Bidiversity

This article, originally published in the Wall Street Journal, highlights the importance of leadership skills as a criterion for selecting fund managers. The author, Jonathan Burton, demonstrates the emotional intelligence of CEOs can lead to generous investment returns.

For some mutual-fund managers, investment research begins in the corner office.

Believing that the quality of a company’s top leaders says a lot about the quality of the company itself, they make it their business to get personally acquainted with the executives running the businesses in which their funds are invested or might invest.

In face-to-face meetings, both before and after buying shares, these fund managers pepper the bosses with questions about how the company is run and management’s plans to keep it humming. Occasionally, a formal business relationship will develop into easy camaraderie, particularly when the fund manager takes a big stake and intends to hold it for years.

“I thought the best way I’d be successful was investing with people who are successful, and are successful because of the way they run their business,” says veteran fund manager Ron Baron, who has backed the ventures of casino magnate Steve Wynn for three decades, ever since Mr. Wynn opened a small property in Atlantic City, N.J. Now, Mr. Baron counts Wynn Resorts Ltd., Mr. Wynn’s latest enterprise, among the holdings in Baron Growth.

Similarly, Mr. Baron’s mutual funds have held major stakes in higher-education giant DeVry Inc. for 20 years, largely because he believed in co-founder Ron Taylor, who retired as chief executive officer in 2006. He has done much the same with discount-brokerage pioneer Charles Schwab, clothing designer Ralph Lauren and the Pritzker family of the Hyatt hotel chain.

While researching the people behind a company is commonly part of a fund manager’s due diligence, getting to know them personally isn’t. In fact, many money managers and executives prefer to keep their distance, wanting to avoid even the slightest suspicion that insider information is being discussed. Some money managers believe that if they get too close to the corporate brass, they might fall in love with a company and miss warning signs that executives are glossing over problems.

“Management can be painting a pretty picture on your windshield,” says John Montgomery, founder of Bridgeway Capital Management, a fund company that invests purely by the numbers using so-called quantitative strategies. “If you’re trying to understand management by talking with them, you have to be extremely good at it” because emotions can creep in and end up hurting you, says Mr. Montgomery. “I wouldn’t say that nobody can do this, but there might be one in 1,000 people who can actually add value.”

Sitting and Listening

The money managers who do get close to executives say they are acutely aware of regulatory boundaries. Because they are long-term buyers, they center their talks on the company’s plans for the next few years, not next quarter’s earnings.

Seasoned investment manager Chuck Akre, for example, says he recently met with top executives at insurance company Markel Corp., in which he has been a shareholder for almost two decades—first at FBR Focus and now as manager of Akre Focus.

“They knew before I came that I wasn’t going to be asking them about the quarter,” Mr. Akre says. “That was of no interest to me. I was interested [in hearing] about the business prospects—how the managers of a business think about the business.”

David Marcus, manager of Evermore Global Value and Evermore European Value, and a former manager of Mutual European, part of Franklin Resources Inc.’s Mutual Series lineup, says his main goal when he meets with a company’s top executives is to find out whether they “are value creators or value destroyers.”

“I usually start a meeting by saying, before we even talk about your company, I want to learn about you,” says Mr. Marcus. “What I’ve found is that successful people love to talk about themselves. Then you sit back and listen. I have all the time in the day when I’m sitting in those meetings. I get a better sense of who they are, where they’ve been. Do I trust these guys? Do I want my money managed by them?”

Read the rest of the story here