By Mitchell Sneddon
This week’s fund manager interview is with Paul Black, the Co-CEO and Portfolio Manager of WCM Investment Management.
Paul Black is the Co-CEO and Portfolio Manager of WCM Investment Management.
The firm is based in California and manages over $42 billion worth of funds.
Australian investors can access Paul’s fund via a Listed Investment Company (LIC) with the ASX code WQG, which is currently trading at a discount of over 10 per cent, or via an Exchange Quoted Managed Fund (EQMF) with the ASX code WCMQ.
The fund has outperformed its benchmark by over 5 per cent per annum since inception.
A key differentiator in the WCM team’s investment approach is their focus on company culture, and that’s the main focus of my conversation today.
So, Paul, I recently listened to a podcast that you were involved in, and one quote came up from yourself that I thought really summed up your investment process quote neatly. You said, “Never bet against great growth companies with superior cultures that are highly competitive advantaged,” and I think that’s a good starting point to unpack your investment process.
Well, yeah, that’s a great question. I actually think I need to clarify that a little bit further because I would actually say, never bet against great growth companies with superior cultures that support the growing competitive advantage. And that’s really, really the key.
Most money managers that are looking for businesses to invest in will tell you that they’re looking for companies that are competitively… First of all they’ll say, “I’m looking for a high quality business.” Really? Okay, great. That’s really unique, right? Who’s going to look for junk? “I want one with a good competitive advantage, that really big one.” Well, that makes sense. “And I want to buy it really cheaply.” Well, yeah, again I’d argue that’s of course you want to pay a good price for it. But what we have found is the reason that most active managers are struggling, or a lot of them are struggling, is because they’re all doing the same thing, expecting different results. They’re all looking for those high-quality businesses with big competitive advantages that are selling at a discount to intrinsic value.
What we have found is that more times than not, just looking at the world the same way everybody else does, most likely will lead you into value traps. It’ll lead you into these companies that have huge competitive advantages, and they’re cheap, but we would argue they deserve to be cheap because their competitive advantage is actually peeking and therefore probably rolling over and eroding.
So I would rephrase that to say, never bet against a great growth company with a superior culture that is aligned with a competitive advantage that’s growing over time. And that is a huge, huge differentiator in terms of how we do things. So if you think in terms of, “Hey, you know what? It’s just not enough for this company to have a huge competitive advantage, we need a company that’s actually growing its competitive advantage in that space.”
Let me give you a couple of examples. Everybody in the growth space, they love Google, they love Facebook, they love Amazon. Those are companies that have huge competitive advantages and it’s very difficult for people to make inroads into them, but if you rephrase the question away from is it a big competitive advantage or is it a growing competitive advantage, we think that all three of those companies are companies that have actually competitive advantages that are huge. But there’s no way that we can make the case that they’re growing, so while most big growth managers own those names, those are all names that we’ve sold over the last couple of years.
By the way, as you know, they have been huge performers over the last five, 10 years. We think the probabilities of them continuing to outperform from a stock side is very, very small, because we don’t think you can make the case that they’re getting stronger vis-à-vis other people in the industry.
I think there, Amazon’s a really good example, especially for your portfolio, because the largest holding in your portfolio currently is MercadoLibre, which is essentially, for those who are unaware, it’s the Amazon of Latin America.
Can you maybe compare and contrast the competitive advantages that you’re seeing with MercadoLibre compared to Amazon?
Well, yeah. When we look at MercadoLibre and, again, they are the Amazon of Latin America, they dominate Brazil. There’s been a lot of talk that, hey, you know what? You got to be careful with MercadoLibre because Amazon’s going to come in, and wherever Amazon comes in they disrupt the market and they take market share.
