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Fund Spy

Manager Question of the Month: On the Road Again?

Stock fund managers mull the value of post-pandemic travel.

Active equity managers want to start traveling again, but it isn't clear when and if they will travel for the same reasons as before. Morningstar manager research analysts recently asked the fund managers they regularly interview, "Do you have plans to travel to visit companies this year?" More than 20 equity managers responded and none of them said they had specific plans to travel in 2021. Only three said they thought they would travel at some point (call it a tepid "yes") but didn't have a definite time frame in mind.

These responses reflect the caution many people feel these days. More intriguing perhaps were the managers' musings on the value of traveling itself, whether to visit companies and/or to attend conferences. As in so many other areas of life, it seems like the changes brought about by the response to the coronavirus have pulled forward trends that were already in progress. That is, improving video conferencing technology made it likely managers would one day rethink the value of travel; the pandemic simply accelerated the change.

Traditionally, traveling to meet with the managements, customers, competitors, suppliers, and employees of potential investments has been standard operating procedure for many bottom-up, fundamental equity managers. Many over the years have boasted of their ability to ferret out insights from plant and facility visits or relationships forged over years of contacts with managers and sources. It wasn't unusual for managers to brag (or complain) about the amount of time they spent on the road or to share anecdotes of how a serendipitous encounter at a conference or a candid moment with a rank-and-file worker led them to pick a successful investment or avoid a bad one. It also was common of managers to claim such boots-on-the-ground research was what differentiated them from their rivals and gave them a shot at beating them and their benchmarks. (Think of the TV ads showing swashbuckling analysts covering the globe.)

However, more managers started questioning the value of such meetings after the advent of Regulation Fair Disclosure, or Reg FD, in August 2000. This regulation forbade selective disclosure, in which an executive might share meaningful nonpublic information with large institutional shareholders (that is, portfolio managers) but not with other shareholders. This practice was more common among small-cap companies than with large ones.

Ever since Reg FD, corporate executives have been far more tight-lipped about what they share with portfolio managers, often repeating in one-on-one meetings what they have said during earnings calls or company presentations. As a result, some now consider meetings with C-suite executives altogether unnecessary.

Yet, these days, almost every manager we ask says company management teams are more accessible than ever. Since corporate executives are mostly working from home as well and aren't traveling extensively, it is much easier now to schedule virtual meetings, even impromptu ones.

On the other hand, several managers we spoke with lamented what has been lost through restricted travel and Zoom meetings. One small/mid-cap equity manager said it's "harder to develop a relationship virtually."

More than one manager also said the real value of company visits lies less in meeting executives and more in seeing the operation. As one growth manager put it, the best way to get a "sense of a culture is by visiting a company's facilities and talking with its people." Perhaps it's not surprising that several of the managers who highlighted the value of such visits manage small- or mid-cap portfolios; large-cap managers seemed less interested.

So, almost every manager we spoke with said he or she would like to travel again in the future but didn't know when that might happen. It depended not only on the course of the disease's spread, availability of vaccines, travel restrictions, and their own willingness, but also on whether the companies would host them. The most optimistic estimates guessed teams would resume travel after midyear, with others hopeful about resuming travel late in the year.

These issues are even more complicated for managers who invest outside the United States. One global-equity manager said traveling overseas cost a lot of time and effort. (Another international-equity manager said the team had already cut their overseas trips over the past decade from about six each year to just one.) He also noted how much information availability has improved over the years, whereas it used to be difficult to get materials in English. However, an international-equity manager pointed out that such trips can still be productive if visiting, say, a half-dozen companies in Japan over a two-week period.

Overall, it seems likely portfolio managers will resume travel once it is an option, but they may be more discerning in their approach. The current environment seems to have made them more cognizant of the true cost of travel, mostly in terms of time and lost productivity. So, while many say there is no substitute for building a relationship in person and meeting face to face, they may think twice about attending events, such as investment-banking conferences where company meetings are akin to speed-dating. Sometimes it's better to just stay at home with a good book--or 10-K.