As an institutional investor, each year we arrange in excess of 1,000 face-to-face meetings with the management of companies and site tours of their operations. The visits provide deep insights into a business and its operations and are critical to our investment decision-making process.
But with companies required to disclose to all investors material information about their business, why bother with company visits?
The continuous disclosure regime
Pursuant to ASX Listing Rule 3.1, market participants are required to immediately disclose to the market all material information about their business, with the exception of confidential information. The Australian Securities and Investment Commission (ASIC) is charged with market surveillance and enforcing the continuous disclosure obligations. Commissioner John Price explained the regulator views continuous disclosure by companies as:
“a bedrock of market integrity … essential to two of ASIC’s priorities: fair and efficient markets and confident and informed investors.”
Over the past decade, compliance with the market’s continuous disclosure rules has been significantly tightened. In August 2010, ASIC took over responsibility for supervising trading activity in Australia’s domestic financial markets from the Australian Securities Exchange (ASX). Since this time there has been a marked increase in insider trading prosecutions. In 2013, ASIC implemented the Market Analysis and Intelligence (MAI) surveillance system enhancing the regulator’s ability to monitor market activity. ASIC can now conduct real time surveillance of market trading activity and has the ability to analyse large data sets to identify irregularities on a timely basis.
So then, with a rigorous continuous disclosure regime requiring companies to disclose to all investors material information, what do we achieve by visiting so many companies?
1. Efficiently gain insights
Compared to a day spent researching and analysing public information on a company at a desk, a one-hour meeting with a company’s CEO discussing their business allows us to quickly ascertain how they generate profit. It helps us to determine a value for the business. With limited sell side analyst research available on the majority of the 2,000 plus ASX-listed companies (that is, those falling outside of the S&P/ASX 300 Index), company meetings are particularly critical.
2. Assessing management
Our assessment of a company’s management team is critical to our overall valuation of a business and one of the most important factors informing our investment decisions. We gather some of our most valuable insights about a CEO and senior executives in our face-to-face meetings. Much like in job interviews, we generally form a view of a person within the first one to two minutes. We gain a powerful impression by observing the body language and the overall demeanour. For example, whether they maintain eye contact and what their posture is. In addition to non-verbal communication, a person’s tone of voice and how they interact with their colleagues is import. Meetings help our understanding of management’s motivations and ensure their interests are aligned with their shareholders.
3. Understanding culture
One of the key filters we apply when making an investment decision is looking for positive corporate culture. Research demonstrates a strong correlation between a company’s culture and its financial performance. A good corporate culture is more important than ever to attract younger talent with Millennials (the generation following Generation Y) seeking more flexible work arrangements. For example, an increasing proportion of teaching graduates are now preferring part-time to full-time positions for flexibility.
As a general rule, annual reports and other reported information provide very limited insights into a company’s corporate culture compared with a meeting. A meeting or site tour allows us to truly gauge the state of a company’s culture. For example, we can observe how a manager engages with their staff at all levels of the business.
Silver Chef Limited (ASX: SIV) is a company we hold in the highest regard for their corporate culture (disclaimer: we also invest in this company). Providing hospitality equipment funding, Silver Chef is committed to giving back to society (through support for Opportunity International) and to contributing to employees’ wellbeing by promoting values of work-life balance, health and happiness.
4. Deeper understanding of financials
Financials are the life blood of a business and in making our investment analysis, reconciling cash flow is our focus. Frequently, our investment team has questions for the Chief Financial Officer about a company’s reported financials. If we are not satisfied with management’s responses, for example, questions about the numbers cannot be answered or we do not think they stack-up, we make a conclusive decision not to invest.
5. Determining consistency of ‘story’
At least every six months we meet with management after results are reported and each time we ask some of the same questions to ascertain if their ‘story’ remains the same. A lack of consistency in a company’s message over time raises concerns about their strategic direction and is a key factor impacting our investment decisions. In our view, the disciplined and consistent execution of a company’s strategy over time is a measure of management’s ability, as well as their trustworthiness.
6. Industry insights
Meetings with management are an important source of intelligence on the market in which the company operates, including their competitors. We gain insights from company visits that enhance our understanding of the industries in which we invest and their key drivers.
In summary, management meetings and company site tours are incredibly valuable for a range of reasons. In our view, company visits will always form the core of a ‘bottom-up’, stock picker’s investment approach.
Chris Stott is Chief Investment Officer at Wilson Asset Management (WAM). WAM will soon provide investors with access to research-driven and index-unaware funds management focused on Australia’s large-cap listed companies through its new listed investment company, WAM Leaders Limited (ASX: WLE). To find out more, see here.