Is direct engagement with investment companies’ management a thing of the past due to enhanced disclosure requirements and AI? Xin-Yao Ng is Co-Manager of Aberdeen Asia Focus plc and looks at this in particular for those investing in Asia.
Meditating on the virtues of humility and curiosity, Confucius supposedly observed: “He who asks a question is a fool for five minutes. He who does not ask remains a fool forever.”
This is a pretty handy maxim for investors anywhere in the world. Given its Oriental origins, let’s concentrate on why it might be a particularly sound dictum for investors in Asia.
The issue at hand here is direct engagement, whose value in any investment setting has been a topic of debate for many years. The opposing schools of thought can be summarised easily enough.
On the one hand, critics of direct engagement regard it as a waste of a time and effort and, by extension, a waste of fees.
They say there’s zero merit in meeting with companies’ management in an era of ever-mounting disclosure requirements and superabundant data.
On the other hand, proponents of direct engagement maintain there’s much to be gained from this form of digging deeper.
They claim it can deliver insights that can’t be gleaned by other means and which can therefore play an important part in shaping investment decisions.
As members of a team that focuses on Asian smaller companies, my colleagues and I are firmly in the latter camp.
Below are four key reasons why, accompanied by some cautionary tales that help highlight the potential perils of assessing businesses only from afar.
1. Many good companies don’t get a look-in
In Asia, as in other regions, many businesses receive little or no coverage from the wider investment analyst community. Most “eyeballs” are forever fixed on large, household-name companies whose quarterly earnings reports can generate more anticipation than a presidential address.
Against this backdrop, specialist investment teams that are able to conduct their own in-depth research are well placed to take up the slack. In numerous cases, quite literally, they venture where others can’t be bothered to look – let alone tread.
What underpins such an approach? It boils down to a belief that a genuine grasp of the people, places, policies and practices that comprise a market and its participants is vital to unearthing hidden gems that would otherwise go undiscovered.
2. Data isn’t the be-all and end-all
Even many active managers nowadays base their stock-picking choices exclusively on data.
Thanks to escalating regulatory demands, there has never been more info available to sift through – and, courtesy of AI, making sense of it all is getting easier and easier.
Yet the notion of markets characterised by perfect information is as fanciful as ever. We know this to be so, because it’s imperfections that give rise to lack of consensus – and, in turn, the array of threats and opportunities – which continues to define the sphere of investment as a whole.
It’s eminently possible for a company to release a raft of confidence-inspiring results while quietly teetering on the brink of losing its way.
Equally, a business whose numbers imply utter disorder might be capable of a spectacular recovery. Dialogue can offer a route past the figures, headlines and soundbites and towards the truth.
3. Appearances can be deceptive
In addition to data, there are various ways in which a company – whether deliberately or otherwise – might conjure up a misleading picture of its prospects.
Slick marketing, media-savvy campaigns, the conspicuous flaunting of the trappings of “success” – all kinds of curveballs can be tossed in the direction of unsuspecting investors.
One of my colleagues once embarked on a fact-finding trip to a business that appeared to be making all the right noises and sending all the right signals.
He arrived to find the car-park festooned with Ferraris, the offices awash with high-end artworks and the CEO exuding self-assurance.
It all proved to be mere gloss. Behind the supercars and the ornaments and the patter, the company was a shambles – poorly positioned, ineptly run and devoid of a meaningful plan for the way ahead.
It took a face-to-face encounter to lay bare the grim reality lurking beneath the surface appeal.
4. It can pay to ask awkward questions
This brings us back to where we began. Maybe the most significant and useful aspect of direct engagement is the ability to ask questions – often awkward ones.
Another colleague once visited the father-and-son owners of a business that was starting to set alarm bells ringing. He challenged them on several contentious points.
He knew the game was up when, despite much prior evidence to the contrary, they suddenly insisted they couldn’t speak English.
Reflecting the proverb with which we commenced, an active manager might well be left feeling foolish for five minutes after meeting with a company’s executives.
Sometimes we’re put in our place – and not necessarily politely. But it’s usually better to say what needs to be said – not least if the executives end up looking silly instead.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
Main image: Asia, map, chuttersnap-aku7Zlj_x_o-unsplash
