Face-to-face meetings help professional investors spot good and bad corporate management. Have remote meetings been a poor substitute?
Fund managers have long debated whether meeting company management teams improves their decision-making. One side argues that investors are simply subjected to puffy sales pitches and PowerPoint presentations that tell them little they couldn’t glean from company accounts. The other says there is value to be found in engaging with management teams to understand whether they can be trusted to deliver on their promises and grow shareholder capital.
The debate has become more nuanced with the pandemic. Travel restrictions and social distancing rules have meant that many fund managers have had to conduct company meetings remotely via Zoom. While many suggest that this has facilitated better access to companies, others say ‘softer’ judgements on whether management teams are truthful and competent have become more difficult. Many miss ‘shooting the breeze’ with management teams, which would otherwise help them pick up new ideas or insights.
The value in meeting management teams
The first question is a philosophical one: should investors be meeting management at all? Many managers believe that, given the current listing rules require all market participants to have access to the same information, management teams can’t give individual fund managers unique insights. This would be insider trading. As such, talking to management is not helpful and can be a distraction.
However, for many, the value in meeting management teams isn’t about proprietary information. Simon Gergel, manager of the Merchants Trust (LSE:MRCH), says: “The management team in any business is responsible for capital allocation. As such, how they think - rather than what they do - is important. It is not about this month’s results, but about ensuring they understand what drives shareholder value.” He believes there isn’t much to be gleaned from group calls or ‘speed dating’ conferences but focused one-to-one chats can help decision-making.
David Clark, a fund manager at Saracen Fund Managers, says a rapport can often develop between the management and the investor, to the benefit of both parties: “It is useful if the management wish candidly to canvas shareholders about a certain strategic decision they are considering, for example. Similarly, it can be of mutual benefit if the management come looking for further funds from fund managers.”
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It isn’t just the management teams. Many fund managers make a point of looking beyond the C-suite, talking to line managers and those on the ground in a company. They may also talk to non-executives, competitors, trade bodies and other players in an industry. Mike Seidenberg, fund manager on the Allianz Technology Trust Ord (LSE:ATT), says: “I have always enjoyed going to user groups, walking the floor and asking what they think of different products. That process sparks so many ideas.”
He also believes that there is a buzz to successful companies that it is hard to judge without visiting the company in person: “When you walk in the lobby, there’s an energy to a company doing well that is difficult to fake. You can feel that things are happening, and the employees have an urgency about them.”
With this in mind, it might appear that the Zoom has been a poor substitute for the insights that can be drawn from face-to-face meetings. However, some managers argue that there have been benefits, particularly for smaller management groups.
Margaret Lawson, fund manager at SVM Asset Management, says: “For investors outside London and boutiques, Zoom calls give much more access, and more frequent meeting. We use the meetings to build up an understanding of strategy and whether the trend of regulation, sustainability, government policy is favourable. We use accounts for the numbers. The pattern of online calls has been helpful and gives more access, with perhaps more checkpoints on progress during the year. Seeing companies two to four times per year, say, rather than once or twice. With a much faster pace of change now, this greater number of touch points is invaluable.”
There is also an environmental angle. The pandemic has shown a new and far more eco-friendly way of working. The idea of fund groups boasting about sustainability credentials while their fund managers fly all over the world to meet management now looks anachronistic. Jon Hudson, fund manager of the Premier Miton UK Growth fund, says: “The shift to video-conferencing reduces time spent travelling allowing us to do more meetings with companies in a more environmentally efficient way. Video-conferencing is particularly useful when meeting companies we know well and only an update is required.”
Nevertheless, the majority of managers are keen to have face-to-face meetings, albeit selectively. James Budden, director of marketing and distribution at Baillie Gifford, says: “We look to work with entrepreneurs and businesses over the genuine long term to help enable them to create wealth and solve problems for a wide range of stakeholders. Often this is done best face to face rather than via a screen. Meeting in person gives you a better chance of understanding the important cultural aspects of companies and their management teams.”
How the fund invests will dictate importance of face-to-face meetings
The emphasis put on meeting management is likely to vary with the style of fund, the sector in which a manager operates and the size of the business. In particular, the size of company on which a manager focuses will make a difference. There may be little fresh information to be gleaned from management meetings with very large companies, where meetings are highly scripted and management tend to be ultra-careful about comments they make.
Meetings with smaller companies will generally offer up more insights. Management teams are bound by the same rules, but those running smaller companies tend to be more open to answering direct questions and won’t have an investor relations army batting away difficult discussions.
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While it may be easy to manage, say, a European portfolio from the UK, there are parts of the world where it is tough to invest remotely. Nicholas Price, portfolio manager of Fidelity Japan Trust (LSE:FJV), says being based on the ground in Japan allows him to unearth less well-known companies and to explore the pre-IPO market. “Speaking the language is critically important when engaging with company management,” he says. This approach brings access to many of the fastest-growing areas of the economy. He has stocks focused on cloud-based security management or ID integration in his portfolio today.
The industry will also be important. Gergel says in areas such as utilities, which are highly regulated, there is relatively little scope to change things: “Energy companies, however, are in the middle of a big transition and how they manage that transition and balance competing demands will be vitally important.” The same may be true of technology companies, says Seidenberg. Management teams need to drive the business, to create new markets and, often, to deal with regulators and policymakers.
In future, fund managers may not get the choice to see management face to face. Clark says he is resigned to the fact that company managements are unlikely to travel to meet investors and potential investors as much as they did previously. They recognise the need to use their face-to-face time with management wisely and circumvent the ‘corporate puff’: “The key here is to not only arrive at the meeting with a clear idea of what you would like to get from it, but actually be not so much prepared as ‘armed to the teeth’ to make sure that you are not distracted from your purpose during the meeting.”
Seidenberg says that meeting management is part of a mosaic when coming to a decision about an investment. “Management teams are paid to be optimistic,” he says. “If they weren’t optimistic, they wouldn’t be in the seat. The leading people need to believe – they are trying to do something very difficult and that takes tremendous effort. Our job is to filter that optimism and figure out what is realistic.
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“Some companies have a secular tailwind that can dwarf the actions of management. If the wind in a company’s sails is strong enough, even a mediocre captain can do fine. However, these are rare, we only find three or four each year. On the other hand, even the best management team can’t make a poor product work.”
Zoom calls have been an adequate, if imperfect, substitute for fund managers during lockdown. However, most are keen to revert to face-to-face meetings when regulations allow. Good fund managers have developed finely honed instincts for spotting good and bad corporate management. The return of face-to-face meetings will allow them to put those instincts to good use once again.
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