Many global financial firms do not disclose enough useful information for investors in their annual and quarterly statements, according to Patrick Lemmens, an Executive Director at Robeco, where he manages the New World Financials fund.
Lemmens says that, while some companies are improving, many are too focused on profit accounting rather than providing more pertinent data about capital and cash flows. The ability to generate cash flow is particularly important for young financial companies such as FinTechs.
“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,” Lemmens explains. “Accounting rules such as IFRS 9 – which requires you to provision amounts you expect to lose from a loan in future today – are very cautious, as you are provisioning for something that might not happen. Rules such as these create more short-term share price volatility than necessary.”
“Also, 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. That’s because you can have a disappointment in one quarter, so we try not to read too much into that.”
Markets are too reactive to such short-term disappointments, says Lemmens, but this creates opportunities. “We might use that shorter-term volatility to change positions as the company overshoots or undershoots expectations. So, we are looking for things that might drive the stock price for a short time, but then it will revert to fundamentals.”