Share price dispersion remains prevalent in equity markets, but today’s active managers are having difficulty extracting alpha. They may not be looking in the right places.
“A lot of them, I think, have failed in their stewardship responsibilities,” argues Ben Yeoh, senior portfolio manager, global equities, RBC Global Asset Management (UK) Ltd.
“I don’t think there has enough of a realization that the world has moved on to where there is a lot of value in intangibles, so this is where ESG actually falls into,” he explains.
“It’s a lot of stuff that you can’t really touch. [It’s] difficult to measure, and it’s actually a significant part of value today.” Stewardship, or engagement, according to a 2016 study by Elroy Dimson and his colleagues, can add value — both at the company level and in the stock price. Sometimes, it’s a simple matter of conversation, such as suggesting best practices to senior managers.
“Financial capital is not the only kind of capital that you have,” says Yeoh. There’s “your relationship with your customers, your employees, your environment, your suppliers.
And the problem is, too many management teams today — for a variety of reasons — behave insensitively.”
Amazon’s customer relationship, for example, is a contingent asset. Yet it’s not readily quantifiable even though it’s a major part of Amazon’s value.
“If you look at the S&P 500 today, it’s almost 90 per cent intangible value,” he says. “You can look at this historically. If you go back 100 years, most of the value was in making widgets. It was actually in your plant, in your factories, in trade. Today, most of your value is in services, in IP, in processes, in relationships between people, in financial services. It’s essentially a relationship thing.”
But metrics have not evolved. While there are ESG raters, the indexes they construct show low correlations with one another, suggesting that they’re not measuring the same things. At the same time, Yeoh warns against the “McNamara fallacy”: if it can’t be measured, it doesn’t count.
But it does, for example, when employee relationships are strained through cost-cutting for short-term gain.
“When I speak to CFOs, this is the part they get, because I speak in their language,” he notes. “This is a liability that isn’t on your cash flow and balance sheet today, but it’s going to come back and bite you in the future.”