WCM Investment Management, a California-based global equities firm that manages over AUD42bn, believes one of the most important contributors to the long-term performance of any organisation is an appropriate corporate culture.

WCM’s investment process is based on the belief that culture is the biggest influence on a company’s ability to grow its competitive advantage or ‘moat’. This process has resulted in WCM’s Quality Global Growth strategy outperforming the MSCI World Index by an annualised 5.3% per annum over more than a decade.

“Great companies tend to have great cultures,” says Kurt Winrich, Portfolio Manager at WCM Investment Management.

“An organisation could have the greatest products, a robust brand and reputation, effective policies and processes and a long history of trading, but if the culture is poor it’s much less likely to succeed when compared to a business with a healthy culture.”

“When a company culture is poor, this can lead to issues such as slow delivery, poor service or rude employees, all of which can affect the customer experience and the company’s long-term financial performance.

“In contrast, companies with great service and employees that go the extra mile rarely have complaints made against them. And if they’re not making complaints, customers will return to the better businesses, leading of course to better business results. It’s that simple.”

Mr Winrich believes many investors underestimate the importance of culture.

He says: “Corporate culture is a much more important factor than most realise. Intuitively, this makes sense. If your employees hate working at your organisation, they are not going to give their best efforts or ideas, and that will make it nearly impossible to have a good company (or investment). In contrast, if people enjoy working at their organisation, they’re going to do more for it and their colleagues—and for the customers.

“Even when you have nearly identical businesses in the same industry there can still be big differences in business performance. For example, consider how Costco is so much more successful than Sam’s Club (a division of Walmart),” he says.

“Costco and Sam’s Club are two retail warehouse chains with identical business models and very similar physical stores, but when you look at the financial metrics of the two businesses they couldn’t be more different. Costco dwarfs Sam’s Club in terms of profitability and margins, and their sales per square foot are roughly double that of Sam’s Club.  We’ve concluded that corporate culture is generally the explanation.”

WCM’s techniques to assess culture include face-to-face meetings with management and employees (both past and present), turnover rates, online reviews and more. Industry surveys and net promoter scores reveal hard-to-quantify appraisals of cultural reputations, or overall customer satisfaction. The latter, for businesses with a significant proportion of customer-facing staff, is often reflective of culture. “As the saying goes, happy employees make happy customers, which make happy shareholders.” He suggested: “The magic combination is a corporate culture which encourages the behaviours that enhance the company’s competitive advantage. This can keep a business ahead of its competitors for years and years.”

Contango Asset Management distributes WCM’s Quality Global Growth Strategy in Australia via the WCM Quality Global Growth ETMF (ASX:WCMQ) and the WCM Global Growth Limited LIC (ASX:WQG).

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Marty Switzer

Leading investment manager WCM Investment Management (WCM) has highlighted to local investors the importance of detailed corporate culture analysis when constructing global equity portfolios.

This message is consistent with the recent revelations of misconduct from the royal commission, which also emphasised the need for investors to garner greater insights into the corporate culture of organisations in which they invest.

The WCM Quality Global Growth Fund (ASX: WCMQ) has been launched as an active global equities Exchange Traded Managed Fund by Contango Asset Management via its interest in Switzer Asset Management Limited. Switzer Asset Management is also the responsible entity for the ETF.

The ETMF has already received over $10 million in allocations in its first 10 days of being open to local retail investors[1]. The initial offer closes Friday 22 August.

It has also received a Recommended rating by Lonsec, thanks largely to the quality of the underlying investment manager, the California-based WCM.

Marty Switzer, CEO of Contango Asset Management, said Contango had searched the world for an appropriate global equity offering to partner with to provide to local retail investors.

Mr Switzer says: “WCM’s investment process is based on the belief that corporate culture is the biggest influence on a company’s ability to grow its competitive advantage.

“This process has resulted in WCM’s flagship global equity portfolio consistently outperforming the MSCI World Index over the past decade and firm assets under management growing  to over A$35 billion.

“The portfolio, which typically holds between 20 and 40 securities, targets quality global growth businesses with rising returns on invested capital, superior growth prospects and low debt.”

Paul Black, co-CEO and portfolio manager at WCM, adds: “A point of difference in our investment approach is that we have developed the ability to identify companies that possess a demonstrable competitive advantage over peers. This includes corporate culture – great companies tend to have great cultures.

“Culture is difficult to measure, given its qualitative rather than quantitative nature.  It is for this reason that culture often gets overlooked in the investment process. We put a lot of emphasis on understanding the corporate culture of our holdings.”

Mr Black highlights that WCM has an analyst dedicated to probe the cultures of companies in which they invest and monitor and have developed a proprietary methodology for assessing this highly subjective element of an investment. This is a key focus of the team when meeting with company management, employees and even former employees.

He notes that an organisation could have the greatest products, a robust brand and reputation, effective policies and processes and a long history of trading, but if the culture is poor it is much less likely to succeed when compared with a business with a healthy one.

“Despite those good products, you might find that many customers have complained about slow delivery, or poor service, or rude employees. These are all indicators of the health of a company’s culture.

“In contrast, companies with great service and employees that go the extra mile rarely have complaints made against them. And if they are not making complaints, then customers will return to the better businesses, leading of course to better business results. It’s that simple.”

Mr Black says assessment techniques WCM uses includes face-to-face meetings with management, employees and even former employees; turnover rates, net promoter scores (NPS), online reviews and more.

Mr Switzer adds: “The WCM Quality Global Growth Fund ETF offering is consistent with Contango’s new strategic direction as a marketing and distribution platform that partners with, and promotes, the best of breed global brands to the self-directed and independent financial adviser channels.”

[1] WCM has been available to local institutional investors for the past five years.

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