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Three things to look for if you don’t have access to management teams

20 October 2022

Murray International’s co-managers explain how they would analyse companies if they didn’t have direct access to chief executives.

By Jonathan Jones,

Editor, Trustnet

Being a DIY investor can be difficult. Even with the energy and time to research stocks, the big asset management firms will always have one advantage that you don’t: access to the management teams behind companies.

For most investors, it therefore makes sense to invest in funds and investment trusts, where teams of specialist analysts do the research for you and grill the people that make decisions about the businesses you have exposure to.

However, for many others, the potential returns you can make from buying winning stocks is more enticing.

As such, Trustnet asked the managers of the Murray International investment trust – Samantha Fitzpatrick, Martin Connaghan and Bruce Stout – how they would approach investing if they were unable to meet the management teams and only had the resources available to DIY investors.

Connaghan said that in some cases, access to management “can be a bit of a distraction as it can lead you to give companies the benefit of the doubt when perhaps you shouldn’t”.

So what is of use? Fitzpatrick said one of the most important sources of information is the financial report, but here there is so much information it can be hard to know where to start.

One metric she said stands out is how much profit a company makes on each sale, particularly during tough economic environments such as the one we are currently experiencing.

“The thing that says an awful lot about a company is its margins, as it shows how potentially protected businesses are going forward,” she said.

“Look at the track record of what margins have done over time and the buffer that is in there. Even if you have a great company selling great products, if you start with very thin margins, then not an awful lot has to change before you don’t have profits anymore and you have no chance of a dividend.”

This is particularly pertinent at present, as Fitzpatrick said investors could fall into the trap of thinking things can’t get worse from here.

“Everybody thinks about investments and what is going to go up, but I think a huge part of investing is not losing your money. That element of downside protection has been drummed into us for many years,” she said.

“We look at it in any environment, but now more than ever. If we are facing increased cost pressures, what sort of damage would that do to some businesses?”

Away from the numbers, Connaghan said that a good track record of dealing with crises will stand investors in good stead, but that from a global perspective, this may mean looking further afield.

“You want to look for companies that have been through ridiculous periods of volatility in the past and have come out the other side. Companies in the emerging markets have been through currency crises and financial crises and are still there,” he said.

He said there are financial companies in Asia, for example, that have been through almost every market condition imaginable, while there are also examples in Latin America that stand out.

“In developed markets, look for companies that have been around and are going to be around in future. Keep it relatively simple. The current environment is tough, yes, but is the company likely to be a strong company in five years’ time? If yes, then ask what you are paying for that and whether the valuation makes sense,” Connaghan said.

Stout suggested that investors should also consider what to avoid, particularly companies that have been around for less than 10 years and have no evidence of barriers to entry, positive free cashflow or strong balance sheets.

“These are all characteristics of companies that we won’t own, but that drove markets in the past few years,” he said.

This is particularly pertinent in an environment where inflation is back and wage pressure could squeeze liquidity, leading to a recession.

“None of these businesses that people have said are the future have been tested in a recession, because they are all five to 10 years old, so they are the biggest risk,” he said.

“Just because some of them are down 60 or 70%, it doesn’t mean the valuation and multiple can’t go down a long way more: they could even go bust because there are so many of them.”

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