SPLASHING corporate cash may be in vogue, with bumper share buybacks and record takeovers, but some investors are demanding firms spend more on improving assets they already own.

Of nearly a dozen fund managers contacted by Reuters, three-quarters expressed concern about the way companies are allocating capital during a period of relatively healthy cash flow.

“If you are in boom times, by and large capital tends to be allocated poorly,” Ben Whitmore, manager of the Jupiter Special Situations Fund, said.

After a nine-year bull run in stock markets, many analysts consider British and European companies to be close to peak values, ramping up the risk of over-priced purchases.

“There has been a record volume of mergers and acquisitions (M&A) recently and there’s bound to be some complete howlers in that. Time will show what they are,” Whitmore added.

Globally deals totalling $1.55 trillion have been struck so far this year, while in Europe M&A have totalled more than $621 billion, up 151 per cent on the same period in 2017, Thomson Reuters’ data shows.

The aggregated value of cash only takeovers so far in 2018 has risen by 33pc year-on-year while the value of deals using cash and stock has risen by 221pc, as companies look to exploit their buoyant share valuations.

“A lot of M&A actually destroys value for shareholders, not adds value ... acquisitions are quite risky, they can be distracting, they have to be integrated effectively,” Sue Noffke, fund manager at Schroders, said.

Of nearly a dozen fund managers contacted by Reuters, three-quarters expressed concern about the way companies are allocating capital during a period of relatively healthy cash flow

Meanwhile, companies have spent or committed to spend hundreds of billions of dollars on repurchasing stock so far this year, with Apple Inc alone planning to buy back up to $100bn of its shares in an effort to bolster its returns.

By contrast, the latest Global Corporate Capital Expenditure Survey from Standard and Poor’s showed that the top 20 capex spenders among non-financial companies in Western Europe invested just shy of $200bn in aggregate in 2016.

And across Europe, the Middle East and Africa, companies had stashed 974bn euros of cash by the end of 2016, the latest data from Moody’s Investor Service showed, with the ratio of cash relative to revenue at a seven-year high.

That has in part been fuelled by ultra cheap debt, an era which is expected to come to an end as central banks around the world gradually tighten the loose monetary policy used to see wobbling economies through the financial crisis.

“What we don’t want is for companies to gear up balance sheets ... we do want them to use spare cash to invest in their businesses,” David Keir, co-manager of the Saracen Global Income and Growth Fund, told Reuters.

S&P data shows the non-financial companies in its rating universe grew capex by just 7pc in the last 12 months, despite posting sales growth and EBITDA growth of 13.6pc and 15.2pc respectively over the same period.

However, there are indications some companies appear to be listening, or at least questioning whether copy-cat M&A deals will deliver their growth ambitions.

Analysts at UBS said a net 30pc of corporate respondents to its Evidence Lab Survey said they expected to increase capex over the next year.

“We’re wary of M&A deals, full-stop. Particularly companies going out to find deals because they feel that they are under pressure to do something,” Andrew Cave, Head of Governance & Sustainability at Baillie Gifford, said.

While some companies have been caught on the M&A escalator, others have won plaudits for stepping off.

Charlie Huggins, manager of the HL Select UK Income Shares fund, which holds a position in GlaxoSmithKline, cheered the British company’s recent decision to abandon a bid for Pfizer’s Consumer Health business.

“The key priority now is extending this capital allocation focus to the R&D pipeline,” he said, adding it was “critical in getting investors back on side in the long run”.

Bye-bye buybacks: Corporate America has led the way in passing on the problem of its surplus capital to investors via share repurchases, with around $530bn spent on US buybacks last year and $800bn expected in 2018, according to JP Morgan.

Critics decry a lack of ambition and ideas among company executives, most of whom have long-term incentive plans linked to the price of their shares, which are lifted by buybacks.

Even special dividends are beginning to lose their lustre, the fund managers said, particularly when viewed in the context of paltry organic investment figures.

George Godber, fund manager at Polar Capital, said doubts over how executives deployed their funds was a key reason why he was steering clear of many of Europe’s largest companies.

“We are seeing a lot of poor use of capital — too much in dividends and too much in buybacks. We’re very, very supportive if they’ve got sensible M&A to do but the actual grunt of integrating complex transactions can be really tough,” he said.

Calls on executives to use capital more constructively could yet have a bearing on a number of deals in the pipeline, particularly if shareholders withdraw support in favour of more organic investment, the investors said.

“The market has rewarded solid, predictable earnings growth for the last 8 or 9 years. And clearly M&A comes with elevated risk,” Old Mutual Global Investors fund manager Ed Meier said.

“You need very strong management teams who are confident in their ability to structure deals, but also execute quickly on these deals. And it’s a skill set that isn’t available to all.”

Published in Dawn, The Business and Finance Weekly, May 7th, 2018