Well, it’s a completely different game in Latin America in terms of logistics than it is in the US or other developed countries. The inroads that MercadoLibre has in terms of working with local providers or logistics is far superior and far longer than Amazon could ever hope to be. There’s no way that Amazon can go down there and rationalise that market in a short period of time. So while there’s a lot of chatter around how Amazon’s going to come in to Latin America and Brazil and disrupt MercadoLibre, over the last five years the evidence is overwhelmingly that that’s not the case.
The other side of MercadoLibre that’s really compelling is that they’re really known for their mobile payment side. That’s an area… Kind of the Holy Grail of investing right now is to find the companies that are kind of dominating or likely to dominate in the mobile payment area. MercadoLibre has a mobile payment service called Pago, they are dominant in that space. The inroads that they have and the network effect they have is going to be really, really hard to disrupt.
Interestingly, it goes to kind of the question of why did you sell Amazon, which we’ve sold in the last few months, and one of the main reasons we sold it is because we looked at Amazon’s inroads into other countries other than the US, and when you look around the globe, Germany, or even Australia recently, or in certainly Turkey, in Latin America, what you find is that Amazon’s having a real hard time getting traction in these other countries outside the US, primarily because the whole logistics piece is not working for them and they’re not able to rationalise that part of the business. So the local operators like MercadoLibre tend to be much better players in that space, certainly than Amazon.
Okay. Now I want to get onto the culture aspect of your investment process, because if anyone goes onto the WCM Investment Management website, one word that’ll come up time and time and time again is the word culture, so that’s a big focus that you put on your investment process. So how do you actually go out and assess a company’s culture? But maybe, firstly, why is it important?
Well, firstly it’s important because from our perspective, if you look at two businesses that might be in the same industry competing every day against each other, the difference between the business that does really well financially and the one that doesn’t has everything to do with the core set of values in the business that are hopefully aligned with the competitive advantage, and where you find alignment between values and the competitive advantage of the business, you’re going to have a recipe for a long-term 10-year, 20-year pull where that business is probably going to perform very, very well.
Look, anybody that’s been around a while, I’m not talking about a 20-year old, but I’m talking about someone who’s 40, 50, 60 or 70 years old, they understand the importance of culture and a good, healthy, robust culture where people are empowered to do what they’re gifted at doing, and if you can get that aligned with the competitive advantage, it’s a huge driver of success over time.
From our perspective, real simply, if you think in terms of great retailers around the globe, you look at every great retailer and why they’ve done so well, usually it’s because at the core of the business, the DNA of the business, is about having happy employees. In retail, if you have happy employees, it’s pretty obvious, right, they’re going to service the customer really well. They service the customer really well, the customer has a good experience, they’re going to come back and they’re going to spend more money, and if they spend more money, obviously the shareholders and the returns are going to be great.
Now, is that the right kind of culture to have in, let’s say, a railroad company or an industrial company? Probably not. In a railroad company, you want a culture where there’s high levels of accountability, you’re probably going to have to pay people more, but the standards and the discipline and the centralisation is going to be far more important to the culture than it certainly is in a retailer.
So with a railroad, you’ve got to have those high levels of accountability, you’ve got to have a lot of structure, and where you have that, you have that great alignment between what the company’s trying to do as a business and what the culture is all about. Every business has a culture, every business has a set of values, and across the board, you want to make sure, and nobody does this, nobody does this work, but you want to make sure that you have that alignment between the culture and the values and the competitive advantage.
And how do you do that? Well, I’ll tell you what, it’s a lot of work and that’s one of the reasons most people don’t do it on the investment side because, look, most people that are doing investment analysis or business analysis, what they spend their time on 95 per cent is on the numbers. Crunching numbers, going through databases, building their spreadsheets, and guess what? From our perspective, there’s almost zero value in that space because everybody is competing and everybody has those numbers.
What we do on the analysis of cultures is we spend a huge amount of our time talking to people around a business about what animates that business and what drives it, and I think one of the best ways… We use expert networks a lot that will help us meet with people that used to work for a company.
