Why bother with company visits when you are investing?

In 1987 I was fortunate enough to have the opportunity of working for a huge American Fund Manager, Fidelity Securities in their Australian Office.  It has set the ground for my understanding of investing, financial planning and what a good professional fund manager does.  Of course, times continually change, new types of investments and themes develop, new styles of investing are created, but there are fundamentals that are as relevant now (35 years later) as they were in 1987.

I learned then, from the masters, that a core feature of making decisions about what investment to make is to visit the companies that you are looking at investing in. Leading fund managers have this approach as a core of what they do when assessing whether to make an investment or not. 

To truly understand how a company works and whether it is worth investing in, a fund manager needs to have a thorough knowledge of the company.  This includes looking at the environment the company operates in. The industry, the economy, the trade issues, the technological, labour issues and headwinds.  This involves a lot of analysis of the particular industry, competitors and what else is going on in the world.

Knowledge is also gained by reading, attending conferences, listening, talking to people, bouncing ideas around and doing statistical analysis.  Here is a summary of some of the things that fund managers consider as good reasons for making company visits.  It was interesting to note in discussions with our fund managers in 2020 in the first Covid surge, that the relationships that they had built up through in person company visits allowed them to continue discussions by video conferencing and even phone to keep in touch with what was happening to the company and what decisions they were making in response to the changed world.

Why bother with company visits?
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 the company's CEO discussing their business allows us to quickly ascertain how they generated profit and allows us to help determine a value for the business.

2. Assessing management
This is one of the most important factors informing our investment decisions.  Much like in job interviews, we generally form a view of the person in 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 important.  Meetings help our understanding of management's motivations and ensure their interests are aligned with their shareholders.

3. Understanding culture
Research demonstrates a strong correlation between a company's culture and its financial performance and a good culture is important to attract younger talent seeking more flexible work arrangements and a sense of meaning.

A meeting or site tour allows us to truly gauge the state of a company's culture compared with desk based research.

4. Deeper understanding of the financials
Financials are the life blood of a business and in making our investment analysis, reconciling cash flow is our focus.  Talking to the Financial Team can help us clarify and understand certain numbers, with insight into the background and projections.

5. Determining the consistency of 'story'
by having regular meetings with management and asking some of the same questions, we can see how consistent the responses are.  A lack of consistency over time raises concerns about their strategic direction.

6. Industry insights
Meetings with management are an important source of intelligence on the market in which the company operates, including their competitors. 

Thanks to Chris Stott for this commentary.