By anticipating how the fundamental profit drivers of companies will respond to new information, and implementing these views through a systematic process, BCS Capital aimed to capitalise on the slow and often imprecise responses of the market to new information, he said. Stuckey’s experiences with corporate management and deep knowledge of industrial economics helped BCS Capital determine the profit drivers of each company, and how they are impacted in different macroeconomic environments. “We hypothesised, through economic theory and research and what I learned in the best part of 30 years at McKinsey, about what really impacts companies and revenues,” Stuckey said. “What affects their top-line is what also affects their share price.”
Even companies within the same industry sector were found to have distinct profit drivers, he said. Boral and James Hardie, both squarely in the building supplies industry, sourced revenues from different activities: while new infrastructure spending would be a boon for Boral, James Hardie would be more receptive to news about a boost in housing starts. Most businesses had between eight and 12 significant profit drivers. But some, such as BHP Billiton, which mines a wide array of resources, could generate upwards of 15 drivers. This has resulted in more than quantitative 400 signals for BCS Capital, Herlihy said, all of which have been back-tested to 2004 against publicly sourced data, such as the Australian Bureau of Statistics. Interestingly, the fundamental input into the manager’s process involves no interviews with corporate chiefs. “We don’t say management doesn’t matter. It does,” Bowers said.
“But at the end of the day it doesn’t matter to our process whether the CEO and team are great or poor. “The characteristics of the economic environment in which they reside actually determines the fate [of the company] more than management does.” Unlike value managers, BCS Capital does not aim to determine the true worth of a company. “We don’t care about the true value of a company or its current share price. The information that is really important [to us] is what drives share prices, and most of this is the information that affects profit drivers. “Value managers have to wait, whereas we’re modelling the oneday change, not the fair value.” He said the market usually responds to new information within five to eight days, but that BCS’ process is designed to react as this information comes to light.