The Hong Kong-listed Value Partners is one of the largest fund management companies in Asia. It invests its clients’ funds based on its 3R-Philosophy: Finding the Right companies with the Right management at the Right price. As a value investor myself, this a really interesting and useful framework to think about investing. It also highlights how management actually plays a huge role in the success of a company; in fact, even great companies with strong competitive advantages can be run to the ground by inept management. In light of that, how can we spot the ‘Right’ type of management?…
The Hong Kong-listed Value Partners is one of the largest fund management companies in Asia. It invests its clients’ funds based on its 3R-Philosophy: Finding the Right companies with the Right management at the Right price.
As a value investor myself, this a really interesting and useful framework to think about investing. It also highlights how management actually plays a huge role in the success of a company; in fact, even great companies with strong competitive advantages can be run to the ground by inept management.
In light of that, how can we spot the ‘Right’ type of management? Here are three questions you can ask yourself to help you find competent management teams.
Question 1: Is management rational?
An important trait of a good manager is rationality. Ideally, management should be making decisions that are based on logic and for the good of shareholders. Unfortunately, reality isn’t that neat as egos surrounding management teams can often cloud their judgement.
As such, a manager that can keep his own ego in check is one that likely will place shareholders’ interests at the forefront of his thinking. City Development’s (SGX: C09) ex-Managing Director, Mr. Kwek Leng Joo, can be considered as one such person. Earlier in February, Kwek had stepped down from his post to allow Mr. Grant Kelley, who’s also the new Chief Executive of City Developments, to take over. Kwek realised that City Developments’ future lies in international real estate markets and so felt that Kelley might be a better choice to lead the company in that direction.
Kwek’s decision is the type in which rationality is needed in huge amounts. In fact, it’s the kind of decision that is much harder to make than it seems.
Question 2: Is management honest?
If one day you decide to start reading annual reports from different companies, I think you’ll notice that most of the reports only talk about the achievements and growth potential that a company has. Very rarely do you see management talk candidly about the problems and challenges their company is posed with both currently and in the future. Honesty is a rare virtue and if a company’s management is able to demonstrate that, then investors might well have unearthed a great investing opportunity.
Question 3: Is management capable in thinking independently?
With almost every industry, there will be times when all the players within start chasing growth and throw caution to the wind, conveniently forgetting potential dangers. When a slowdown in the industry arrives, the most cavalier companies would then be hit the hardest.
Conversely, companies with management teams who are able to pace themselves and not get too caught up in the euphoria might find themselves in a more comfortable position during the bust.
The shipping industry is a good example of how an entire industry can get carried away. Near the end of the first decade in the 21st Century, there was strong demand for vessels and shipping services. But, overly-enthusiastic ship owners took on huge amounts of debt to build up capacity that eventually exceeded demand. Now with shipping mired in a downturn, many firms within the industry are facing huge financial risks as a result of borrowing too much. Management teams in shipping firms that managed to not overstretch their companies’ balance sheets during the boom-phase for the shipping industry are examples of independent thinkers.
Managing a business is a dynamic process and sometimes, clues that point toward a capable management team can’t be found from reading a company’s financial statements alone. It is through a careful reading of a company’s annual reports that might just give us a rough indication of the quality of a company’s management team.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.