The first-hand experiences of travel are essential to a global investment approach, says Burgundy’s Jeff Musial.
Assessing a company requires not just knowledge but experience, too. As investment analysts, we gather information about companies from a variety of sources – company filings, phone discussions with management teams, conference call transcripts and industry publications. All are useful, but none is a substitute for seeing companies, their management teams and economic environments first-hand.
We believe that travelling to see a business in operation offers potential investors specific insights that would otherwise be hard to acquire. Making such trips is a major commitment for us, as they typically involve attending 25 to 30 meetings in a single week (with all the travel that requires), but they are instrumental in building our knowledge of companies and we believe the rewards are fivefold.
The first benefit of visiting a company comes when you step inside the front door – and before you’ve even met the management team. First impressions can be surprisingly revealing.
On a recent trip to Australia, we visited a large international commodity producer. Standing in the office lobby, we marvelled at the gleaming white marble walls, lofty ceilings and 20-foot black door that automatically (and silently) slid to one side to grant us entry. Inside, it was equally lavish, with lush leather seats, expensive art and even a well-stocked employee bar! While by no means a conclusive analysis, we got the impression this was not an overly cost-conscious company.
By contrast, a highly successful and profitable e-commerce firm we visited in Japan was based in a modest head office located above a supermarket. The difference between the two set-ups told us something about how each company views overhead expenses, and shareholders in general.
Face to face
What we look for in companies is the ability to offer high returns on capital, opportunities for growth, strong competitive positioning, and excellent management. Face-to-face meetings with management teams are indispensable in identifying such companies, since they provide the best context in which to ask questions about areas like capital allocation, competitive dynamics, industry trends and corporate governance. Beyond the immediate answers, we also use those meetings to learn how the management team thinks about the business itself – such as whether their horizons are short or long term. Sometimes, what is not said is just as important as what is.
Kicking the tyres
Site tours are another invaluable on-the-ground tool to learn more about a business. Visits to factories, distribution warehouses, and research and development (R&D) centres can really flesh out our understanding of how a company works. This ‘kicking the tyres’ is one of the most illuminating parts of the learning process – a site tour can be worth weeks of research done at one’s desk. Many of our ‘Aha!’ moments occur while on these tours.
On one tour of a Chinese flavour-and-fragrance company’s R&D centre, we found that rooms labelled “temperature-controlled” had open windows, letting in both hot air and local insects, while the few staff we encountered were surly and unapproachable. Such a state of inactivity and disrepair seemed very much at odds with the company’s claims to world-leading profitability in a highly competitive research-driven industry. It would have been all but impossible to find this out about the company without doing the groundwork ourselves.
Context and culture
The fourth key benefit of travelling to see a company is the insight the visit provides into its business environment. Without visiting Japan, it can be difficult to understand why 7-Eleven is a thriving business and leading international example of retailing excellence; written sources do not do it justice. However, even a couple of brief visits to a Tokyo 7-Eleven (and a few of their lunch boxes) help make clear that it is a local institution visited not just for packaged candy and drinks, but also for fresh food, airline tickets and day-to-day banking services – all of which drive return visits and enhanced productivity.
Finally, interaction with local culture can help provide insights into behaviour at both the individual and organisational levels. Experienced investors with a stronger understanding of local culture are better able to navigate the idiosyncrasies. In Japan, for example, collectivist values mean companies regularly place clients, employees and societies as whole above the interests of shareholders – and may be insufficiently aware of corporate governance issues. Our role is to understand such issues and communicate them to management.
Useful knowledge is not confined to an annual report. Indeed, travelling abroad is an essential element of our investment process, making us much more informed global investors.
Burgundy Asset Management is a fund manager for St. James’s Place. The opinions expressed are those of Jeff Musial of Burgundy Asset Management and are subject to market or economic changes. This article has been adapted from ‘The View from Burgundy’, a Burgundy Asset Management publication. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. Full advice should be taken to evaluate the risks, consequences and suitability of any prospective fund or investment. The views are not necessarily shared by St. James’s Place Wealth Management.
The value of an investment with St. James’s Place may fall as well as rise. You may get back less than you invested. Please be aware that past performance is not indicative of future performance.