During the recent Switzer Investor Strategy Day Kurt Winrich co-Chief Executive Officer and Portfolio Manager of WCM Investment Management talked to Peter Switzer on business culture, competitive advantage–and how to avoid some of the common pitfalls of Wall Street. In this session investors can learn:
- how to identify companies with a strengthening competitive advantage;
- why a healthy corporate culture is the biggest influence on a company’s ability to grow; and
- how WCM Investment Management ’s internal corporate culture experience has led it to manage A$114 billion (as at 31 March 2021) on behalf of institutional and retail investors around the world including Australia.
Peter Switzer (PS): Kurt, thank you for joining us.
Kurt Winrich (KW): Thank you. I’m sorry to be a little late Peter. I had the wrong link, but that’s how it goes these days.
PS: People at our young age, we sometimes can get the technology wrong. But fortunately, the people you work with are good at picking tech companies that have a lot of potential.
KW: That’s correct. I’m glad they are.
PS: I recently heard one of your guys address a conference, where I was doing a presentation myself, and the one thing that I found fascinating was when he said, “our funds have exposure to tech companies in the digital space”, but he also made the point, which I think shocked a lot of people, “that the digital age is in its infancy” and that kind of staggered me.
KW: That assessment, I think, has a lot of validity. It’s funny coming from me, I don’t know if you remember my background, Peter, but I was an electrical engineer in another century. I’ve been interested in tech for years and the digital age is my whole career and I really do see what they’re talking about. There comes a point in the future where, not only is everything we work with, digitised and connected, but even at some point, our bodies will be connected and digitised. I think we’ll look back on 2021 where people younger than myself will think it was primitive back here.
PS: WCM came to Australia a little less than four years ago. It has two well-known listed products. One is a LIC (listed investment company), that’s WQG and the another one is virtually an ETF (exchange traded fund) called WCMQ. They’ve performed fantastically since coming onto the Australian Stock Exchange.
I think a lot of people need to understand the history of WCM, and its investment strategy because it’s quite a unique investment strategy. When I tell people that WCM cares about the culture of a company, people are really fascinated in that. Why don’t you just give a part of the history of the company and the investment strategy Kurt?
KW: I’ll just start by making a connection to what you just said: the history has a different story, but nowadays we say that WCM stands for Why Culture Matters. It really is the history of our firm that has led us to that conclusion.
The firm was founded over 40 years ago. The original founder was what I sometimes call a solo act who made all the decisions, made all the money, and owned all the stock. As you can guess, the culture that is born out of that kind of an attitude tends to not include other people. For example, talent would be hired because you need somebody to do the work, but they would quickly find out they didn’t have a place to go and instead would go out the back door and start their own. That happened numerous times, until my partners and I were able to buy out the original owner in the late ’90s.
We made a promise that we were going to build a culture that was different. Most of the time that meant doing things differently. The objective was to say, ‘we not only want to attract great talent, we want to keep great talent, and let great talent do great things’. To do that, you have to share the wealth, you have to be transparent and you have to push equity down.
So, from one owner in 1976, to four owners in 1998, to 34 owners at WCM today, out of a total of 70 people – that is a lesson that was learned in fits and starts. What made us accelerate was realising that if culture makes such a huge difference in the people that would leave our company and people that would stay within our company, it’s got to make a difference everywhere.
When you look around, you find out that almost everybody that is a great investor, believes that as well. We started with U.S. domestic products and then in the early 2000s, branched out to international and global. Like I said, now 70 people – about four different offices in the U.S., but the main one is Laguna Beach. We’re happy to have a great presence in Australia.
PS: Now tell us what is so unique about your investing style? I should say to those watching, in our financial planning businesses, we have WCM and Magellan because you are both very good fund managers, but you invest differently. That’s why we like having two different styles of investing, for our financial planning clients. Tell us about what your investing style is.
KW: Thank you. I think there are two main things to consider in our style. It has to do with what we think is important in a business that’s going to make that business grow and give a return to its investors, which is of course, what we’re trying to achieve.
The number one is you have to think about competitive advantages. We like to say, you have to think of them differently than most people. It’s common to talk about a competitive advantage, to have one that’s large. In fact, Warren Buffett gave the old moat metaphor to this years ago. Now you see it at Morningstar and everywhere else.
