Investment valuation models used to be based simply on a spreadsheet output...
Investment valuation models used to be based simply on a spreadsheet output. The drivers behind those spreadsheet models may have had some qualitative assessment, but they had still been translated into numbers and the final output from the model gave the answer as to whether or not the shares were a Buy, Sell or Hold. Perhaps it is a result of increased regulation, or in my view more likely increased disclosure and transparency, but as markets have developed in recent years and as investment has become increasingly competitive and sophisticated, the opportunities to create “alpha” from an excel spreadsheet generated valuation are now few and far between. Having a proper sense of where a company is going, what the chances are of the success that the model indicates is possible and whether or not contextual market developments will hinder or assist development are the deciding factors. Together of course, with the all important qualification of whether or not the management team are up to delivering the strategy. Taken together this is now what is often referred to as the “Equity growth story” and both defining this for the company and then making clear to investors what this is, is the rasion d’etre for any management team. And also a key focus of our capital markets and IR work with all our clients.
Story seems an odd word to use for a sophisticated investment decision, but it is a basic premise of psychology that you can encourage someone to support your position if you can tell an inspiring story around it. The well known US valuation expert – Aswarth Damodaran – wrote in his book “Narrative and Numbers”, that a narrative also helps you decide on a valuation. “A good valuation is not just the quantitative judgment that spills out of your spreadsheet, but also the narrative, the qualitative judgments about reality, that guides the assumptions that you plug into the cells”. (http://www.valuewalk.com/2017/01/valuations-number-cruncher-learned-tell-stories/?all=1). So how do you develop that narrative? I believe this is where contemporary management and corporate thinking has added to investment in a way most fund managers have only just begun to realise.
When I started as an equity analyst in the 1990’s, no one cared how a company treated its employees (or very few investors did certainly), little attention was paid to ESG issues and without doubt there was no thought process that how employees felt about their work would impact on how the company performed. Those views have changed radically (and for the better!) in recent years, in all likelihood partially driven by the rise of social media and the feedback loops that they can create and indeed the immediacy of any response. And that is why investors are now sitting up and taking notice of the narrative around a potential investee company and factoring this into their investment decisions. There has been growing recognition that happy employees can be the most productive and efficient and importantly the best advocates for their company. One of the ways this can be reflected most easily for all investors to see is via a non financial KPI. So for instance IHG, global hotel group, has one of their KPI’s as employee engagement survey responses. If you are conducting this type of survey internally (as many responsible companies now do), then why not make it public information so that others can judge you on it too? I expect many more companies to follow this type of example and include employee engagement measures as non-financial KPI’s in the future.