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Aug 30, 2023

Why Pyrford believes face-to-face interviews with management are ‘crucial’

Suhail Arain of Pyrford International on investment strategies and integrating ESG

Pyrford International, founded in 1987, is an investment boutique that operates independently within Columbia Threadneedle Investments. Pyrford is a provider of global asset management services for collective investment funds, investment management companies, local and state bodies, pension schemes, endowments and foundations. Its investment approach is rooted in capital preservation and its strategies include global absolute return, global equity and international equity.

Suhail Arain is head of portfolio management for the Americas. He joined Pyrford in 2008 as a portfolio manager covering North American equities having previously worked at Scottish Widows as a global equities portfolio manager and research analyst. He has more than 25 years’ experience in the asset management industry with a particular emphasis on US and global equities.

Arain graduated from King’s College, London with a degree in law and completed a masters in finance from London Business School. He also holds the CFA designation and  has held positions at KPMG, Hambros Merchant Bank, Prudential and ABP Investments.

Pyrford is owned by Columbia Threadneedle. Do you operate independently?
We operate independently of Columbia Threadneedle so nothing has changed for us in terms of our investment process or our clients.

Of the $8.92 bn in assets under management, what proportion is equities?
Around 70 percent.

Does the team split sectors and geographies?
Our investment team is split into regional geographies – we have a European, an Asian and an Americas desk. Each geographic desk looks across all sectors for opportunities that meet our quality and value requirements.

Which screens do you use?
We screen out small-cap names and companies with more onerous interest payments. We exclude companies with less than three times cashflow to interest cover. We rank the remaining companies based on dividend yield, return on equity and P/E ratio.

What is your active share?
More than 90 percent.

How would you describe your investment style?
Quality, which is why we look at leverage and return on equity, and value – primarily dividend yield and P/E.

What’s your minimum market cap and average length of holding?
Minimum market cap is $2 bn in Europe and the Americas, $1 bn in Asia. Typically, our average holding period is eight years.

What’s your sector allocation?
We are bottom-up stock pickers and focus on fundamental analysis so our sector allocations are a result of stock selection. We have a global stock selection committee meeting each month that all portfolio managers attend so we are aware of our sector weightings. We’re not going to end up with everyone holding only energy stocks, for example.

How is ESG integrated into the investment process?
Before ESG was a buzzword, we focused on high-quality companies. We always visit management prior to buying a stock and, once we are holders, we like to meet management annually so governance and ensuring management is kept accountable has always been a core part of our process.

Good companies make good investments. If we had concerns about the ethics of a business, we wouldn’t invest. Several years ago, we introduced an ESG template that is incorporated into our investment process. When we present a stock, we must also present an ESG template that looks at Scope 1, Scope 2 and Scope 3 emissions, governance, board composition and any controversial issues, for example. This is a new part of the investment process that is now formalized as part of the process.

Any sectors you won’t invest in?
We invest across all sectors unless a client prohibits us from doing so.

Do you prefer dividends or buybacks?
We are a dividend shop, so dividends are important, as is the sustainability of the dividend yield over the long term. We do our own independent research and produce a ‘stock sheet’ where we record data from the annual report of a company. We want to find out how sustainable the dividend yield and profitability are. If we are buying a new stock, we go back at least 10 years. Our quantitative analysis looks for asset turnover and/or margin improvement.

What we don’t like to see is companies improving their operations by taking on more and more debt as that’s only sustainable short term before things start to unravel. Before we buy, we meet management two or three times and then see management every year. We don’t mind companies buying back stock, as long as there are consistent policies in place.

Can you tell us about some of your holdings and why you invested?
Texas Instruments:
An analog semiconductor company. The analog market is quite concentrated. There are only two or three players, which means returns are very high. The life cycle of the product is long, more than 10 years. There are barriers to entry as they don’t teach analog design at universities. You only learn analog design at companies such as Texas Instruments or Analog Devices. It is not leading-edge technology – it’s trailing-edge technology – so capital expenditure is quite low. There is high free cash flow generation and profitability, plus dividends and buybacks.