What we think is important, is not necessarily a big competitive advantage, but one that continues to get stronger. That is the number one principle of how we invest. We’re trying to find businesses that are on the rise, in terms of their competitive position. Maybe even more important, if you will, in terms of protecting the downside, which is something we do very consciously and very well, you do not want to own businesses that is losing its edge.
The bulk of our research is spent on trying to understand: how do you tell that a competitive position is strengthening? How do you tell that it’s weakening? The next question is, how do you tell if it’s going to keep strengthening? If it’s going to do that, not just for a year or two, we’ll provide a partner in a business for a decade or more.
We think the answer to that is how does the culture fit in that company’s strategy, and with its advantage? So, the big idea for us is to find a competitive position that’s getting stronger, and find a culture – which is basically just the behaviours of the people in that company – find a culture that supports that competitive advantage and helps it continue to grow. What you end up with here is a business that outdoes expectations. Because these are not factors that are found in a DCF model, these are not factors that are found in any database. These are about people, their behaviours, and staying ahead of their competitors. That’s the kind of business we want to partner with.
PS: Two questions on what you’ve just discussed. The first one is, when I talk about your interest and care about culture, people instantly ask me well how do they do it? And I explain how WCM has created an annual IP, its own filters for culture, and you explained that in more detail. But secondly, could you give us an example of a company that you thought was a good company, you may have made money out of it, but over time the culture filters caused WCM to remove this company?
KW: One that comes to mind is a company out of the UK called Reckitt Benckiser. Reckitt Benckiser has an interesting history for us with some cultural ups and downs. Quite honestly, we had a lot of learning out of that experience. Years ago, the company was extraordinary at acquisitions and in consolidating the home-healthcare businesses and the products that go along with that. It had an interesting departure, by both the CEO and the CFO within a few months, unexpectedly. Initially that caused us to be wary of what was going on. We actually sold the position when we thought that the culture was damaged.
A few years later, a new CEO came in that we were quite positive about. We gave him some time to work out how he was going to run the place. We thought that we had a pretty good sense of it and rebought Reckitt Benckiser. We made some money at it but then found to our surprise that the new CEO quit again. We said, this is two times and we’ve got to figure this out.
We dug deep and found out that there were issues all the way to the board level that we weren’t comfortable with. So, the idea of vetting the culture, not only in the leadership of the people, but in the people that pull the strings as well, has been the new learning lesson from all of that. That’s a company that we made some money on, but we’ve ended up not owning it because the culture’s not as healthy as we thought it was.
PS: How have you created a filter for culture, or is it done one-on-one every time? You must have at least a checklist of what is critically important.
KW: It is mostly is one-on-one conversations. We have a dedicated culture analyst team here at WCM who feeds information into our normal business analysts. All of it is based on extensive conversations. The tools that we use that are beyond are using survey companies to help us understand, by asking peers and competitors – even in our conversations, some of the most enlightening information comes from talking to competitors.
The idea that we’re looking for are three. A culture needs to be adaptable, for one. We’ve found out from academic research that a culture that has an external awareness, tend to have better business performance than those that are only internally aware. An example would be to talk about a business that understands who its competition is and what it’s doing. Opposed to an internally aware culture that simply says, ‘we can do better than what we did last year’.
It also needs to be very well aligned with what the business’s strategy is and their competitive advantage. The classic example I’ve used with you before Peter is that the culture that’s right for a retailer like Costco, where the adage is ‘happy employees mean happy customers’, also means happy shareholders. That’s not necessarily the right culture for an industrial company, like a railroad – where the goals of the company the competitive advantage are different, will need a different type of people.
So, we want them to be aligned is number one. We want them to be adaptable, that’s number two. Third, we want to find out that the culture is actually permeating the organisation. Remember, we talk about culture as the behaviours that the people do, the things that motivate them. Sometimes around here, we say it’s what the people do when the boss isn’t looking. If that culture is right for the business then we’ve got something. If it’s strong throughout the organization, it’s adaptable and it’s aligned. And that’s what we find is the secret to finding the things about the culture that we want to know.
PS: Thank you Kurt.