With apologies to the anyone reading this who was there, this article draws on the presentations made at this year’s Winterflood Investment Trusts Annual Conference. There was a good range of speakers, including managers of a number of trusts I own and one I was inspired to buy – more of that later.
It is always fascinating to me how successful managers can have quite contrasting views on the ‘right’ way to manage money.
One point made by Alastair Mundy, manager of Temple Bar, was that he placed no value on meeting company management on the basis that they are all generally practised in the art of charming investors (so they are never likely to give you a balanced view on the prospects for their company) and they cannot tell you anything that they have not already told everyone else.
It is a fair point, sounds rational and not meeting management has not affected his investment returns as far as we can see. Temple Bar is the second best performing UK Growth & Income fund over the past five years (behind Finsbury Growth & Income) in net asset value (NAV) terms, beating the UK market by 44%.
By contrast, the next speaker, Paul Atkinson, manager of North American Income Trust (NAIT) for Aberdeen, placed great emphasis on meeting management saying ‘we see ourselves as partners’ with companies (considering that, his presentation was a little heavy on the macro backdrop and light on the reasons behind his individual stock selection).
Aberdeen’s investment style is supposed to be consistent across all of its equity funds, regardless of geography, and a punishing schedule of company meetings and an emphasis on quality of company management are integral to that.
Alexander Darwall, manager of Jupiter European Opportunities, also spends a lot of time meeting management – he had just come back from two days of company meetings in Germany. He said meetings with company management were the best source of information available to investment managers both on their companies and the companies they deal with and are in competition with (he almost never speaks to sell-side analysts).
He places considerable emphasis on identifying open, honest and accountable management when selecting stocks (while weeding out those he believes are self-deluding).
Finally, Shumin Huang, the manager of JP Morgan Chinese, said she relied on the contact JP Morgan’s locally based teams of analysts – 25 in Shanghai alone – have with companies.
So do face-to-face meetings with companies make a difference? It was definitely something we used to attach great importance to at M&G.
One thing I noticed then, though – and this is the dim and distant past, so you can take it with a pinch of salt – was that meetings with smaller companies were much more valuable than meetings with larger ones.
The larger companies tended to arrive with slick pre-prepared presentations they were reluctant to deviate from. The best meetings were the ones in which we could abandon the presentation and delve more deeply into the areas we were interested in.
Mundy’s portfolio is heavily weighted to larger companies and he said at the conference that he does not invest in smaller companies: ‘It is not an area we are good at so we do not bother with them.’
I will leave Atkinson aside as NAIT’s track record is a bit short, but Darwall’s portfolio is also dominated by large caps. Both Mundy and Darwall are running focused 40-odd stock portfolios (I think this is often a sign of a good manager as it means they have courage in their convictions). So perhaps Darwall is just good at getting the managers of these companies to open up to him.
For Huang, the close contact her analysts have with management is essential for identifying those companies that may be being less than honest in their accounts. As the litany of Chinese companies that reversed into US cash shells and turned out to be frauds showed, having boots on the ground that can meet the management and kick the tyres can make a real difference in markets such as China.
The trust I bought today was JP Morgan Chinese. (I missed the bottom in this – early September 2012, around the time I wrote the article suggesting it might be a good time to buy it!) But I thought Huang presented a convincing argument at the conference that the uptick in Chinese share prices, which has been driven by a recovery in valuations from oversold levels, should continue as earnings start to recover.
Now that the hiatus of the leadership change is behind us, the government can focus more closely on the economy and the well-publicised problems such as non-performing loans and the wealth management products, some of which are definitely dodgy, are ‘known problems’ that they can tackle.
Growth may not return to previous levels, but a steady 8%-9% will serve investors well. Performance has been held back a little by their weighting in A shares, but Huang thinks retail investors may start to flood back to this market. The discount is still attractive, especially relative to Fidelity China.
James Carthew is a director of Sapient Research