1. Newsroom
  2. Growing, fading, restructuring or maintaining?
Menu
UBP in the press 04.12.2017

Growing, fading, restructuring or maintaining?

Growing, fading, restructuring or maintaining?

Handelszeitung (04.12.2017) - Modelling a corporation’s journey along its CFROI lifecycle enables the discovery of alpha generating opportunities.


The levels and development of a company's Cash Flow Return On Investment (CFROI) are consistent indicators of its ability to create value for investors. Companies tend to follow a similar life cycle of profitability, reflected by their respective levels of CFROIs, which allows for comparison of companies across sectors and countries.

Underestimated return potential

A young company will go through a time of high asset growth and development costs, leading to initially weak levels of CFROI. As strongly growing revenues cover costs better, CFROIs will rise, despite still good asset growth. It can be very rewarding to take part in this high growth stage, but there is inherently a higher level of risk. Interesting CFROI growth names in Switzerland would be Straumann, AMS and VAT. Globally, Technology plays like Google, Facebook and Sunny Optical are attractive.

Subsequent superior CFROIs tend to fade down as value creation attracts competition, often through offering a superior, or more attractively priced, product. Similarly, a product may become obsolete due to new technology or changing consumer behaviour. Mobile telephones evolving into smartphones come to mind here, and, today, many retail formats are challenged by online offerings.

Only around 5-10% of companies are able to sustain their CFROI at high and stable levels for longer than the market discounts. These are interesting investments, as they tend to be long term alpha generators, because CFROIs are revised upwards from expected fading. Examples in Switzerland would include Partners Group, Geberit and Givaudan. Globally, Henkel, L’Oréal and Mastercard come to mind.

When CFROIs deteriorate significantly, a successful management team needs to address the phenomenon before the company goes bankrupt. This typically will involve restructuring, reorientation or new product launches. Restructuring is a high risk, high reward area of investing and it can precede the strong growth of the start of a new CFROI lifecycle. In Switzerland, restructuring names include Gurit, Clariant and Bucher. Globally, the Energy and Materials sectors offer opportunities with EOG, BHP and Rio Tinto.

Zoom in on undervalued companies

A CFROI-based investment approach entails identifying undervalued companies by analysing their position in their CFROI lifecycle. The aim is to combine high-growth CFROI and restructuring companies with corporations which are able to demonstrate high and stable CFROIs. The weighting of the three categories will also depend on the stage of the economic cycle: in periods of uncertainty, a higher proportion of the portfolios will be concentrated on high and stable CFROI generators. Today, where global GDP growth outlook and PMI indicators support economic development, high-growth CFROI businesses should be favoured.

More about Swiss & Global Equities

TAYLOR JOLIDON Eleanor.jpg

Eleanor Taylor Jolidon
Co-Head Swiss & Global Equity

MOELLER Martin.jpg

Martin Moeller
Co-Head Swiss & Global Equity

Asset class

Japanese equities

Why the current outlook makes a compelling case for Japanese equities

Watch the videos

Most read

UBP in the press 02.04.2019

Zurich: a nerve centre for UBP

Le Temps (29.03.2019) - UBP, which acquired Coutts exactly four years ago, has doubled the amount of assets it manages in Zurich to CHF 25 billion in five years. We spoke to Adrian Künzi, who has headed UBP’s local branch for the last year.

UBP in the press 03.12.2018

It’s all in the family for Union Bancaire Privée's de Picciotto

The Straits Times (25.11.2018) - As times change, CEO’s ambition is to make UBP one of the biggest family-owned banks.

UBP in the press 26.03.2019

UBP is ready for all Brexit eventualities

AWP (25.03.2019) - Union Bancaire Privée (UBP) anticipated the uncertainties surrounding future relations between the United Kingdom and the European Union. By expanding in London with the acquisition of ACPI and maintaining a strong presence in Luxembourg, the Geneva bank is prepared for any outcome, as its CEO Guy de Picciotto explained to AWP.

Further reading

UBP in the press 23.05.2019

Trade dispute supports gold price

Finanz und Wirtschaft (18.05.2019) - Since the end of February, the stronger US dollar and the firmer equity markets have put a lid on gold prices.

UBP in the press 20.05.2019

Distinction between private and institutional clients fades

Le Temps (20.05.2019) - Wealth management professionals have all noticed that every year the line between private and institutional clients is fading and their specific needs, which used to be so different, are becoming increasingly similar. And the trend is not a passing one.

UBP in the press 09.05.2019

China is the place to invest in equities

Bilan (24.04.2019) - Since China joined the WTO in 2001 and adopted a capitalist approach to its economy, investors have viewed the local financial markets with an equal mix of hope and fear.