The sum of all parts - Better Investors

Online, January 10, 2010 (Newswire.com) - These are the questions investment managers try to answer every day. This usually means collecting and analysing reams of information about international economies, different industries, individual companies, about political factors, technological change and much more.

A lot of this information is available through desk research - from government economic agencies, regulators, broker reports and from information released by the companies themselves. Yet for many investment managers - particularly those looking to buy companies that have been mispriced by the market - the information that leads to better investment decisions is often information that is not easily visible

"You don't make great investments staring at a screen displaying information everyone else in the market can look at," says Patrick Farrell, head of Advance Investment Solutions*.

Getting under the hood, under the ground

Tim Barker, manager of the BT Natural Resources fund, agrees. A trained geologist with more than 26 years of financial markets experience (and 17 years within the BT fold) he spends much of his time deep underground, investigating mines and meeting miners.

"When you visit a site, you're not necessarily trying to find out what production is going to be," he says. "You're trying to get a feel for how the people operate, for how a pit is run."

These factors, often only visible, dare we say it, at the coalface, can have a major impact on company performance and on the return companies generate.

"One of the things I'm looking at when I visit a mine site is how they manage safety," says Tim. "Good safety practices are paramount and make business sense. For a start, workers in safe mines tend to be more productive. Safety affects cost structures too. In NSW coalmines, for example, workers compensation insurance is one of the major costs. Safe mines pay lower insurance premiums - and that flows directly through to the bottom line."

Seeing is believing

On one occasion Tim was being guided around an underground mine by a mining manager who took him down a wrong turn into a taped off tunnel. "On its own that's a simple error," says Tim. "But a mine manager should really know his way around the mine. So it gave us something to think about." Nine months later that company went into receivership.

On another mine visit Tim concluded that the operation was facing some short-term cash flow pressures simply by looking at the way in which the ore was sourced from the mine.

Tim uses the term, 'mosaic thinking' to describe how the insight you pick up on the ground mixes with a whole range of other information built up over many years of experience to give you an overall view of a company, industry or commodity.

"What you see at the mine is only one tile in the mosaic," says Tim, "but it can round out all the information you've already collected about the company, the commodity they mine and the industry dynamics. Interestingly, management changes at mining companies often lead to quite radical changes to mining methods and approaches. Often, it's the mine inspection that reveals where the potential surprises are - both positive and negative."

It is also important to put on-the-ground information into a broader context. The skill of an individual mining manager will have more impact on a small, one-mine company than it will on a large diversified miner like BHP-Billiton. A major producer of oil, copper and iron ore, BHP's fortunes reflect global economic conditions more than the performance of any single mine.

Learning from others

Another important aspect of this mosaic approach is that information not only comes from varied sources but from a range of people. Tim often visits mines along with other analysts.

"Different people, each with a unique skill set and experience, will see different things," says Tim. "And it's often very valuable to hear another viewpoint."

The BT Investment Management team all sit on the same floor in the same building in Sydney. That means that in developing his outlook for gold or copper, or BHP or Rio Tinto, Tim can also call on insights from BT's bond analysts, its economic strategists and from currency experts.

This search for a wide variety of insights is one reason BT will visit a company's competitors, suppliers and customers, always seeking a clearer view of how the business runs and what its prospects really are.

"When we meet mine managers and mining executives we don't just talk about their company," Tim explains. "We'll want to know about their competitors. So we'll ask, "How's that gold mine down the road going?"

"One of the best ways of assessing the efficiency of a mining company is asking a mining contractor - the people hired to do the actual mining. It's usually a good sign if they complain that the mine owner always fights tooth and nail over costs."

Talk to a wide range of people - to executives and the people who run the business on the ground, in the mines, factories, offices and shops where the money is made - and you're certain to pick up information that hasn't made its way onto a modelling spreadsheet or the business pages of a newspaper. At the peak of the technology boom one BT analyst gained in-depth insight into the PC sector when he found himself standing next to Michael Dell (founder of Dell Computers) at a cocktail party in Austin, Texas.

Similarly, Patrick Farrell doesn't restrict his fact-finding to information that's already out there. "Some of my best commodity insights came from a chance conversation with a mining engineer on a plane to Perth. So don't sit in a building looking at screens. Talk to people".
Information and how to use it

Today's sharemarket performance reflects more than economic fundamentals and the strategies of company management. It's affected by technology, government action, by the decisions of hedge fund managers and the speculations of day traders.

In this kind of world it makes sense to gather information wherever you can find it. The ability to see what others have missed and make connections others have ignored is a key part of a successful investment process. Yet it is only a part, and would be worthless without a disciplined investment process that subjects all investment information to rigorous testing and review. As Patrick says, "All the investment insights in the world mean nothing if you don't have the skills to understand what they tell you about the company's share price - and if it really reflects what the company is worth."