Company visits: why investors don't need to meet

There are two significant arguments why investors should not meet with company executives simply as a matter of course – not only will you not hear anything new, you cannot be 100% sure of everything you see

12/11/2018
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Authors

Juan Torres Rodriguez
Fund Manager, Equity Value

Ahead of deciding to buy into a company – and then for as long as they might own it – many professional investors like to visit the business and talk to the people at the top.

Here on The Value Perspective, however, for reasons we have discussed before, in pieces such as the self-explanatory Why meeting a company’s management team is not all it’s cracked up to be, we will not do this simply as a matter of a routine.

To be clear, that is not the same as saying we will never meet with the managers of a company.

We certainly will if we believe that doing so could add value, if the board is not acting as we expect or if the business is in a bad way and we think it could benefit from our experience of owning other companies in a similar position – but we will not meet management just because that is the game that everyone else is playing.

The information is public already

We appreciate that not everybody is convinced by this stance but the simple truth is that companies make a huge amount of information public and this is more than enough on which to base an investment decision.

What is more, just because you meet company managers, they are not going to tell you anything that is not already in the public domain.

At least they shouldn’t – it would be insider information.

A company might make it public, say, that mergers and acquisitions were to be a key part of its growth strategy but its managers could not then tell any visiting investor who it might buy.

Maybe they might let on the regions they were intending to expand into and perhaps even particular countries but anything more than that would be heading into insider trading territory.

No real added detail

Similarly, a company might announce quite specific plans to cut costs – earlier this year, for example, Lloyds said it was planning to reduce its cost-income ratio from 46.8% in 2017 to “the low-40s” by 2020 and costs from £9.95bn to less than £8bn  – and you might reasonably assume that will involve some job losses.

Visit the company and ask which specific divisions will be affected, however, and you will leave disappointed.

There is also the argument that, if you do go and visit a company, its managers are most unlikely to reveal anything that puts the business in a bad light.

To illustrate this, let’s consider two examples from different books – admittedly, both are extreme as they relate to fraud but they do hammer home the point that companies tend only to show visiting investors what they want them to see.

The case of Enron; fake busy

The first example comes from Bethany McLean’s 2003 best-seller The Smartest Guys in the Room, which tells the story of the rise and fall of Enron and relates to the time it launched its Enron Energy Services (EES) arm.

In 1998, the book recounts, Enron CEO Jeff Skilling and EES CEO Lou Pai invited company analysts to the company’s Houston headquarters to meet top executives and see the exciting new business in action.

The analysts were duly taken to what was described as “the EES war room” on the sixth floor of Enron’s offices where, writes McLean,  “they beheld the very picture of a sophisticated, booming business: a big open room, bustling with people, all busily working the telephones and hunched over computer terminals, seemingly cutting deals and trading energy”.

All very impressive – and all a sham.

“The war room had been rapidly fitted out explicitly to impress the analysts,” the book explains. “Though EES was then just gearing up, Skilling and Pai had staged it all to convince their visitors that things were already hopping. On the day the analysts arrived, the room was filled with Enron employees. Many of them, though, didn’t even work on the sixth floor.

“They were secretaries, EES staff from other locations, and non EES employees who had been drafted for the occasion and coached on the importance of appearing busy.”

After receiving the all-clear signal, they all packed up their belongings and returned to their real desks elsewhere. “The analysts,” notes McLean, “had no clue they’d been hoodwinked.”

The case of Theranos; fake lab

Our second example comes from Bad Blood: Secrets and Lies in a Silicon Valley Start-up by John Carreyrou, which was published earlier this year and recounts the tale of a private company called Theranos, which became something of a media darling.

Launched by Stamford drop-out Elizabeth Holmes in 2006, Theranos claimed to have revolutionised blood-testing by avoiding the need for needles.

At one point the company, which later claimed to have invented a ground-breaking blood-testing kit to use at home, was worth some $9bn (£6.9bn) and had a board packed with big names from the world of politics.

Again, though, it was all a sham – including the laboratory Holmes and her chief operating officer Ramesh Balwani created when then vice-president Joe Biden came to visit.

“Holmes and Balwani wanted to impress the vice-president with a vision of a cutting-edge, completely automated laboratory,” writes Carreyrou. So instead of showing him the actual lab, they created a fake one. They made the microbiology team vacate a third, smaller room, had it repainted, and lined its walls with rows of miniLabs stacked up on metal shelves.”

The book continues: “The day of the visit, most members of the lab were instructed to stay home while a few local news photographers and television cameras were allowed into the building to ensure the event got some press. Holmes took the vice-president on a tour of the facility and showed him the fake automated lab … During the roundtable discussion, Biden called what he had just seen ‘the laboratory of the future’.”

Extreme, but valid

As we said, these are two extreme examples designed to hammer home a point – not that every business is committing fraud but that there are two big issues with the information investors glean when they visit companies and talk to management.

Not only will you not hear anything new – you cannot be 100% sure of everything you see.

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Authors

Juan Torres Rodriguez
Fund Manager, Equity Value

Topics

The Value Perspective
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