article 03-21-2013

Beyond the Numbers: Why Management Matters

Portfolio Manager Chris Clark stresses that technology is most beneficial when utilized within an investment framework that also offers experience, intuition, personal interaction, and hands-on active management.


Investing is a wonderful mix of art and science, statistics and subjectivity, evidence and intuition, history and prediction. Advances in technology and access to information have greatly altered the investment landscape over the past two decades, largely for the better.

The volume of information and data readily available to both the casual and professional investor is staggering. It has clearly leveled the playing field, particularly in one important respect. The research process is no longer improved by gathering timely and relevant financial information or sifting through once difficult-to-access corporate documents.

Those functions are now handled by just about any computer with access to the Internet in a matter of minutes. Two important questions are, how will investors ultimately use this fire hose of information and will it benefit or detract from investment returns in the long run?

One area that has clearly been affected is the holding period for stocks as the increased volume of information has channeled investor attention toward managing each incremental data point at the expense of taking the longer-term view of a company's enterprise value.

At Royce, financial data and statistics are of great interest to us though they are most useful only when combined with several other analytical considerations, not the least of which is an analysis and evaluation of the management team charged with operating the business.

Determining whether or not a business is soundly run, possesses a culture of integrity, and exercises fiscal prudence is crucial to developing the level of conviction that allows for a long-term investment. Our portfolio managers and analysts meet with management teams regularly. The team averages roughly five or more meetings a day in our New York offices while also attending numerous investment conferences.

Importantly, we are meeting both with companies in which we currently have investments along with a multitude of potential candidates for our portfolios.

These meetings are comprehensive and provide valuable and timely insights not only into specific business trends and challenges, but also industry and market dynamics as well. These men and women are the day-to-day stewards of the capital we have committed to their businesses on behalf of our clients, and we monitor very closely what they tell us and what they consequently do.

At Royce, financial data and statistics are of great interest to us though they are most useful only when combined with several other analytical considerations, not the least of which is an analysis and evaluation of the management team charged with operating the business.

We observe the culture they cultivate in their companies, their capital allocation priorities, hiring decisions, and how they themselves are compensated.

Do we share their vision for the business and are we reasonably confident they are capable of executing on that plan? These periodic interactions give us an important timeline over which we grade their capabilities and actions and review our analysis and forecasts.

Information may have become ubiquitous, but successful investing requires much more. The numbers and headlines must be woven into an investment framework that contains more inputs and relies heavily on prior experience, reason, and intuition.

We are often asked how active a role we take with the management of companies in which we take a stake. Will we seek board seats in an attempt to influence decision making or change direction? These are valid concerns, especially given the growing number of high-profile professional investors in the marketplace who are taking on an activist role, sometimes with stakes far smaller than ours.

Bill Ackman at J.C. Penney and Herbalife, Carl Icahn at Dell, Bruce Berkowitz at St. Joe Company, and David Einhorn at Apple represent just a few of the efforts by outsiders currently attempting to influence corporate behavior.

While it is clear that activists tend to prefer shorter-term returns, this is not always the case as they often advocate strategies that require a substantial amount of time to implement and an enormous commitment of their own resources.

We are advocates for a long-term perspective. While we certainly have strong views about how an individual business might be optimized and shareholder value enhanced, our preference is to invest alongside management teams that we respect and avoid those we disagree with in terms of business direction.

We also tend to operate reasonably diversified portfolios and in that context are somewhat limited in our ability to take on a management role in any of them. That said, we take very seriously our role as owners in the business and give all shareholder proxies great consideration, voting our stakes independently and always according to our principles and judgments.

Gaining a competitive advantage when investing in today's world of information parity and real time analytics is increasingly difficult.

The successful investor must look beyond the readily available numbers and be willing to make independent assessments and, importantly, swim against the tide.

Experience over multiple market cycles is invaluable as are long histories of following companies and industries.

Looking into the culture of a business through the eyes of its management over extended time periods is vital, and here at Royce provides a key component for the goal of developing long-term enterprise quality.

Important Disclosure Information

Chris Clark is a portfolio manager and principal of Royce & Associates, LLC. Mr. Clark's thoughts in this essay concerning the stock and bond markets are solely his own and, of course, there can be no assurance with regard to future market movements.

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