Boots On The Ground: The Essential Role Of Travel In Burgundy’s Global Investment Approach by Jeff Musial, Burgundy Blog
Travel plays an essential role in Burgundy’s bottom-up investment research process. Our portfolio managers and analysts regularly travel to find new investment ideas, conduct due diligence on portfolio holdings and build expertise on the geographies where our investments reside. As a global investor based in Toronto, this is particularly important to us – in 2015, our Investment Team held more than 850 meetings with companies in at least 17 countries across North America, South America, Europe and Asia.
We recognize that it may not be entirely self-evident how travel contributes to Burgundy’s end goals of protecting and growing your capital. In this issue of The View from Burgundy, we attempt to describe the types of valuable first-hand experiences that travel delivers, all of which contribute meaningfully to our investment process – and your portfolios.
This issue of The View from Burgundy was written by Jeff Musial, Investment Analyst for Asian equities. Most of the examples throughout are drawn from the Asian equity team’s experiences, but conversations with any of our Investment Team members will demonstrate they all have similar stories to tell.
“ Pure logical thinking cannot yield us any knowledge of the empirical world; all knowledge of reality starts from experience and ends in it.” – Albert Einstein
As investment analysts, we are constantly striving to grow our knowledge of businesses by learning from a multitude of sources. These include company filings, phone discussions with management
teams, conference call transcripts and industry publications, all of which are invaluable and necessary in helping us build our understanding of specific companies and industries. However, there is no substitute for physical travel to another location or country to see managers, businesses and economic environments first-hand. Company visits add depth and a crucial element of context to the research process.
The insights gained from on-the-ground experience are many, and in this issue of The View from Burgundy we will describe them across five dimensions: first impressions, face-to-face interviews with management, site tours, knowing the lay of the land and cultural understanding. Altogether, these are the key ways in which we are able to improve our understanding of businesses and their environments when we travel.
First Impressions Matter
The primary purpose of our research trips is always to meet managers in person, with a typical trip consisting of 25 to 30 meetings in a single week. Time is frequently in short supply as we drive from one corporate headquarters to the next, conducting intense interviews with senior managers. On trips outside of North America, both language barriers and jet lag add elements of complexity. But despite the challenges, we find these trips to be instrumental in helping us conduct due diligence and build our knowledge of companies.
There is much to be learned before a meeting even begins. Take, for example, a recent experience in Australia, where we met the management of a large international commodity producer. Standing in the office lobby, we marvelled at our surroundings: gleaming white marble walls, lofty ceilings and an impressive 20-foot-tall black door that automatically (and silently) slid to one side to grant us entry.
The environment inside was equally lavish, with lush leather seats, expensive art and even a well-stocked employee bar! While by no means a conclusive analysis, simple observation left the impression that this was not an overly cost-conscious company.
Now compare this experience with a more recent one we had in Japan, where we visited a highly successful, rapidly growing and profitable e-commerce firm. Despite having the means to provide similarly luxurious facilities for its employees, we met the company in its modest head office located above a supermarket. Imagine the contrasting impression this left upon us with regards to how each company views its overhead expenses and shareholders in general.
Q&A with Management
Our investment research approach at Burgundy is bottom-up in nature, which means that we make investment decisions based on our understanding of individual businesses and their competitive environments. What we look for are companies that possess quality characteristics, such as high returns on capital, opportunities for growth, strong competitive positioning and excellent management – and when assessing this latter point, face-to-face meetings with managers are indispensable.
Meeting with a company’s senior management in person provides us with a forum for asking questions and airing concerns, and also provides a more thorough understanding of how they run the company. Questions we ask have to do with topics such as capital allocation, competitive dynamics, industry trends and corporate governance, to name a few.
When listening to a management team’s responses, we are first and foremost trying to learn. But we also pay close attention to what their answers say about how they think about the business, such as whether they take a short-term or long-term approach to growing profits and building a competitive advantage, or whether they tend to think conservatively about the business. On this point, what is not said is sometimes just as important as what is. For instance, in Japan we occasionally encounter management teams who, across multiple meetings, will never utter the phrases “return on equity” or “shareholder returns.” What they aren’t saying demonstrates that they do not think about their businesses in a way that emphasizes capital efficiency, which is a knock against them in our quality-value investing playbook.
Site Tours (a.k.a. “Kicking the Tires”)
Management meetings are not the only on-the-ground tool we use in our efforts to learn more about a business. Another piece of proper due diligence is conducting site tours, in which we visit factories, distribution warehouses, and research and development (R&D) centres in order to flesh out our understanding of how a company works – “kicking the tires,” so to speak. This is often one of the most illuminating parts of the learning process while we are getting to know a business.
Site tours greatly enhance our ability to understand companies; in the same way that a picture is worth a thousand words, a site tour can sometimes be worth weeks of research done sitting at one’s desk. Simply put, seeing a business or process in action can clarify and add detail to what may be difficult to understand through written sources alone. Many of our “aha” moments occur on site tours, as what was previously confusing becomes clear.
The insights from a site tour can vary, ranging from an enhanced understanding of a business on one end to disturbing red flags on the other. On this latter point, consider a site tour the Asian equity team conducted years ago at a Chinese flavour and fragrance company’s R&D facility. Normally lab environments are tightly controlled, but in this case, rooms labelled “temperature controlled” had open windows, letting in both the hot summer air and a fair share of local insects. What’s more, the facility was curiously devoid of employees, and the few research staff we did encounter were surly and unapproachable. It seemed odd to us that a company could have its main R&D facility in such a state of inactivity and disrepair, while reporting seemingly world-leading profitability in a highly competitive research-driven industry.
Our negative impression from the site tour provided useful information that would have been difficult, if not impossible,