By Jeremy Richardson
It’s been said that the fastest car in the world is a rental. That might not always be true – unless, of course, your local Avis has a Bugatti Veyron on its books – but the statement does reflect how people feel differently about the assets they rent compared to the ones they actually own.
A rental driver returns the keys and doesn’t have to worry about the amount of tread left on the tires or how much wear remains in the brake pads. But the car owner is much more likely to care about such things.
The significance of ownership
It’s peculiar how many investors don’t consider the long-term condition of the assets they own. Perhaps it’s because most owners are not owners at all, but are just renting a share certificate for a short period of time. High-frequency trading strategies are probably the most extreme example of this.
Passive investment strategies are arguably similar. These attract investors wanting exposure to an index or “asset class,” not to individual businesses. Whether it is high-frequency trading or passive investment strategies, it’s clear that neither option does anything for improving the quality of the underlying asset – the business.
Businesses: A source of real wealth generation
Businesses are instrumental to the way we live our lives. Just look at the things around us – the cars we drive, the phones we use, the foods we consume – they’re all provided by businesses. The separation of daily management from ownership, enabled by the creation of joint stock companies, has allowed businesses to become larger and much more complex, but the principles that Adam Smith, the father of modern economics, observed over 200 years ago are just as relevant today. Individuals are collaborating, combining their labour, capital and ideas to generate outputs that are worth more than the sum of the individual inputs.
Owner engagement is critical
Of course, things change. Businesses compete and, at any time, a business may find a more productive way to combine labour and capital to add value that leads to its enrichment at the expense of competitors. So not all businesses will do well all of the time. A struggling business may impact employees, suppliers and customers, but it’s the owner who stands to lose everything if it fails. This means owners are not only ultimately responsible for ensuring their business can compete and therefore generate wealth, but are also incentivised to do so.
But in a world that’s increasingly divided between highly vocal investors looking for quick gains and mute passive investors disengaged from the businesses they own, maybe it’s time to ask whether that division between the owner and day-to-day management is still operating in a way that increases societal wealth.
There are three main ways in which owners can increase returns while lowering risks:
- By avoiding unnecessary costs. These include both the transaction costs of a high-turnover portfolio as well as the loss of capital that come from owning an under-invested business when it struggles to compete due to past “borrowing.”
- By better knowing what they own. Actively engaging with a business and accepting the responsibility of ownership deepens knowledge
- By compounding returns. A successful business competes effectively, expands market share, reinvests in new opportunities and operates in a responsible manner
The benefits of engaged ownership
Of course, positive results can’t be guaranteed and much will depend upon successful and disciplined implementation. But done effectively, investors who engage with the businesses they own may not only succeed in being better stewards of capital, but may also help sustain better businesses.
Jeremy Richardson is senior portfolio manager, global equities, RBC Global Asset Management
Comments