I recently spoke with WCM Portfolio Manager and Business Analyst Mike Trigg about the company’s investment process and how it examines corporate cultures as part of its search for the best long-term growth opportunities.
Ferrara: Tell me about WCM’s investment process – how does the firm uncover potential opportunities? How does a name make it into your portfolios?
Trigg: There’s about 250 stocks that have passed a variety of screens to become part of our investable universe. There’s something like 60,000 securities out there that are publicly traded. If you look at companies with a market cap of $3.5 billion or greater and eliminate industries that would really struggle to grow faster than nominal GDP – things like timber and utilities – you get to a few thousand companies quickly.
From there, if you add some conventional quality metrics like return on equity of 10% or greater, net debt-to-EBITDA1 of 2.5 or less, and some type of growth hurdle2 – like 8% – you get down to about 500 companies. That’s the typical quality/growth universe that everyone is chasing after.
For almost 15 years we’ve constantly mined that list and looked for companies that not only have the presence of a moat – an ability to maintain a competitive advantage – but companies where we think that moat might be getting stronger.
Ferrara: How do you analyze a company’s culture?
Trigg: We try to figure out if the culture is well-aligned with the business strategy. We’ve always focused on culture as part of our investment process, but I think we’ve gotten better at analyzing it over time. We’ve figured out that there’s not one perfect kind of culture. It’s something that’s unique across different industries and across different companies.
For example, a cost-driven efficiency play like a railroad company is probably going to focus on being decentralized, avoiding red tape, and fostering accountability. A people-driven business like a retail or tech company is going to be something completely different.
We ask the companies we meet with a lot of questions about mistakes they’ve made, and about how externally oriented they are – do they study the competition? We have a culture analyst who will not just do CEO interviews, but interviews with former employees. We want to know a company has the right culture to be able to achieve its objectives.
Ferrara: Can you give an example of how those conversations can unfold?
Trigg: In my experience, if you ask a senior leader within a company about their corporate culture – basically no one will answer that question very well. Many years ago, I met with one of the top people at a large tech firm. I already had an idea that the company had a very strong culture. I opened up a meeting with him by asking, “Tell me about the culture here, in your own words.” Ten minutes into his answer, he’s told me nothing about the culture.
Later, I asked him about a decision to close down an initiative they were building to compete against a rival and he said “Oh, that was an easy decision to make. Our product people came to us and said that we should shut it down.” And I said, “Wait – the people that built it told you to shut it down? How does that happen?” He told me “It’s very easy. We compensate people not based on revenue growth but on user satisfaction.” And I said to myself – bingo! That’s the culture – take care of the user. But I had to know the right questions to be able to tease that out.
Ferrara: Why is a company’s culture such an important thing for investors to consider?
Trigg: We think companies are changing, industries are changing, and cultures are changing. Adaptability is important. You have to find companies with good cultures that can make transitions. There needs to be culture/strategy alignment. We really believe that strong cultures can help the potential of companies to outperform in their space over the long term.
2 A hurdle rate is the minimum rate of return on an investment required by an investor.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
Natixis Distribution, L.P. is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.
Natixis Investment Managers, L.P. and WCM Investment Management are affiliated.