'Worrying' about other people’s money is what fund managers have chosen to do for a living and they get their kicks out of performing functions that most adults would never dream of doing! They interview the sweaty Directors of JSE-listed companies (and dig into their darkest secrets) to find out whether or not your money should be going along for the ride.

To find out a little more about the 'secret life' of fund managers, Jim Millar of Financial Fitness Consulting interviewed a few of them to more fully understand what they are looking for in a good investment. Here's what they had to say...

Corporate Governance
One definition of this subject reads as follows:

"Corporate governance relates to the internal means by which corporations are operated and controlled".

Here, I discovered that management issues are highly important to Fund Managers and they ask questions in a manner that should leave little room for misunderstandings.

Reporting
While a company may never win an award for the layout of its annual report, when a Fund Manager asks one of its Directors for accounting information it must be available, clear, concise and — above all — the other Directors, not just the Financial Director, must understand the numbers and be able to provide illuminating comment.

Use of shareholders' funds
Today’s Fund Managers want to sincerely believe that the capital employed within their favourite investments is working extremely hard for the shareholders. They realise the need for an appropriate level of style and comfort in a successful corporate environment, but are not impressed with rows of expensive cars in the parking lot and ultra-designer décor if shareholders are losing out of the gainful employment of their capital and the resultant loss of net earnings.

At the extreme of decadent behaviour, many Fund Managers expect big trouble when they see plans for a huge new corporate headquarters. Recent examples of Dimension Data and Nedcor seem to perfectly underscore this point.

Transparency
When Warren Buffett goes shopping for his next investment he looks for profitable companies that are simple and easy to understand. During the 1990’s he publicly admitted that he did not understand high technology companies and, therefore, could not invest in them.

His critics were quick to latch onto this and say that 'Buffett' was a relic of the past and ill-equipped for modern investment analysis. Since the dotcom bubble burst in the first quarter of 2000 his critics have been strangely silent.

The request for transparency is really another way of asking for honesty. Fund Mangers want to be told about the opportunities that companies can foresee in their chosen markets, but they also want to here about the threats. Business is a series of calculated risks and it will not instil confidence if your directors can only explain the opportunities with little understanding of the threats.

Careful Planning
It is no secret that some massive South African companies have made a few monumental blunders in their rush to expand locally or overseas. Most listed companies cannot afford massive losses of shareholders' capital and Fund Managers are looking for business plans that reduce these risks to a minimum.

So, it’s vitally important that a listed company has a clear business plan and that each director can explain this plan in a way that would make any Fund Manager sleep well that night.

In recent times there has been far too much talk about how complicated the world is becoming. While this may apply to international politics most Fund Managers do not think that it applies to a good investment. Listed company Directors should have a perfect understanding of where the business is going and how it intends getting there.

Real earnings growth
One of the more surprising comments I received from a Fund Manager was that "Executive Directors should truly understand how the company makes money and be able to explain this in a succinct manner".

Previously, you may have thought that anyone near the top of a company structure would know exactly how the business makes money, but this is not necessarily a given. Fund Managers have regularly come across Executive Directors who only really understand their department of the business and not how it all works together to create profits.

To counter the potential conflicts of interest, directors should hold significant stock in their own company with the natural conclusion that they will run the business for the benefit of all shareholders.

Shareholders rule, OK!
Running the kind of company that Fund Managers are looking for is theoretically easy, but it often requires a huge internal shift in attitude toward the reasons for the company’s existence. Whether the directors like it or not, listed companies will not grow and prosper over the long-term unless they are run for the primary benefit of shareholders.

Corporate governance rules try to regulate this, transparency requirements try to monitor this, business plans try to guide this and earnings per share growth is the result of this. Yet, only the Directors will truly know what their long-term intentions are until they have had enough time to prove themselves to the investment world.

Most of the really successful business leaders have followed the above path and Fund Managers dream about finding the next one, and the next one, and the next one...

James Millar is the Group Managing Director of Financial Fitness Consulting

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