A few dozen of the great and the good from the market town near where I have made my home gathered to hear me reflect upon a career in the investment world the other week. The title – Thirty-five Years in the Square Mile. You heard it, 35 years. It makes me feel tired just thinking about it.
Actually, the title was not strictly accurate. for five wonderfully diverting years I worked in Birmingham but still in the world of investment management. The 35 years is accurate though. And how things have changed.
When in 1963 I started my first serious period of employment in a stockbroking firm that is now part of the mighty Dresdner Kleinwort Benson, our computer took up an entire floor. But we did have a computer – pretty rare in those days. Indeed, I remember visiting a small broking firm where all the staff sat in a single room dominated by the senior partner whose ancient and sloping desk rested on a dais at one end. Their contract notes were typed. Just.
Investment management was also something of a cottage industry in those days. The legislation that covers our industry was then just a few years old. It was only in the previous decade that George Ross-Goobey succeeded in converting pension fund managers to the cult of the equity. Investment styles and investment processes were unknown. Not so today.
Now, I have nothing against the more formal disciplines of an investment process but it must deliver results. What is more, you need to know why it works. There are plenty of black boxes around these days which can filter analysts' ideas. Too many of them use the same criteria though so you can have a sudden upward or downward spike in a share price when all the numbers tumble together, giving the same signal to managers as far apart as Aberdeen and Albuquerque.
One investment house that has made something of a virtue out of its investment process is River & Mercantile. They pay particular attention to the performance of broker analysts – an investment approach that, for science fiction buffs, puts me in mind of Isaac Asimov's psychohistory authors from The Foundation trilogy. However, it has sufficient virtue to deliver consistent performance. Their approach to smaller companies is even more interesting.
A report they published recently looked at the power of intellectual capital among businesses. More specifically, they explained how it was used within a business and related this to the performance of the shares. They came up with interesting results.
What exactly is intellectual capital? Anthony Cross of River & Mercantile describes it as brands, procedures and culture. The way in which companies exploit these intangible strengths can have a crucial bearing on how successful they are. What is more, their application is now far more important than at any time in the past.
First of all, intellectual capital is now very exploitable. We have information technology to thank for that. Second, service-based companies – which rely more heavily on intellectual capital – are now more important than the manufacturing sector. Given that last week we learned that call centres now employ more people than the mining, steel and automobile industries of this country put together, I see what he means.
Finally, the report claims that it has become much harder for companies to sustain traditional forms of competitive advantage. In other words, the employees that create intellectual capital are now crucial in determining the success or otherwise of the company in which you are investing. According to the report, those employees with direct equity ownership in the company in which they work are likely to produce the best results.
To support his argument, he cites a number of smaller, service-orientated companies that have delivered spectacular returns over recent years. These are the type of companies that fulfil his criteria. With smaller companies still largely out of favour, having the right ideas in this sector is doubly important.
River & Mercantile is one of those companies that probably fit into this mould as well. Significant worker shareholder involvement means they have every encouragement to get it right. This report shows they are thinking very hard about what they do. Worth watching.