Checking out how a company’s founder and CEO behave might give you clues about whether to invest in it or not, says fund manager Mark Devcich.
Devcich, who is a portfolio manager and head of research for Pie Funds, says his investment team assess closely the management of any company they invest in.
The Pie team prefer businesses still led by their founder, because many studies show founder-led companies can do better long-term.
Founders look long term
“I think there are a couple of key reasons,” Devcich says. “The first is that the founder can take a long-term approach.”
He says the typical chief executive will stay in the job for five years. They may not be willing to make a decision affecting the business many years into the future, when they probably won’t be around.
“So, some CEOs are more focused on short-term gains to make them look good while they’re at the company,” he says.
“But founders tend to be more concerned about the longevity of the business, so they’re making smart decisions that, although they may have short-term pain, are more likely to be positive in the long term.”
Spending their own money
Founders also have a big financial incentive to see their firm to do well, because they own part of the company, says Devcich. In other words, if the company does well, they’ll grow their personal wealth.
“They treat the company as their own, because it is – it is their own money, so they can be cautious on wasteful spending.
“Nor will they do expensive takeovers just for the sake of being a bigger company, so the CEO can get paid more.”
Are they resigning?
Another factor to consider is if key people are leaving the business.
Says Devcich: “If there are management changes, quite often there could be a problem with the company. It might come out in the next few months that the company’s performing a lot worse than people expect.”
Likewise, it could be a bad sign if the CEO or board members are selling their shares. Do they know about some underlying problem?
But, says Devcich, if they’re buying up shares, that’s generally a good sign.
Published November 2018
Mark Devcich is the Head of Research and Portfolio Manager at Pie Funds Management Limited. Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement here. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. Before relying on it, we recommend you speak with a financial adviser. All content is correct at time of publication date.