dismissed as insufficient to explain the levels of performance differentials over time include:
Earnings growth rates
Sector composition and weighting
Notional P/E ratios
Impact of differences in depreciation accounting between US GAAP vs IFRS on REITS and consumer discretionary sectors
Data for both regions since January 2021 point to stronger returns from indices such as the Solactive European Buyback and S&P 500 Buyback, as compared to the Stoxx Europe Select Dividend 30 or the S&P 500 Dividends Aristocrats.
Lo Giyose said: “What is really intriguing here is that the bulk of the difference in returns between the United States and Europe can be explained by companies more consistently allocating capital to one particular factor, which is share buybacks.”
“Thinking about Shell and BP and Total, they are in a tough position. But let us say there was no war, and no supply constraints. If they were following ESG principles by reducing production of fossil fuels and were increasing renewable energy and buying shares back and trading at 5.7% dividend yields, they would be outstanding investments.”
“Paying dividends is one thing. But buying shares back is far superior to just paying shares back. Companies also buying shares back on a consistent basis over a certain period of time outperform companies that just pay dividends.”
“Buying and removing 10% of the shares in issue compounds at a much faster rate than being paid a dividend every year.”
Notes to editors:
The Group of Boutique Asset Managers (GBAM) www.gbammanagers.com
GBAM is a global network of like-minded, independent specialist asset managers who have come together to improve their presence in international marketplaces. GBAM describes boutique firms as having a limited range of products, a close relationship with clients, and a relatively flat organisational structure. GBAM firms tend to be small to medium sized, entrepreneurial, flexible and responsive to changing market conditions. Members tend to focus on the manufacture of investment products rather than mass distribution. Ownership tends to be in the hands of founding partners,
GBAM investment professionals describe themselves as innovative craftsmen who have a creative yet focused approach to fund management with a passion for ‘doing the right thing’ for their customers. They are given the freedom to manage, are driven by performance cultures and pride themselves on the intellectual rigour they bring to asset management. As a result of the satisfaction they derive from working in a GBAM boutique they tend to stay with their firms for lengthy periods.
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