After meeting with a firm, fund managers were more likely to make changes to their portfolio.
One of the stated selling points of active fund management is the ability of the fund’s research team to meet the managers of the companies they invest in. If the company is in the portfolio of a fund, a member of the fund’s team will meet the management team of the company to ask questions and try to get a sense of the firm’s performance and potential.
This takes time and resources. As a result, it is one reason why actively managed funds have higher fees than passively managed index funds. The claim of active managers is that this part of their investment process helps them to make better decisions about the companies they invest in and, therefore, provide better performance.
But how useful is this really? According to a new academic study, very. The study, titled ‘The Benefits of Access: Evidence from Private Meetings with Portfolio Firms,’ focused on Aberdeen Standard Investments (soon changing its name to Abrdn), one of the UK’s most popular fund houses.
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Over a nine-year period, the academic paper attempted to get a detailed insight into the ‘internal day-to-day activities' of Aberdeen Standard Investments and its predecessors (Standard Life and Aberdeen merged in 2017). This included looking at notes of all contacts and meetings with companies in the portfolios of funds, the votes cast at shareholder meetings and the internal recommendations of the fund house.
The conclusion of the paper? Meetings with companies are highly useful. First, the paper notes that following a meeting with a company, fund managers were more likely to make a trading decision. Even better, however, these trading decisions were more likely to result in a good outcome for the portfolio’s performance.
The paper explains: “The primary finding of this paper is that for this active investor, monitoring and engagement generates insights and information advantages that influence internal analyst recommendations and are used for trading decisions. These trades generate abnormal returns.
“Fund managers heavily trade portfolio firms precisely on meeting days, and trading remains elevated for several days; funds that trade around meeting days tend to be those that trade around other events such as internal analyst upgrades or downgrades and shareholder votes. Not all meetings are the same. Meetings with fund managers generate both buy and sell trades, whereas meetings with governance specialists generate largely sell trades.”
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So, while the arguments for passive investing may remain strong overall, the ability of fund managers to gain access to the management of companies they invest in is a force for good.
The study was not comparative, so we cannot gauge how well other fund management companies do compared to the funds considered. However, it does suggest that the quality of a fund’s research team is important, as well as the emphasis fund managers put on meeting the managers of their portfolio holdings.
The paper also gives a fascinating insight into how funds assess the companies in their portfolio. The study includes notes from a 2015 meeting between Standard Life’s governance specialist and the chairman of Carillion’s board. Notes from the meeting show that the governance specialist was unimpressed.
One concern was the number of other roles the chairman held outside Carillion.
The governance specialist was also unimpressed with the chairman’s assessment of Carillion’s growth prospects. According to the notes, the chairman said he had “an intuition that there were opportunities in developed and developing economies”. But, the governance specialist said: “The force of this insight was somewhat diminished by the admission that ‘they hadn’t really made any progress on that front’”.
The governance specialist also noted that the chairman appeared to have an ‘avuncular relationship’ with the CEO of Carillion.
All these appeared to be red flags and resulted in Standard Life’s internal analysts downgrading Carillion from a ‘hold’ to a ‘sell’ two weeks later and funds reduced their holdings. A few years later, Carillion collapsed.
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