If you expect raw material prices to go up and you want to take advantage of that, you have to put your money to work in the futures market, commodity specialist Evy Hambro from BlackRock once told me. You don’t want to buy shares from miners or trading houses, because they are led by managers, people who can ruin a good return with stupid decisions. At the time, I thought that was a good argument. On the other hand I felt that if you invest your money in raw material companies with good managers, the benefit would be doubled.
Good management is crucial. I concluded this last week during an interview with Paul Donovan, chief economist at UBS Wealth Management. He explained to me why he has a much larger position in equities than his colleagues in the market. If the global economy grows by more than 3.5% in real terms, he said, this comes down to 6.5% in nominal terms and to more than 10% in corporate profits. And that is a percentage where you, as an investor, have to be ‘overweight stocks’.
When I suggested to Donovan that profit growth should actually grow at the same rate as the economy, he nodded. The point is though, the economist said, you have to distinguish between state-owned companies, non-listed companies (mostly SMEs and family businesses) and companies with a stock market listing. The first two categories in general show little productivity growth, while the latter is flourishing precisely in that area. And a rapid increase in productivity translates into excessive profit growth.
What distinguishes listed companies – although there is also a lot of variability within that group – is good management. Recent research by economists from Stanford, Harvard and MIT among 20,000 companies from 34 countries shows that the profitability, production, size of exports and the number of patents per employee in well-managed companies are up to four times as high as poorly managed companies. This involves basic practices such as ‘keeping track of what is happening internally’ and ‘translating these into objectives for continuous improvement’.
It is of great importance that companies try to mirror the best performers in their sector, according to the researchers. This is much more standard procedure for globally competing listed companies than for the family business that has just been taken over by the eldest son, or for the hospital that does things because they have always been done that way. If we want to make our countries more productive and therefore more prosperous, then the challenge lies here. Unfortunately, few governments have ‘improving management in all companies that are not listed’ in their policy objctives.
- This column was first published in Het Financieele Dagblad on Monday, February 26th (in Dutch)