Consensus is one of the themes of the stock selection process favored by Dresdner RCM Global Investors. And the consensus is reached after considering more than just financial analysis. One of the unique features of Dresdner’s research process is its network of what it calls ‘grassroots’ researchers, whose fieldwork aims to read the pulse of the consumers who ultimately lie at the core of a stock’s earnings stream.
Directed out of San Francisco, the grassroots research team complements the work of the financial research analysts. It is a separate group comprising mainly journalists and industry specialists, whose task is to conduct non-financial research to support the financial analysis. Taking their direction from the traditional research and the portfolio management teams, the grassroots researchers identify and study issues that threaten to impact on a chosen company’s competitive position – and thus its earnings.
From those street-level surveys and ‘channel checks’, information filters up to the decision-makers who help guide Dresdner RCM’s worldwide assets under management of about US$258 bn, with Asian clients accounting for about $8 bn of that.
As for Dresdner RCM’s financial analysts themselves, their time is divided between visiting companies, building financial models and discussing their recommendations with the portfolio managers. They are the ones who identify investment prospects and carry out the preliminary research, engaging the support of the grassroots team if necessary. Earnings models are then produced and recommendations made to the fund managers. Next, analysts and fund managers discuss the merit of each recommendation and, hopefully, its fit within a particular portfolio. Thus the process comes full circle. ‘Our whole process drives us towards consensus,’ says Mark Konyn, Hong Kong-based director and head of marketing with Dresdner RCM Global Investors. ‘Consensus in terms of what we think are good ideas and what we don’t think are good ideas.’
First steps
The analysts approach a potential investment by first considering its earnings, the quality of its management and the stock’s valuation. A secondary consideration might be the domicile of the company, where its business originates and the sector it belongs to. Country, regional and industry sector views are considered in all cases, as they relate to any given portfolio. ‘We focus on all sectors at all times,’ says Konyn.
Konyn says that stocks will initially be discussed for recommendation in a country fund. If it is judged to be up to the mark, the stock will then be put forward to the regional team for possible inclusion in a regional fund. If a stock proves exceptional, it may end up in front of the global team to be considered for the global equity portfolio.
All stock recommendations and earnings models are stored on a central computer system. They are closely tracked and analysts are rewarded for the impact their pick has had on a portfolio. Konyn says Dresdner RCM’s equity philosophy is best characterized as ‘bottom-up research driven’. He explains: ‘For pure equities, we are a bottom-up fund manager. We build portfolios company by company.’ Indeed, Dresdner’s global equities mantra is We are looking for the best companies in the world to put in the portfolio.
Risky business
Despite taking a bottom-up approach to stock selection, a top-down approach is taken to risk management with a central investment policy. Research and risk control are further enhanced by the senior investment committees that are assigned to each discipline, as well as an economic strategy team headed in London by global economist Andrew Hunt. External advisors, while having no permanent status, may be called upon to offer a view from their own area of specialty, such as gold market analysis, for example.
Under certain circumstances, special valuation techniques may also be used by analysts. ‘We stress, though, that we’re not driven by models or any particular valuation technique,’ Konyn points out. ‘We use them as tools to understand how the market might consider a particular opportunity relative to its sector. But any given valuation tool is definitely not a Bible.’
Size is also not something that Dresdner RCM sets in stone. Though no limits are placed on the size of Dresdner RCM’s funds, it has nevertheless capped the amount of money it is prepared to invest in a small number of less liquid disciplines such as small-cap and biotech stocks for ‘efficient portfolio management considerations.’
Although fund managers buy for the medium term, there are times when short-term developments can be taken advantage of. For example, a stock may be bought with a three-year view towards earnings growth. If that growth comes through more quickly than expected, then it can be sold earlier than planned.
‘If the value is realized in a short period of time, then the fund managers are certainly at liberty to sell. And it’s normally driven by the analysts themselves. They set the target for price when they make the recommendation, and as it starts to approach that target, they review it, and they have to re-rate it. Overall, we believe that over a full market cycle, our stocks will outperform because we’re focusing on quality. If we have a policy, that’s it.’
In the search for quality, Dresdner RCM has come to regard good corporate governance as a key issue in the overall stock selection process. ‘The general view is that good corporate governance is good news for the shareholder and it helps realize shareholder value,’ Konyn says. ‘That’s the binding principle, so we will tend to invest in companies that do exhibit good corporate governance.’
Bad corporate governance, he says, would tend to steer the firm away from any potential investment, though he cautions, ‘Obviously, you’ve got to take into account regional differences. What is good corporate governance in Asia may not be seen to be good corporate governance in the UK.’
Speaking of questionable governance, Dresdner RCM has recently turned its attention to the Chinese markets, signing a technical services agreement with Guotai Securities, one of China’s biggest domestic securities firm. ‘We hope to develop our technical services agreement into a joint venture,’ says Konyn. ‘We are looking to take up our maximum allowable ownership of that joint venture, and we look to develop the business and take advantage of our global expertise.’
Under the terms of the agreement with Guotai, Dresdner provides the technological expertise, fund management experience and administration. In return, it will become Guotai’s official joint venture partner in its fund management company once the necessary rules and regulations are promulgated.
‘We are hoping to be part of the introduction of China’s open-ended funds initiative. That’s the initial target, and obviously there are also developments within the pension funds area.’ Both the foreign joint ventures regulations and the open-ended funds are expected to materialize this year.
Asian expansion
In Hong Kong, Dresdner RCM is a sponsor of the Mandatory Provident Fund (MPF), which is a new state-sponsored pension arrangement launched in a blaze of publicity last December. Under MPF rules, all Hong Kong employers and workers must contribute 5 percent of the employee’s salary to the fund. Dresdner RCM currently controls about HK$2 bn in assets under management for MPF clients.
Meanwhile, its Taiwan operation has ‘gone from strength to strength’ in a little over a year since it was awarded a license to operate a fund management business; and Australia has also proved to be a good move for the firm. ‘And like any other asset management company in the region, we’re looking at Korea quite closely.’ Other key offices are Singapore and Tokyo. Dresdner RCM employs about 100 people in its regional headquarters in Hong Kong, where its regional fund management activities kicked off in 1983.
Despite the devastating affects of the Asian financial crisis on the region’s stock markets, Dresdner RCM boasts asset growth in the region over the past three years of 30-35 percent. Konyn believes the fund management firm’s prospects look promising. ‘There is a lot of interest from Asia in US equities, especially large-cap, and other global equities,’ he says of current trends. ‘And Asian equities are becoming more interesting, although obviously this is an asset class that has fared quite poorly in terms of investor interest over the last three years.’
Indeed, the firm recently played host to a group of 25 European and Australian institutional investors, on a visit to Hong Kong, Shanghai and Beijing. ‘They’re now more interested in the region,’ Konyn concludes, ‘particularly China.’
