Meeting Company Management Deepens the Credit Research Process
Yesterday, my colleague, Phelps Hoyt, gave some insight into how industry conferences play into the work of credit analysts at Principal Global Fixed Income. I want to expand a little on their role in our research process and the objectives I pursue when I’m able to attend an investor conference.
While many conferences are held at interesting or beautiful locations, last week, the desert oasis surrounding my hotel provided little more than a change of setting for my morning run. The busy schedule of each day had me going from breakfast at 7:30 a.m. until wrap-up of the evening reception at 10:00 p.m. I came to the conference with several objectives. First, meet with management teams in order to assess the outlook of their business. Second, build deeper relationships with contacts and management of these companies. Lastly, regain perspective that an ever-volatile market can suppress over time. Here’s how things went…
Objective 1: Assess the current and future strength of companies.
In the two days of the conference, I had nine one-on-one or small group meetings with various management teams and attended an equal amount of large group presentations. Many of these meetings were with companies that we hold in client portfolios, making the time and opportunity extremely important. These meetings are full of detail. For example, while the media and popular press attempt to analyze the strength and sustainability of the housing recovery, I was able to sit across the table with the executive management teams for six of the largest national homebuilders and talk about recent trends they’re seeing and their outlooks for the future. I worked my way through a list of prepared questions while also letting management take the discussion to unplanned yet insightful places. These types of meetings provide a wealth of information beyond the actual words they say…the way in which they answer questions, their body language and tone, and the confidence and clarity of how they tell their story are important qualitative factors to our research process as our high yield team decides whether or not the investment provides attractive risk-adjusted returns for our clients. Objective 1 was a success.
Objective 2: Build relationships.
Another key purpose of my time was to positively represent Principal Global Fixed Income and build a relationship with the leaders of these organizations. Both investors and issuers understand our various roles in the ecosystem of capitalism; they, as an enterprise, are looking to expand the value of their shareholders’ equity, and we, as a provider of capital, are helping fund that growth. The trust between these groups often determines the depth of our discussion. One practical day-to-day benefit of establishing these personal relationships with management teams is that I know they will return my phone calls when tough times inevitably come around and many companies would prefer to disappear from the public eye. Objective 2, also a success.
Objective 3: Regain Perspective.
One of the most challenging aspects of our job as investors is to keep perspective and separate the daily noise of market volatility from the trends in business and financial markets. The time at a conference is a great opportunity to hear from business leaders about their views on the health of their industries and outlook for the future. Additionally, it really highlights the differences that exist in credit quality and outlook when hearing companies present their story one after another. Good management teams rise to the occasion, while the pretenders are exposed. This fresh perspective helps reset the market landscape, often deepening conviction in names already owned in our portfolio or helping identify new investment opportunities. Objective 3 was a success too.
At the end of the conference, I returned home exhausted and refreshed: exhausted from the action-packed schedule accentuated by an unfavorable time zone change, but refreshed from the opportunity to meet with influential business leaders on the future of their business. With credit research, every piece of information is important as we strive to provide our clients with the risk-adjusted returns they have come to expect from Principal Global Fixed Income.
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