Assessing CEO and management key to stock picking success

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The quality of a company’s CEO is a key determinant for its success, and analysis of company leadership should form part of an investor’s decision-making process, says Chris Bedingfield of Quay Global Investors.

“Undertaking in-depth research and due diligence is vital to successful investing, but there are always unknowns that create risk for investors. One way to help reduce this risk is to analyse the management and leadership of companies before investing in them,” says Chris. 

“A good CEO is key to a good business, so it’s important to understand what makes a good one.

“The sector outlook, market environment or demographics can make a company seem a very attractive investment proposition, but the CEO can make all the difference to its ultimate success or failure.”

Chris says there are four key areas Quay looks at when assessing the potential of a CEO: track record; understanding of risk; response to challenges; and leadership ability.

Track record matters

Looking at how a company has performed since the CEO was appointed can be illuminating. 

“Poor business and share price performance is always a warning sign, but if things have improved since the CEO took over, this clearly shows good leadership and ability,” Chris says. 

“It is particularly useful to look at changes in performance in the context of the market and economic environment.  For instance, if out-performance has continued in both strong and weak markets, this is a very positive signal.”

An intuitive understanding of risk

Good CEOs display excellent foresight and the ability to back their own (correct) judgement in the face of opposition. 

Chris uses the example of Westfield Group, which had the ability to shift its strategy in the lead up to the global financial crisis.

“Prior to the GFC, Westfield sold assets and raised substantial equity, which stood it in good stead during the financial crisis.

“It is a strategy hard to execute when peers are increasing leverage and growing earnings, but the leadership team recognised that the industry was becoming frothy and that change was required to manage risk.”

Leadership matters when times are tough

It’s easy to lead a company that is already performing well – good CEOs show their true mettle when times are tough. 

“It’s a good idea to look at the past history of a CEO, not just their performance at one particular company,” says Chris.

“Has the CEO also performed well at other companies that perhaps were struggling?  Do they have a track record of turning companies around?  Or have they only been with companies that are doing well, and left when things got tough?”

Leading the industry

Chris says Quay prefers to back companies and CEOs that can see industry challenges and opportunities well before the market – even at the risk of near-term underperformance. 

“One of the more frustrating aspects when meeting companies is when we ask them why they have made a certain decision and they respond ‘because we listened to the market’.

“Generally, we are not attracted to this type of investment.”

Thoroughly assessing a CEO’s ability can lessen the chance of unexpected results and reduce the risk of future losses. 

“Making a judgement on a CEO’s track record, understanding of risk, response to challenges and leadership ability provides an insight into future performance, and should be an important consideration for all investors,” Chris concludes.

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About Bennelong Funds Management

Bennelong Funds Management (Bennelong) is a boutique fund manager nurturing a growing suite of asset management teams. Bennelong’s boutique partners collectively manage over $7.5b in funds under management. Bennelong is a wholly owned subsidiary of the Bangarra Group (formerly known as the Bennelong Group), a privately owned company encompassing a number of independent businesses.

Visit bennelongfunds.com

 

About Quay Global Investors

Quay Global Investors is a boutique investment manager focused on the preservation and creation of wealth through innovative strategies in real estate securities.

Quay was launched in May 2015 as a partnership with principals Justin Blaess and Chris Bedingfield and Bennelong. Prior to this, the business operated as Quay Real Estate Advisors which was founded by Justin and Chris in 2013.

The founding partners have over 40 years of collective experience in direct property, equities research, investment banking and investment management across domestic and global markets, giving them a unique skill set and perspective which they bring to the management of a portfolio of global real estate securities. 

Visit quaygi.com