AutoZone: A leading auto parts retailer in the US. Key to the business is having inventory for cars when customers come into a store: around 60 percent of customers come in out of necessity because their car has broken down and they need to fix it urgently. AutoZone either has the part in store or in one of its mega-hubs and tries to get the part to you within two hours.

There is also a strong service element. If customers don’t know how to fix their car, AutoZone will help, even providing the tools in some instances. So like at Lowe’s and Home Depot, the customer experience is great. The average age of a car in the US is more than 12 years, which is very good for AutoZone as, after five or six years, cars often need new parts. Also, the current cost-of-living crisis favors the DIY element of fixing your own car.

Additionally, AutoZone is moving into the commercial market supplying professional mechanics, who don’t want a car on the ramp awaiting parts, so managing inventory is key. In the commercial market there are only a couple of large competitors and lots of smaller operators so there’s the opportunity to take market share. It’s a fantastic company.

S&P Global: It has four main businesses. The first is credit ratings, which is a market dominated by an effective duopoly with Moody’s; Fitch makes up the top three. Obviously, all companies want an acceptable credit rating as it lowers their cost of capital and all fixed income investors need to know the ratings.

The second business we like is the index business and S&P owns the S&P 500 and Dow Jones indices – two of the most-referenced indices in the world. Fund managers have to pay S&P to use that data for their performance measurement. It is written into many investment management contracts what the reference benchmark is so it’s an annuity business.

The third business, and one I think is overlooked, is Platts, a commodities business. It’s a great business because S&P Global makes reference prices such as the West Texas Intermediate (WTI) oil benchmark. There are thousands of commodities: rice, cheese, milk, butter, copper, and so on. Once you become the benchmark (reference price), people have to pay you to get the WTI price. It is referenced in many chemical company contracts, for example. So S&P Global has a number of annuity type businesses where people have to pay year in, year out to use its data.

The fourth is a newer business – the market data segment. Feeding data to fund managers to get live prices for the S&P, Bloomberg, and so on. It is a very profitable and high-margin business, and a great company. We’ve held it for five or six years.

Automatic Data Processing (ADP): The first thing we like about it is its client retention of more than 90 percent. It is the leader in payroll software in the US, expanding internationally and also provides human capital management software. Once ADP is ingrained as a provider, it is quite difficult to leave and not many clients do, which is why retention is so high. It is in a great position as it is one of the few companies that can navigate the increasing complexity of payroll and taxes in different jurisdictions.

The growth part of the business is the professional employer organization segment. Smaller companies can outsource their human resource function to ADP, releasing them from an administrative burden. We’ve owned it since 2008 and its share price is up six or seven times. ADP is a dividend aristocrat: it has increased its dividend for 25 consecutive years, putting it into a select basket of US companies to have done so.

Can you tell us why meeting management is an important part of your investment process?
We run concentrated equity portfolios and don’t have any index positions. Every position we hold is active. Given that we hold for eight years, we like to meet management to ensure we’ve done our homework. We like to visit a company’s HQ so we can gauge the culture of a company.

Pyrford believes face-to-face interviews with management are crucial and a stock will not be selected for investment prior to meeting with management. Portfolio managers also revisit management at least once a year as long as the stock remains in the portfolio. Company visits provide us with firsthand knowledge of the company, its management and its operations. They also give us invaluable input for our macro analysis and help point us toward developing economic trends that have not been reported in officially released statistics.

What is your preferred method of meeting management?
In person – and we prefer one-on-ones as we tend to have specific questions. Levels of knowledge among investors at group meetings vary and it isn’t always the best use of our time.

Are there any companies that stand out as particularly good at IR?
KLA, Texas Instruments, S&P Global, AutoZone, ADP and Lockheed Martin.

Why should companies meet you?
We are well prepared for meetings as we always do our homework and we have an eight-year-plus holding period. We see investing in a company as a partnership – we are not a hedge fund that wants to flip a stock for the quarterly earnings. We really want to build up a rapport and understand the business at a deep level.

Gill Newton is a partner at Phoenix-IR, an independent Europe-based IR firm

Gill Newton

Gill Newton

Gill Newton of Phoenix IR
Partner at Phoenix-IR