We need to look beyond the accounting data. Increasingly, we are analyzing cash flow data and levels of capital rather than profit in the accounting model.
All this means that Lemmens focuses less on annual reports and quarterly releases and more on presentations from the company, usually posted in the Investor Relations section of their website. This might be a slideshow or a recording or video of a presentation to analysts, which often gives more relevant detail.
“Also, we get a fuller indication of longer-term performance from meeting and talking to the company about their plans,” he says. “When we meet with companies, we cover a range of questions to see whether their growth and development are in line with their long-term plan and with market expectations.”
Another problem in this sector is that banks are forced by regulators to provide too much data, says Lemmens. “The amount of data and disclosure since the financial crisis has increased to the point where they are swamping us – there is too much available and it is too detailed.”
“I would like [companies to focus on providing] more tangible data that is relevant to me today. What is your capital position today? What is the cash position? What dividends are you paying? How are you deploying your cash – for example, how much are you reinvesting and where? Those things are more important than a manipulated earnings number that has many assumptions behind it and so is not tangible. For example, if you hold a bond, you keep it to maturity – you are not going to sell it today, so it is meaningless to value investments based on today’s value.”
For us, it is better to look at long-term trajectory rather than at every quarter of data; we try to anticipate how the company will be performing in two years.
A new world of reporting
The global shift from GAAP toward IFRS has allowed better comparison between countries, Lemmens adds, “but we still have to make many adjustments. Focusing on capital, cash, reinvestment and dividends helps to break through all that. But local demands on capital and the regulatory demands on banks and insurance companies are relevant, so you have to look at these issues locally as well.
“Some countries have made progress in providing good data. Others are at an earlier stage. Generally, they understand that having internationally recognized accounting systems will encourage investment.”
The views of third parties set out in this article are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.
Patrick Lemmens, lead manager on the Robeco New World Financials fund, says that when analyzing financial firms, he looks beyond the accounting data and focuses on capital and cash flows. He also prefers to look at a company’s long-term prospects, and finds that he gets a better sense of this from talking to the company about its plans.