In an increasingly integrated global economy, many companies of all sizes are becoming global in their businesses. In this Q&A, Will Robbins, a research director and portfolio manager, discusses the ways in which Capital’s research groups are being organized and developed to meet the challenges of this evolving investment universe.
As companies have become more global in their revenue sources, end markets and business competitors, how has your thinking about analyst assignments evolved to reflect this new reality?
Acknowledging the global nature of investing, where appropriate we have structured research coverage in a way that allows our investment analysts to roam across geographic borders. But clearly there are areas of the marketplace that lend themselves to having an industry overlay that considers global linkages, and areas where it is less relevant.
The automobile industry is a good example of a truly global industry. You have Toyota, Honda, Volkswagen, Ford and General Motors all competing for the same customer, often in the very same markets with the same model types in car classes. In these types of industries, we strive to incorporate a global research coverage map, while also being sensitive to the challenges our analysts face having to cover companies in several different time zones. This blend of coverage — a matrix model of sorts — incorporates the top-down macro perspective from a regional generalist with the views of the industry or sector specialists. Having these two perspectives helps tremendously in identifying where global valuation anomalies and differentiated global market opportunities exist. Pharmaceuticals are another example of an industry that is very global and where we have analysts covering companies in multiple regions.
On the other hand, there are areas of the market where incorporating global research coverage is not as appropriate. Regional banks and insurance companies tend to be locally regulated, have substantial exposure to local and domestic businesses and less affected by what happens elsewhere in the world. In these instances, we have organized industry clusters that bring in that global perspective and can allow portfolio managers to make valuation comparisons across different countries and regions so they can decide on the most attractive places to invest.
As a research director, how much do you allow this matrix coverage to develop organically as informal networks among analysts and portfolio managers, and how much thought do you give to formalizing analyst interactions?
Some of the interaction is more formal. We have established industry clusters for technology, financials and consumer products, to name a few. A large part of this knowledge network is organic. In the end, what matters most is that the analyst gets the information and the forecast right about a company and an industry.
Inevitably, that means calling upon colleagues, and often it is not just a colleague that happens to be covering a competing company domiciled in a different market or a different region. It could be a colleague who covers a part of the supply chain, or an aspect of the end product market, or the macro analyst on the country, or a fixed-income analyst who covers a different part of the capital structure of the company. There are generally two to three key variables that drive the stock price, and identifying those variables is the most important factor. At times those variables will require on-the-ground research; at other times, that information can be obtained from others in Capital’s research network.
Recognizing that the world is becoming more nuanced and complex, we have recently introduced a hybrid approach to information sharing that blends a bit of the formal and informal. We are calling them swarms. These are groups organized around a particular topic, such as shale gas or mobile payments. Unlike the industry clusters, swarms cover topics that stretch across multiple sectors and are intended to exist for a limited time, because obviously topics that matter today may not be as important six months or a year from now. But this structure allows us the flexibility to draw together knowledge on timely issues and linkages that make sense on a global basis. It is by no means the only way to think about the world, and I am quite certain this will evolve over time, but right now we believe it is relevant and working well.
What differentiates the Capital organization from its competitors in terms of this global approach to research?
First and foremost, we were one of the earliest to recognize that the lines had blurred — that many companies and industries needed to be viewed through a more global lens. The key is to draw out this global perspective from our teams of investment professionals. It may sound mushy and intangible, but in reality, the very strong culture of collaboration that we as an organization foster in a very deliberate manner is probably our biggest competitive advantage. No single person can cover all time zones, even if they can cover a subset of an industry. It is this very deep aspect of collaboration and sharing of information and dialogue at all levels that creates an invaluable reservoir of knowledge and is critical to successful investing in a globalized world.
What is it about the organization that fosters this culture?
I think there are three primary factors. The first is the recruiting process. We spend a considerable time recruiting, and we only recruit investment professionals that we think can thrive in a collegial environment. We check references to make sure we are getting analysts who are good at communicating and collaborating with others. We want people to be competitive, but competitive with the people outside our walls — not inside. The second is strong institutional values. Once an analyst arrives here, it is hard not to adapt in large and visible ways to the culture.
Finally, there is the compensation structure, which in some ways ties in with the collaborative nature of the firm. We don’t create a fixed bonus pool and allocate bonuses based on how well one fund did relative to another fund. If everyone at the firm does well, everyone gets paid. This could ultimately impact the margins and the profitability of the company, but we have the luxury to do it this way because we are privately held. There is also a qualitative aspect to compensation. We allocate bonuses based on 360-degree reviews — a collaborative effort. Analysts are reviewed by their fellow analysts, portfolio managers and research directors. For newer analysts, we ask specifically for feedback on how an individual is developing as a citizen of the firm. So we try very hard to perpetuate our culture in the review and compensation process.