The best way to find out about any company or any business is to talk to people who have left on friendly terms, they’ve left on good terms. Like, if I want to know anything about a business, if I can talk to five or 10 people that had a great experience at a business, they’ve left and gone somewhere else, and I can begin to build the mosaic by talking to those individuals and building kind of this, as I said, this mosaic about what ultimately drives the business and what animates it.
So it’s a lot of hard work. There’s no advantage we think, today, with computer power and all the people that are super smart on, let’s say, Wall Street, there’s not a big competitive advantage just crunching numbers. It’s got to come down to these softer things that ultimately drive returns.
And how do you actually go out and find those ex-employees? Is it as simple as your guys go trawling through LinkedIn?
They do. It would’ve been hard to do 20 years ago, Mitchell, but today it’s a lot easier. And we also, as I mentioned, use expert networks. Expert networks, we’ve got a number of expert networks we use that if we say, for instance, we want to do some analysis on Amazon’s culture, we want to try to understand it, they go out. They’ve got about 500,000 consultants that they are connected with over time, and we will go to them and say, “We want to talk to former employees of X, Y, Z company.” They will go out and find those people for us to talk to.
But we also do it ourselves. We have analysts that will call companies. Obviously, you have to talk to the CEOs and the CFOs and the treasurers of businesses, but they’re scripted. When you talk to the leaders of an organisation, they’ve got a script and it’s much better, as I said, to kind of use the expert networks to talk to people that have left organisations.
And again, it’s probably, Mitchell, what you do on a daily basis. You’re trying to find people through your network that have some information that’s not readily available about a company, and we do the same thing.
So what questions are you asking when you’re, say, sitting down with a CEO as opposed to when you’re sitting down with an ex-employee, and what type of information are you trying to find out specifically about the culture?
Well, it’s really interesting. If we ask… like, what do most analysts do that go into a CEO meeting? They sit down and you know what they ask? They ask, “Hey, tell me about next quarter. What do you think profit margins are going to be? What do you think sales growth is going to be? What do your earnings ratios look like? What do your debt ratios look like?” They get lost in the minutia of the numbers.
What we do is we come in and we completely turn the meeting on its head by asking them simple questions, try to ferret it out what animates the business, and you might do that by saying, “Hey, Mr CEO, tell me what you would tell a new employee…? Let’s say that a friend of yours was coming to work for your organisation. What three adjectives would you give them so that they can be successful in your business?”
Which again animates a lot of responses, and you can kind of ferret through that as you want. You might ask them a little bit about, look, what are the stories that are really important to this business? For instance, you ask about WCM. If you ask me, “Hey, Paul, what are the stories that are really important to WCM?”
That actually was going to be one of my questions, Paul. So, please, go on.
You’re good. Yeah, but I would say, the stories that are really important to WCM, they’re not the successes that we’ve had, it’s not that, hey, we’ve performed so well, it’s not that we’ve got $35 billion of assets under management. The stories that really animate us are the times when we really literally almost buried the firm, when we had periods of time 20 years ago when performance was really rough. What did we learn from the mistakes that we made? We were constantly kind of wrestling with we’re going to make mistakes, but let’s try not making the same mistakes over and over.
So if you heard our history and you and I were sitting down having a beer, I would tell you the times that got really rough when what we did wasn’t working. But I’ll tell you what, let me tell you what we learned from that. And one of the things, like you heard right out of the shoot that I talked about how important it is to buy companies with expanding moats, therefore moats that have a positive trajectory. That came out of our errors around buying these big, wide, moat businesses and buying them for a cheap price and finding out that, low and behold, we were stuck in value traps.
We were buying Yahoo 15 years ago instead of Google, because Yahoo had a bigger market share, they had a bigger moat, and it was a lot cheaper than Google. We were buying Dell instead of Apple, we were buying eBay instead of Amazon because they all had wider moats and they were all selling cheaply, but we were absolutely wrong. What we’ve learned since 15 years ago, as I said, is the importance of the direction of the competitive advantage versus the size of it.
