Role of investor relations in the investment making process

Conversation with Kamil Dimmich, manager of a $1.5bn fund at North of South Capital

Last week, I had the opportunity to speak with Kamil about his investment decision process, specifically focusing on the role investor relations plays within it.

Kamil is responsible for emerging market strategy at North of South Capital in London. As a generalist, he invests in all emerging markets and meets with over 200 companies annually. As I mention in the introduction, he has been my go-to expert for insights on investor relations and capital markets, and I was fortunate to delve deeper into his perspectives.

Here are my key takeaways from our conversation:

1- Governance: On the outset, Kamil emphasises the importance of company management acting in the interest of all shareholders. This includes ensuring alignment between the company and minority investors through various means such as consistent dividend payouts or management incentives aligned with business growth.

He assesses whether cash flows are reinvested wisely, if there are sufficient independent directors, and the extent of minority investors' influence in decision-making.

2- ‘Quality’ Investment Case : ‘Quality’, as Kamil views it, is subjective and encompasses various factors. He looks for businesses with significant barriers to entry, sustainable profits, investment in R&D, and the potential for substantial long-term cash flow distribution to shareholders. It is then his job to estimate the fair value of those cashflows, applying a discount rate which factors in any associated risks.

3- Face-to-Face Meetings : Kamil finds immense value in physical meetings for gaining a real perspective on the business and understanding a company's inner workings. Kamil prefers to meet people in the company that ‘run the business’, placing high value on that conversation. This is in line with what Harry Schwefel, CIO at Point72 meant when he said that his investment teams are ‘long term students of the companies they invest in’ and the value of having access to more than one person to truly understand its operations or Matt Hochstetler from Capital Global who is also a big advocate of face to face meetings.

As Kamil put it:

“The goal should be to build a relationship of trust and understanding with the investor. If we end up buying shares in a company because they told us everything is amazing and didn't tell us about all the bad stuff. And then the bad stuff happens. We're going to sell the shares and we will never buy them again. Because we'll say, well, sorry, we don't trust these guys.” “Or more simply, we'll say, well, look, clearly we did not understand this business. We failed in our job and we're not going to go anywhere near it because we clearly don't know what this business is about. And so you will have forever lost an investor. The goal of a good presentation (or a meeting) is: giving Kamil the comfort that he understand the business. This is very different to doing a sales job.”

4- Effective Presentations : A good IR presentation should focus on providing investors comprehensive understanding of the business, and not be ‘a sales pitch’. The key pillars should be include information about company’s history, market analysis (with a reference to its end-client dynamics), and business drivers.

5- Accessible Information: Kamil prefers easily accessible information, enabling him to follow up and understand ongoing developments without being overwhelmed by constant updates from companies. Being able to locate all the required information on the IR website does the job nicely.

6- Sell Side Coverage: He considers sell side coverage an important information source, especially when forming initial opinions about a company. This is especially true for investment companies whose investment universe is very large.

“It's clearly unhelpful if we're having a first look at a company and we pull it up on Bloomberg and there are no consensus estimates. That raises the hurdle for us. We have a little more work to do that we have to build up our own estimates from scratch without having any reference point. So there is value in having sell side coverage.”

7- Liquidity and Free Float: Liquidity issues, often tied to low share prices and market caps, present significant challenges. Companies need to balance between improving liquidity and considering the costs of a public listing.

Furthermore, the choice of listing venue can matter greatly for liquidity. Companies listed in less prominent markets or in countries with no connection to their operations can struggle with liquidity, suggesting that listing in their home market, where their business is better understood, might be more advantageous. This strategy can transform the vicious cycle of low liquidity into a positive driver for the company, attracting more investors and potentially also improving sell side coverage.

8- ESG Considerations: Kamil is skeptical of the 'mega ESG' approach but acknowledges the importance of environmental and social concerns in his risk analysis. He expects companies to provide concrete ESG investment details and justifications for non-adherence to certain global standards.

“Transparency is good. I think there's nothing wrong with a company being transparent about all the different factors. And I think it has to have a plan. I think companies have to acknowledge that the world is changing and they need to show how they are adapting to that. really what you want to see in any ESG documentation is concretely:  Here are the investments we've made, here are the investments we're going to make. Companies management should absolutely consider environmental concerns, should absolutely consider social concerns because it's good business practice to do so.”

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Kamil’s insights reveal a multi faceted approach to investment decision-making. His methodology underscores the necessity of a holistic and long term approach to learning about companies. It's not only about the numbers; it's about understanding the core of each business and its alignment with shareholder interests. As emerging markets continue to evolve, the perspectives of experienced investors like Kamil offer valuable lessons for management teams of companies in those markets who want a place in his portfolio.

Full interview is below: