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Culture fuels business power for exceptional returns: US$74bn IAM

Paul Black, WCM Investments
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WCM Investment Management’s CEO, Paul Black, believes that corporate culture is key, serving as the catalyst for unlocking a business’s potential to exceed return expectations, and particularly crucial for the California-based firm with a modest Asian asset contribution.

As an independent asset manager (IAM) of Natixis Investment Managers, WCM manages US$74 billion firm-wide, across global, emerging markets, US, and China growth equity strategies, with approximately US$1.7 billion AUM in Asia.

Natixis IM holds a 24.9% stake in WCM and maintains a long-term distribution agreement with the firm, which does not currently have any offices in Asia. It is majority-owned and controlled by employees who are empowered to excel without the hindrances of “politics, bureaucracy, or cultural deficiencies,” according to Black.

“If you care about your people, not just on the professional side, but also on the personal side, you build a very, very cohesive team that has a chemistry that allows you to excel. And the single greatest reason that we have succeeded over the last few years is because of that,” he shared with Asian Private Banker.

WCM not only seeks companies with strong corporate cultures but is also committed to fostering a good corporate culture itself. They have employed a culture coach to ensure their culture remains one of their key competitive advantages.

“Culture is the key that unlocks the power of a business to compound returns beyond anyone’s expectations.”

In addition, they have committed to materially broadening the firm’s ownership across their own employees, which means apportioning shares to the next generation of investment professionals who share their foundational investment beliefs.

Fun, gratitude, and serve others

The CEO believes that most individuals share fundamental values like integrity, discipline, and adherence to processes – considered the basic ‘permission to play’ values. However, in his view, he aimed to define values that truly reflect their identity as individuals. As a result, they formulated core values such as ‘fun, gratitude, and serve others.’

“And when you think about it, those are very, very different core values than any other firm I’ve ever heard of,” Black pointed out. “And it’s pretty simple. If you love what you do, if you have fun every day, and as Buffett says, if you skip to work every day, you’re going to get a lot more out of everybody in the organisation.”

Gratitude, to him, is just an acknowledgement that “we’re pretty fortunate to be able to do what we do. Allocating capital is really one of the most exciting jobs in the world, and we get to do that.

“So hopefully with a sense of gratitude, there comes some humility. And that humility is around, boy, you know what? We compete against very smart people every day. Everybody works hard in this business,” he explained.

Investing in corporate culture

In fact, when selecting companies to invest in, WCM believes corporate culture is one of the most important drivers of moat trajectory and, therefore, long-term shareholder value. So, when evaluating any business, the team examines shared values guiding employee behaviour, evaluating their impact on the organisation’s success.

“The reason many active managers don’t outperform the benchmarks is because they’re doing the same thing, expecting to get different results.”

Most importantly, they also look at whether the company’s corporate culture is aligned with the business’s competitive advantage and strategic objectives. “Culture is the key that unlocks the power of a business to compound returns beyond anyone’s expectations,” Black said.

Stock picking

Aside from that, since the IAM’s objective is to outperform benchmarks over an extended period of time, they employ a focused approach of 30-40 holdings in which to invest. These companies are from growth sectors like technology, health care, and consumer discretionary, and steer away from areas where growth is challenged, such as utilities, commodities, and telecoms.

“The reason many active managers don’t outperform the benchmarks is because they’re doing the same thing, expecting to get different results,” Black added.

WCM does not take part in fluctuating style rotations – for example, value versus growth, and small cap versus large cap – in an effort to extract incremental gains on short-term price movements.

The team likes simple businesses with clear financials, minimal debt, rising returns on invested capital, dependable free cash flow, and consistent earnings and revenue growth. Their analysis focuses on the company’s business model, moat trajectory, corporate culture, and valuation.

For example, the firm’s US$16 billion Focused International Opportunities Fund launched in 2011, has outperformed the MSCI ACWI ex-US by about 4% since inception.

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