So to me, if you can get CEOs or C-suite executives talking about the mistakes they’ve made and what they’ve learned from them, and what are the stories that are communicated down through the organisation to hopefully have a very transparent, candid conversation, that’s enormous in terms of assessing a company.
What I’m interested in as well is you guys are global fund managers, you hold companies across the globe in Asia, in Latin America, in the States as well. How do you go assessing company cultures across those different regions?
A company’s culture in Asia is going to be vastly different, I presume, to a company’s culture in Latin America, and you guys being Americans, how do you go into something…? Like, Tencent is one of your main holdings in your portfolio. How do you go into a company like Tencent and assess such a foreign culture to your own?
Well let me a give you a couple of stories that I think set that out pretty nicely. I personally, and I think here at the firm, I have a general thesis that you want to invest in companies and cultures that are optimistic in their view of the world, versus those that are pessimistic or negative.
About seven years ago, a group of us went to China and we had the privilege of meeting with a group of doctoral students to become medical doctors in China, and there were probably 15, 20-year-old kids who wanted to be doctors. I asked them, I said, “What is it that animates you? What drives you? What makes you want to become a doctor?” And you know what, every single one of them said, this is interesting, they said, “Every day we wake up and we think how can we be as successful as the developed nations? How can we be as successful as Europe and America and Australia? How can we do that?” And I thought, you know what? That’s an idea that I can invest in.
Very different from, frankly, the developed world where when you’re in the developed world and you talk to a 20-year-old kid, they’d probably be talking exactly about, “Hey, how do I win at Call of Duty or some other video game?” They’re focused on just nonsense, versus China, which is incredibly optimistic.
When we went to Brazil about five years ago, and in the pit of despair it depreciated about 50 per cent, inflation was rampant, corruption was rampant, and we met with 12 different companies. Out of those 12 companies, there were only three companies that never mentioned the corruption, the inflation, the real, or the macro. All they talked about was we have a brilliant business model, and if we execute on that business model we can clobber the competition. So literally out of that meeting, we came back and we bought MercadoLibre and we bought…
To us, we put a huge premium on optimistic cultures, kind of like from a country side, but also from a company side, and we’d be less inclined to invest in, let’s say, a Turkey. And I can say this because my wife is Turkish. When you go to Turkey, nobody trusts each other, everybody thinks everybody’s out to get them. For any problems that they have kind of culturally, they blame it on what the west has done. You have this heavy kind of blame on the west and other people, and less of this, “Hey, we’re going to make this happen no matter what.” I think those are important things.
But again, in terms of assessing company cultures, you got to meet with them, you got to sit down with them and you have to… Like I said, you meet 12 companies in Brazil, nine of them say, “Hey, we can’t operate in this environment because the macro is so horrible,” three of them say, “You know what? We have such a powerful business model and we’ve got such a great leadership team that we can manage right through this,” that’s a huge recipe for success.
Paul, listening to this, what I’m thinking is when you are personally out there looking for a new analyst to join the WCM team, you’re probably looking for some slightly different characteristics in a person than what the average fund manager’s looking for. Would that be correct?
You know what we look for? I’ll tell you exactly what we look for. We couldn’t care less about pedigree. If somebody comes from Harvard, Yale or Brown University or Stanford, that’s 10 strikes against them. It sounds odd, right? But part of that, if somebody has an MBA, probably of concern, because what you find with individuals that come from more kind of, for lack of a better term, blue blood, well established, well known places, certainly if they have an MBA, they start to believe that they actually know something that they don’t know. What they actually know is a bunch of structure, a bunch of a rigid way to think.
