Veteran portfolio manager says CEOs hold the key and investors must try to look around corners
Business is more art than science, according to a portfolio manager with almost half a century’s experience in the industry.
Claudia Huntington, an equity portfolio manager at Capital Group, believes the best investment decisions are made when the investor is on the same wavelength as the CEO, and understands their talents and the likelihood that they can navigate risks and execute their strategy.
Huntington said one of the most important lessons she has learnt over the years is that rich dialogue with company leaders pays off in the long term.
She said: “Early in my career I thought it was primarily about math and perfecting my model. Sure, you need math, but the more you invest, the more you realise it’s about making judgments — about people and about the future. There are no facts about the future, so you have to try to look around corners.
“Perhaps the most important lesson I’ve learned is that a company’s management is essential to its ultimate success or failure. If you have a great company run by a poor CEO, the odds of that company turning into a good investment are low. On the other hand, if you have a mediocre company in a mediocre industry with a superb CEO, then it is much more likely that company will turn out to be a good investment. So, being able to calibrate CEOs and management teams is an important skill to develop.”
The veteran investor highlights Microsoft’s Satya Nadella as an example of an excellent CEO. Far from the obvious choice to take over from Steve Ballmer in 2014, he has been able to build a distinct, inclusive culture that invites different voices into the decision-making process.
She also picked out Mark Donegan, of Precision Castparts, a maker of specialty metals for the aerospace and defense industries, as a fine detail-oriented leader with a laser focus on productivity and a great allocator of capital. “But what is most special about Donegan is the culture he has fostered at his company,” Huntington added. “He created a real sense among his employees of working together to do the right thing.
“I often ask executives to describe the culture of their company. Some have great answers; others look at you like you came from the moon. The best companies are often the ones with a very strong culture.”
Huntington has also seen her share of downturns, having started her investing career near the beginning of one of the worst bear markets since World War II. Her first job was at another asset manager that had three rounds of layoffs in her first six months. Capital ended up acquiring the firm’s assets.
She explained: “This early experience taught me that this is a very volatile business but that down markets are opportunities. We try to reassure associates during periods of uncertainty and encourage them to focus on long-term opportunities that may arise. The easiest thing to do in a downturn is to just freeze, so many of my suggestions try to help colleagues manage emotions and take action.”
Huntington’s 10 tips for weathering market downturns.
- Do scenario analysis
- Pay attention to balance sheets
- Keep talking to companies, but understand they don’t know more than we do
- Don’t dwell on what the market did yesterday
- Try really hard to see around corners
- Keep Will and Ariel Durant’s “The Lessons of History” handy?
- Remember buying opportunities may exist when fear is at its worst
- Keep a current wis/worry list and update it daily
- Humour helps, so talk to one another
- When things are bleakest, think about what "green shoots" could make the future "less bad"