Fund Managers’ CEO Mania Gave a Head Start in 1,400% Rally
Two money managers have turned the study of chief executives into a game-changing investment strategy.
(Bloomberg) -- Two money managers at a Finnish fund have turned the study of chief executives into a game-changing investment strategy.
Burton Flynn and Ivan Nechunaev, who help manage the Evli Emerging Frontier Fund, were early buyers of shares in Supermax Corp. After meeting the CEO of the Malaysian maker of medical gloves in mid-2019, they invested in the company just before its stock soared 1,400%.
The two are on a mission to sit down with the leaders of all the firms in their prospective investment universe. In the case of Supermax, they say the meeting with its CEO provided them with enough information to move into the stock well before others. When the pandemic hit, they suddenly found themselves in a uniquely strong position.
Flynn and Nechunaev have traveled across 10 emerging and frontier markets, where they ended up meeting with 632 companies and speaking directly with 323 CEOs. Based on their legwork, the two fund managers found five early signs that a company is likely to outperform the market.
First, CEOs confident about upcoming earnings were more likely to welcome the opportunity to praise their company, while CEOs about to announce a bad set of results were more likely to delegate the meeting, according to Flynn.
Second, CEOs who used more transparent language and cited more numbers ran stronger companies than leaders who hid behind difficult language, Flynn said (he cited findings from natural language processing). The third signal Flynn and Nechunaev identified was a CEO’s tone when addressing risks.
“CEOs who are more confident about their prospects might be more willing to talk openly about the risks,” Flynn said.
What’s more, executives who expected better earnings growth went on to deliver stock gains, while undervalued companies tended to be those whose CEOs could clearly articulate what investors misunderstood.
When the stock pickers take a position in a company, they typically invest about 3% or 4% of their fund, or as much as 6% in the most compelling cases, Flynn said. The idea is to leave room for the investment to grow, given they’re constrained to a maximum of 10% per security, he said.
The Evli Emerging Frontier Fund is up more than 6% since Flynn and Nechunaev started traveling the world to meet CEOs in June 2019. Flynn plans to use the findings for academic research he’s hoping to publish in the coming year (controlling for variables that could skew the results, such as industry, sector and country effects).
A final lesson from the project: meeting the boss can also be a real eye-opener on where not to invest. Flynn recalled one (short) meeting in which the CEO responded to every question with, “I don’t know.”
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