We are much more interested in hiring people that have degrees from state universities, small schools, because we believe that there’s a little bit of a chip on their shoulder and they’re going to be super scrappy about kind of getting after it and proving themselves, so from our perspective we don’t love people to have CFAs, which is the Chartered Financial Analyst designation here in the US, don’t love people that have MBAs, we love people that are just scrappy and understand that it’s really more about their own personal growth than it is about kind of book growth. The people that we hire really tend to be people that think very differently.
Look, again, that’s one of the reasons that the industry as a whole doesn’t add a lot of value, it’s because everybody’s being taught to think the same way around high quality, big moats, cheap prices, and that doesn’t work, but that’s where everybody rests. So to me, if I can find somebody that’s hungry, smart and humble, hungry, smart and humble, that’s a home run. If you’re missing any part of those three, then you’ve got a problem. If you’ve got hungry and smart but they’re not humble, you know, I got to watch this. You’ve got potentially a dick on your side that thinks he’s a prima donna. If you’ve got the humble and the hungry but they’re not smart, you’re not going to get much out of them, so you need all three of those, and those three are really great recipes for success we’ve found over time in terms of hiring people.
But I’ll tell you what, you give me somebody that doesn’t even have a college degree but they’re super hungry, smart and humble, we’re going to give them a chance.
Great to hear. Paul, we’ll look to wrap it up here, but if you could just sum up WCM’s, I guess, competitive edge in a real nutshell, because you’re one of the true long-term fund managers out there who have actually outperformed the market over a long period of time, what would that be?
Right. To me, as I said earlier, it comes down to a set of corporate values that kind of animate a business. Just as we think you’ve got to figure out that DNA of businesses we invest in, when I’m looking at money management firms, I want to know what animates them. What animates us are two core values: gratitude and fun. Those are kind of interesting. Gratitude is the sense that, look, we’re very fortunate to do what we do in a time and a place when allocating capital is richly rewarded, and it’s like, well I’ve had people ask me, “Well, how does gratitude help me?”
Well, you know what? It helps you because hopefully with gratitude there’s a sense of humility that I’m not maybe the smartest guy in the room. I may not be the hardest working guy in the world, although I work really hard, but there are a lot of people that work really hard. But you know what? The sense that we’ve been given a gift, and because we’ve been given that gift we’ve got to steward that really well, and with humility comes the sense of constant learning, constant driving to get better.
And then fun, fun is really important because if you love what you do and you skip to work every day, I guarantee you I’m going to get the best out of every person in this firm. If people love what they do every day, they’re going to work hard, they’re going to give their best and our clients are going to get really good returns.
So I would say, from our perspective, and look, philosophically I think we’re doing things very differently around competitive advantages and culture, but at the core is this set of beliefs that’s about, hey, you know what? We’re really fortunate. Let’s work super hard because we are fortunate to deliver the goods, and you know what? If we have a great time doing it, it’s not work, and we’re going to be able to give people a lot more of our effort.
Great. I’ve just forgotten one last question I did want to ask you. On the terms of culture, is there a company or a couple of companies in Australia that actually do stand out to you?
Yeah. Actually, in our international portfolio, which is ex-US, is CSL. That’s actually one of our top holdings. I think it’s in the top three holdings in our international portfolio. It had a founder mentality, we still think it has a founder mentality. We’re big fans of founders leading companies, but also making sure that when they do leave that there’s still that piece.
So when you look at the total addressable market for a plasma company around the globe, it’s a huge, huge market that’s likely to continue to grow for a long period of time, and then culturally they have still imbued the culture with this sense of decentralisation, ownership and people really embracing the you know what, they’re probably doing a lot to change the world for the better because of what they deliver to patients and clients.
Excellent. Well, Paul, thank you very much for joining us here today. It’s been fantastic to have a chat with you and to really try and get to the bottom of your culture investment approach. Thank you for joining us.
That was Paul Black from WCM Investment Management. And a reminder, Australian investors can access Paul’s fund via the listed investment company with the code WQG, or via the exchange quoted managed fund with the code WCMQ.