Gustavo Ballvé on January 13th, 2015
Corporate Governance, Food for thought, Home, Portfolio Management, Risk management

Back in early 2014 we published our 4Q13 management report containing a special, 10-page text discussing Proxy Advisory Firms. It was motivated by further research following a June 2013 post on Buysiders.com called “Proxy Advisory firms: use with caution”. In the original post I highlighted “the dangers of “outsourcing research” – be it in Corporate Governance, people, financials, business models, competition, whatever – and the temptation of trying to systematize/quantify an investigation that is, by nature, subjective and case by case.” In the excerpt (inside) we addressed this part in detail but also mentioned “the fundamental choices we should make in terms of capital allocation (be it financial or human).”

We can choose how we do our research and in what processes we rely on, and we should choose wisely. For us the choice is clear.

A very important event that took place after we wrote our text: Institutional Shareholder Services, Inc. (“ISS”) was sold by MSCI to Vestar Capital Partners. Please keep that in mind when we discuss potential conflicts of interest in the text.

 

Here is the excerpt from the 4Q13 Management report: Proxy Advisory Firms – Excerpt from Edge 4Q13 report. I hope you will agree with our conclusion after reading our text:

“Our choices result in some “truths”, among which we highlight those applicable to this case:

We will never outsource the analysis of vital aspects of companies and industries. Corporate governance is one such aspect, in the pre-selection of companies to be analyzed (many assets “fall short” in this first test), as well as in the pre-investment analysis and, to an obviously larger extent, the monitoring of invested companies. The investigation of current and past practices within the company and the track record of its executives, board members and controlling shareholders are the target of relevant time allocation individually and collectively (during meetings and on Edge’s intranet);

We will never reduce the analysis of a complex issue to a summary of “nice to know” information and tasks, which are standardized and useless. Each company has its challenges and these change more quickly than the most watchful investors can take care of.

We will never have a fund with 5,000, 500 or even 50 positions for not believing it is possible, with “fewer, better people” working so intensely and in such collaborative manner as we want, to have the degree of understanding/knowledge that we deem necessary at so many companies to the point where, after all filters and still demanding the adequate price, we have left 50 good companies to compose a long-only portfolio that is conservative and long-term oriented;

We will never believe a priori in “knowledge” reported by third-parties, regardless of “clout” or fame, experience, relationship, track record etc., before we verify ourselves the primary sources, talk with several people, think and discuss the subject among ourselves – and repeat the process until a conclusion is reached. Still, at Edge decisions such as “it makes sense, but after we studied it we are not convinced enough to sleep well at night” are common and, if this behavior has made us pass up some “golden opportunities”, countless times it saved us from mediocre investments, or those with immeasurable risk (therefore too high for us). “Nothing substitutes for thinking”, said Charles Munger.

We fervently believe in the saying “you are what you do,” and we seek to exercise every day our most basic choices as investment managers and as guardians of the culture and processes at Edge.”

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