Marty Switzer

Investors traditionally seek to understand a companies’ financial results, earnings, business metrics and other figures before investing.

However, over the past half-century, intangible factors, such as corporate culture, are a far more important factor measuring and driving a company’s market value.

Most of the stock market value of an organisation today is derived from assets that are not on the balance sheet, says Ocean Tomo[1], a US-based research and ratings firm. Approximately 84% of the market value of the United States S&P 500 equity index is in ‘intangibles’ – assets not captured on the balance sheet.

That leaves only 16% of the market value of a company to be ‘tangible’. This portion includes traditional earnings, ratios, estimates, cash, receivables, plant, property, equipment and inventory.

Intangible assets are not physical in nature. They are the results of human intellect and include intellectual property (items such as patents, trademarks, copyrights, business methodologies), human capital, reputation, brand recognition and customer relationships.

“Corporate culture is an intangible factor. It is often described as the ‘DNA of the organisation’ and shapes interactions with internal and external stakeholders,” says Marty Switzer, CEO of Contango Asset Management. Contango distributes WCM’s Quality Global Growth Strategy to Australian investors via the WCM Quality Global Growth ETMF (ASX:WCMQ) and the WCM Global Growth Limited LIC (ASX:WQG). The strategy has a unique corporate-culture focused investment approach.

“Corporate culture is as important to a company’s health and future as any financial indicator. I’d also argue that culture is the single best predictor of long-term performance and viability,” he said.

The recent revelations of misconduct from the Royal Commission highlight the need for investors to garner greater insights into the corporate culture of the organisations in which they invest.

“Unhappy banking clients affected by the fees-for-no-service scandal joined disgruntled shareholders and have seen their shares fall in value by more than 20% over the past five years in some cases. In contrast, companies that are famous for their focus on culture, such as Netflix among others, have seen their share price rise more than 450% over the same period. While not a like-for-like comparison these are not isolated examples,” he said.

He notes studies demonstrate that companies with a positive workplace culture consistently deliver superior investment returns.

Mr Switzer says an increasing number of investors want to know what the CEO of an organisation has learned from other great leaders, what the firm’s core values are and how they are integrated throughout the organisation.  “Corporate culture is as important to a company’s health and future as any financial indicator. Companies with a positive workplace culture consistently deliver superior investment returns. Engaged employees keep customers happy and generally deliver consistently on business objectives. This can translate to more innovative products, higher sales, lower costs from staff turnover and lower financial volatility.

“When you have nearly identical businesses in the same industry there can still be big differences in business performance – due to differing corporate cultures. In the financial services sector, when a company culture is poor, this can lead to numerous issues which can affect the customer experience and the company’s long-term financial performance.”

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Marty Switzer

Kylie Jenner and ETFs – two things you never thought you’d hear in the same sentence.

Australian investors have had limited exposure to stocks shares such as Shopify, the e-commerce platform which powered the launch of Kylie’s makeup line.

Shopify is in the top 10 holdings of WCM Quality Global Growth Fund (ASX: WCMQ), an ETMF currently launching on the ASX. The fund, launched by local Contango Asset Management and managed by Californian-based WCM Investment Management (WCM), has already received over $10 million in allocations in its first 10 days of being open to local retail investors.¹

Marty Switzer, CEO of Contango Asset Management, says: “The Canadian-based Shopify helps small businesses set up and manage their online stores.

“The reason that WCM likes them is because of their corporate culture. WCM’s investment process is based on the premise that corporate culture is the biggest influence on a company’s ability to grow its competitive advantage.”

Mr Switzer notes: “Recent revelations of misconduct from the royal commission highlight the need for investors to garner greater insights into the corporate culture of organisations.”

“Great companies tend to have great cultures. And that tends to be great for investors.

“Factors relating to the quality of people and the relationships among them – the corporate culture – can be up to twice as important as the numbers.

“There are a range of investment opportunities offshore and Kylie Jenner’s favoured e-retailer Shopify is just one,” adds Mr Switzer.

Paul Black, co-CEO and portfolio manager at WCM, adds: “Similar companies with identical business models can have vastly disparate performance. The difference in many cases is culture.

For instance, any organisation can 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 that has a healthy culture.

“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 their customers are not making complaints, then customers will return to those better businesses, leading of course to better business results.”

The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The read should not assume that an investment in the securities identified was or will be profitable.

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

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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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