Asset managers from The Group of Boutique Asset Managers (GBAM) and leading academics addressed the ‘fallacies’ behind many company valuation methodologies, including smart beta and Environmental, Social and Governance (ESG) screening, at their recent workshop in Siena University.
In a gathering of academics and value managers chaired by Jose Luis Jimenez (pictured), head of Asset Management at Mapfre, a range of topics were discussed which either aimed at discussing some common investment approaches or which set out the investment case for investing in certain favoured ‘best idea’ stocks.
GBAM members laid out five case studies featuring favoured historic or current stocks choices ranging from Fuchs Petrolub presented by Lampe Asset Management, Dusseldorf; Mr Price, presented by First Avenue AM of Johannesburg; Grifols from March AM of Madrid; NN Group from Norwegian manager Skagen; and Bombardier, Gruma and Freeport-McMoRan from Fisch Asset Management of Zurich.
Each case study highlighted differences in approach in the ways in which each manager valued their chosen companies.
On the academic front, Pablo Fernandez, Professor of Finance at the IESE Business School in Madrid, referenced his paper on the ‘119 Common errors in company valuations’ performed by financial analysts, investment banks and financial consultants.
In doing so he outlined a range of errors which led to poor valuations These errors included errors in the discount rate calculation and the riskiness of the company; errors when calculating or forecasting expected cash flows; errors in the calculation of the residual value; inconsistencies and conceptual errors; errors when interpreting the valuation; and organisational errors.
A presentation from Constanza Consolandi, of the Department of Business and Law at Siena University who highlighted the fact that Economic, Social and Governance (ESG) factors are not being taken seriously by many companies despite the fact that many see real value in pursuing them.
Prof. Consolandi argued that ESG activities create value for companies if they have an impact on four areas traditionally valued by markets namely, Growth, Return on Capital; Risk Management; and Management Quality.
However, she argued that there still remained lack of agreed methodology, measurement and inconclusive results which acted to hinder the engagement by all companies in ESG activities.
This, she felt, ensured that there was a real opportunity for ESG professionals to fill the gap.
Andrew Clare, Professor of Asset Management at Cass Business School addressed the ‘Smart Beta’ products, which he felt were neither ‘smart’ nor justified the cost that investment firms, were asking for them. On the cost point, he argued that they should be no more costly than any traditional index tracker fund.
The rationale for paying less for ‘Smart Beta’ is that Cass has demonstrated that almost any alternative beta strategy devised has beaten market cap indices (so why pay more for it?) Prof Clare demonstrated that even a beta strategy based on the scoring in the Scrabble word game can show a credible return.