Small-cap manager MATT CABLE and North American value manager, DAN WHITE discuss their different views on the subject.
Company meetings present something of a conundrum. The law rightly says that no investor should be in possession of ‘material non-public information’ when trading in shares, so both fund managers and corporate executives are very careful to make sure that none is disclosed when they meet. But if we are actually prohibited from obtaining information that would be considered useful to a ‘reasonable investor’, then why do we do it at all? Why not simply rely on companies’ published results, annual reports and so on, backed up with market research and plenty of elaborate spreadsheets?
I think the answer lies in how we define ‘information’ in the first place. The FCA defines ‘inside information’ as (among other things) that which is ‘of a precise nature’ and ‘is specific enough to enable a conclusion to be drawn’. And therein lies the rub – investment is an imprecise science at the best of times, so often very non-specific information can be helpful.
I agree that meeting the management team of a company can be interesting, informative and even entertaining. But I’m not convinced that it really helps with the investment decision making process.
My most memorable company meeting of all time was with the head of the investment banking division of a certain listed bank (not naming names). During this meeting, the individual in question proclaimed on a number of occasions that we were “living in the golden age of risk management”.
The reason why this meeting is so memorable is that it took place in 2007, just prior to the GFC. The bank went on to lose billions on its subprime investments and had to have several painful and dilutive capital increases to shore up its balance sheet………somewhat contradicting those “golden age” assertions!
As a fund manager I obviously want to understand a company’s business model, strategy, risks, capital allocation strategy and the many other factors that are important when making an investment. But company management teams are not necessarily the best source for this information, in my view.
I find though, that I can learn things in a company meeting that are both useful and legal! Let me give an example.
Consider two listed operators of care homes (again, not naming names). When I first met them, the companies had broadly similar strategies, scale and capital structures. Analysis of historical data showed little to choose between them. Meeting management, however, was chalk and cheese. One chief executive was keen to explain the merits of his financial model and wanted to point out the recent (high) valuation placed on his freehold properties. He was focused on how poor state-run provision was in his sector and the financial opportunity that presented.
The other boss wanted to talk about his clients and the difference he could make to their lives. He emphasised cooperation with local authorities and listening carefully to their needs. He wasn’t interested in freehold valuations as he wasn’t planning to sell his buildings.
This fundamental difference in outlook is not ‘precise’ or ‘specific’, nor does it tell me anything that I can enter into a spreadsheet. The value however, is as clear as day – one of these companies is likely to be financially aggressive and short-term focussed, while the other is much more likely to build sustainable long-term value.
As you may have guessed the two stocks have fared rather differently since I first met them – one is up 18%, the other down 72%.
That’s an interesting example Matt. As you know, I can, and do, meet company management teams. But I don’t put a huge amount of emphasis on those meetings in my investment process – it certainly isn’t a prerequisite to meet management before investing in a company’s shares.
I prefer to use more balanced, impartial and audited sources of information when assessing management teams. Investing as I do in North America, a US-listed corporate’s annual report, otherwise known as the 10-K, is an excellent resource in this regard. Analysing the company’s balance sheet tells me a lot about the relevant management team’s attitude to debt and M&A, while the remuneration policy shows whether their interests are adequately aligned with shareholders.
Of course the differences are not always as stark as those in my example, and I am not pretending that company meetings are the only thing that matters in coming to an investment decision. For me though, they represent a critical step in the process of developing conviction in an investment idea, or indeed, and sometimes more importantly, in deciding what to avoid. And in the small-cap sector where I am investing, meeting company management teams is even more important as very often there is little research coverage of the companies’ shares.
I do agree that management teams are important, as a good management team can make a big difference to the performance of a company. But I can usually make a much more objective and accurate assessment about the quality of a management team based on their actions rather than their words. And very often, I find conversations with the companies’ non-executives are much more insightful – but that’s a whole new topic for another blog!
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.