Higher, stronger, bluster I – Unfair performance enhancement is not just an Olympic issue
From the individual athlete’s programme of training, participation and occasional holiday to the optimism and preparation that characterises the start of every team’s season and the triumph or despair that marks its end, cycles and cyclicality are as integral to the world of sport as they are to value investing – and the Olympic Games are no exception.
Looking beyond the event’s four-year schedule (the kind of regularity of which stockmarket investors can only dream), there is the less obvious example of the media cycle associated with the modern Olympics – a few years of broad indifference, six to 12 months of morose speculation the host city will go broke or never be ready in time and the past few weeks of huge interest, pleasure and excitement.
This sort of cyclicality – humanity’s ability to swing back and forth between extremes of emotion – is of course something with which we are greatly familiar here on The Value Perspective. Emotion in general, and fear and greed in particular, are prime portfolio-destroying influences a strict adherence to a value investment strategy is designed to protect against.
Another – related – discipline with which we are greatly familiar on The Value Perspective is the need to think differently from the crowd. And so, rather than focus on the current huge interest, pleasure and excitement – not least all the medals that were so thrillingly racked up by Team GB – let’s cast our minds back to the drug scandal that only recently threatened to rain on Rio’s Olympic carnival.
We will not dwell on the detection or otherwise of performance-enhancing substances in a sporting context, however, but on an area where we have rather more expertise and experience. This involves spotting where a company may be using one or more techniques in its corporate accounts – and completely legitimately, we should stress – to try and present itself in a more favourable light.
As we have highlighted before in articles such as Period of adjustments, we spend a lot of time poring over companies’ accounts, results and other announcements to build up a robust view of how they are faring financially. Often when we ask a senior executive about a particular issue in their business’s accounts, we will be told we are the first to raise the point and they will have to get back to us.
For every investment we make in one of our portfolios, here on The Value Perspective, at least one member of the team will have worked up a financial model based on at least 10 years of the company’s history – a practice that make us, to say the least, unusual.
The importance we attribute to accounting quality means we do hold some very strong views on the subject. We suspect the majority of visitors to The Value Perspective would be astonished how variable accounting quality can be – even in the UK – and how differently accounting standards are interpreted by even some household-name companies and their auditors.
It had therefore crossed our minds that we should name and shame some of the more egregious practitioners. Given the rather more upbeat nature of what went on in Rio, however, we will, in Higher, stronger, bluster II, run through a list of the various performance-enhancing techniques to which some companies – and their auditors – are increasingly resorting.
Fund Manager, Equity Value
I joined Schroders in 2008 as an analyst in the UK equity team, ultimately analysing the Media, Transport, Leisure, Chemicals and Utility sectors. In 2014 I moved into a fund management role and have had experience managing Global ESG and Pan-European funds. I joined the Value investment team in July 2016 to focus on UK institutional and ethical-value portfolios.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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