Asset Managers from The Group of Boutique Asset Managers (GBAM) and leading academics debunked the ‘fallacies’ behind many company valuation methodologies, ‘Smart Beta and Environmental, Social and Governance (ESG) screening at their recent workshop in Siena University.
In a unique gathering of academics and value managers, as well as some fund selector guests, a range of topics were discussed which either aimed at debunking some cherished investment approaches or which set out the investment case for investing in certain favoured ‘best idea’ stocks.
GBAM members laid out five case studies featuring favoured historic or current stocks choices ranging from Fuchs Petrolub presented by Lampe Asset Management, Dusseldorf; Mr Price, presented by First Avenue AM of Johannesburg; Grifols from March AM of Madrid; NN Group from Norwegian manager Skagen; and Bombardier, Gruma and Freeport-McMoRan from Fisch Asset Management of Zurich. Each case study highlighted differences in approach in the ways in which each manager valued their chosen companies.
On the academic front, Pablo Fernandez, Professor of Finance at the IESE Business School in Madrid, referenced his paper on the ‘119 Common errors in company valuations’* performed by financial analysts, investment banks and financial consultants. In doing so he outlined a range of errors which led to poor valuations These errors included errors in the discount rate calculation and the riskiness of the company; errors when calculating or forecasting expected cash flows; errors in the calculation of the residual value; inconsistencies and conceptual errors; errors when interpreting the valuation; and organisational errors.
Debunking continued in a presentation from Constanza Consolandi, of the Department of Business and Law at Siena University who highlighted the fact that Economic, Social and Governance (ESG) factors are not being taken seriously by many companies despite the fact that many see real value in pursuing them. Prof. Consolandi argued that ESG activities create value for companies if they have an impact on four areas traditionally valued by markets namely, Growth, Return on Capital; Risk Management; and Management Quality. However, she argued that there still remained lack of agreed methodology, measurement and inconclusive results which acted to hinder the engagement by all companies in ESG activities. This, she felt, ensured that there was a real opportunity for ESG professionals to fill the gap.
The final attack was delivered clearly and comprehensively by Andrew Clare, Professor of Asset Management at Cass Business School. Prof Clare’s target was ‘Smart Beta’ products, which he felt were neither ‘smart’ nor justified the cost that investment firms, were asking for them. On the cost point, he argued that they should be no more costly than any traditional index tracker fund.
The rationale for paying less for ‘Smart Beta’ is that Cass has demonstrated that almost any alternative beta strategy devised has beaten market cap indices (so why pay more for it?) Prof Clare demonstrated that even a beta strategy based on the scoring in the Scrabble word game can show a credible return. In an experiment which apes the Monkey blindly selecting stocks with a pin from a newspaper, Cass created 10 million randomly chosen indices. The experiment showed that most monkeys (from Cass’s own creation - ‘Simian Asset Management’) beat the market cap weighted index.
Prof Clare concluded that market cap-weighted ‘passive’ investing is just one possible rules-based investment process of an infinite number of possible approaches – some were simple others very complex. Paying any more for so called ‘smart-beta’ was therefore “not smart”.
GBAM chairperson Jose Luis Jimenez of Mapfre Asset Management said that the Siena workshop highlighted differences between how the value managers, unlike passive investors, allocated capital to the most deserving enterprises. He said that value managers’ contribution to the diversity of financial markets was a contributor to market efficiency as they helped reduce the gap between price and value. He said that rational decision making in the allocation of capital was in stark contrast to the illogicality of passive investing which did not distinguish between what is expensive and what is cheap and so was a contributing factor to the boom bust cycles being experienced in markets in more recent times.
He said the success of the GBAM Siena workshop was likely to be the precursor for future events and he praised the fund selectors, form sovereign wealth funds, private banks to institutional managers who had attended and made a contribution to the discussions.
“GBAM’s members are established asset managers who, by definition, have demonstrated great past performance. It was therefore encouraging that those fund selectors who attended were able to gain insights, not only into the fallacies around some of the ideas currently being marketed to less informed investors but also best practice in value investing in order to retain and further their conviction in active investment management,” said Mr Jimenez.
Notes to Editors
1. *Professor Fernandez has written two papers on the subject of company valuations and CAPM. They can be found here:
2. The Siena Value conference took place on Friday 16th October at the University of Siena, Italy.
3. Any of the academics mentioned can be contacted via the details below.
4. The Group of Boutique Asset Managers (GBAM) is a network of senior executives who run independent specialist asset management firms. They have come together to improve their presence of their businesses in their respective marketplaces. They do so by sharing information and promoting their presence both individually and collectively to potential investors. GBAM is a private company limited by guarantee.
The principal activities of the GBAM are:
· To Foster cooperation among member firms
· To identify best practice and shared experience in all aspects of asset management (research, portfolio management, risk control, marketing etc.)
· To improve understanding of operating in international markets.
· To support members by highlighting their expertise in their chosen fields.
Company Secretary, GBAM Ltd.
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