ANJLI - THE SMALL CAPS EQUITY INVESTOR
"It's okay to not know absolutely everything and it's okay to make mistakes, learn from them."
Anjli Shah is an Investment Director on the Smaller Companies Team at Aberdeen Standard Investments. She is the co-manager on the Global Mid-Cap Strategy and provides research support on US Small and Mid-Cap Equities. Anjli joined Standard Life Investments in January 2016 from Stifel (previously Oriel Securities) where she was an Equity Research Analyst. Prior to this, she was a Banks Analyst for the Prudential Regulation Authority (PRA), Bank of England for 2010-2014. Anjli has 5 years’ experience at ASI and 10+ years industry experience. She has BSc (Hons) in Economics from The University of Warwick, CFA and IMC.
Hi, I'm Gillian...
...and I'm Sophie. And you're listening to Breaking Through careers Investment Management Edition with Future Asset, where we demystify the industry that is Investment Management.
Each episode we explore a new asset class or role to find out what our guest does on a day to day basis and what they did in order to get there.
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Do you need to study economics at a certain university to get into...?
What's the difference between active and passive investment?
Funds? Indices? Can you please speak normal English!
I thought you needed to be posh to work in investment....
On a scale of one to 10, how boring would you say...
Am I going to need to get a pinstripe suit?
Welcome back to the smaller companies equity investor. In Part One, Anjli gave us some monopoly strategy advice, told us what is meant by generating alpha and told us what qualifications you need by UK law in order to manage other people's money.
So it sounds like there's a lot going on in your role, day-to-day Anjli. But what do you think an average day in the job looks like for you?
Oh, gosh, an average day like, I don't think there is such a thing as an average day because every day is so different! But I think making like really broad generalisations, I probably wake up, and first thing I do is look at all the news flow. So whether it's just macro stuff, like the Federal Reserve has raised interest rates, or this government is putting a stimulus package together or like GDP is falling off a cliff or like oh, no, COVID is here! Whatever it is. And then you also look at company-specific news flow. So has a company reported its quarterly results? Have they announced some acquisition? Have they introduced a new product that's doing really well? Have they fired the CEO and changed them for someone else? Or whatever it is. And then we usually have a morning team meeting, where we discuss all of that, so that really helps us all to keep abreast of what's going on in the market. And the other advantage of that is some early trends that we see emerging in one part of the world, we could easily see similar trends in another part of the world. But by talking about it together, we can see that oh, no, this is something that's affecting the globe, like COVID is a good example of that, right? Where it kind of started off in China, then we had some cases in Italy. And then unfortunately, it spread across the globe. And then after the team meeting, really the day comprises of fundamental analysis, which sounds like a mouthful, but essentially, what that is, is you're basically looking at different stocks. So you're looking at different companies, and determining whether or not to invest in them. And you do that by looking at a company's financial statements. You look at what the quarterly results have been like, do these companies meet your investment, philosophy or process? But also, as part of that you do things like speak to sell side analysts. So if you think that on the buy side, and again, I'm making sweeping generalisations now, but on the buy side, I'll give you an example. So I work on a global smaller companies portfolio. And in that universe, there's over 6000 stocks, and our team has about seven individuals, it will be impossible for you to know all 6000 of those stocks exceptionally well. So you do rely on sell side analysts who typically are kind of arranged by sector. And they really are experts at those stocks, they follow the same 5/10 stocks over the course of their career. So they know these companies in really granular detail, so you speak to them. But you also arrange meetings or calls too with C suite executives of the companies that you're potentially looking to invest in. Sometimes it's good to hear it from their own mouth to see how they're explaining their business model, how they're articulating what their strategy is. And once you've done that, you then write a stock note. And within the stock note, you're basically looking to explain things like what does this company do? So what is the business model? What are its competitive advantages? What are they doing really well versus other companies that operate in a similar industry? You're looking at what are the growth drivers for this company? And then the more challenging part and I still struggle with this when I write stock notes, and everyone will tell you this at work. But the kind of section of why do you think you can make money on this stock? What is your view versus the market? Where are you different? What makes you think you have the edge on this company and then once you've written that note, you then typically have peer review. So your other colleagues will come and quiz and ask you various questions. And it's not to put you on the spot and make you feel uncomfortable, but more it's just to really critique an investment case to really understand: "Okay, why is this company a good fit for our fund? Why do we think we can make money?" And then finally, you are in agreement that you're going to go and buy that stock, you'll then place a trade, and then you make various portfolio decisions. So apologies, that was a really long winded way of saying what I do on a day to day basis, but I would say it's pretty varied. But what's common is kind of the news flow every day, looking at market and just interacting with lots of different people. And just the variety of written work, number crunching, etc. So, yeah, pretty mixed.
Sounds like you've got to be really on the button with it! And based on the fact you do peer review, I think that you must be very good at your job, because you are always asking why. So...
Yeah, although sometimes, you've got to know what's material. So I think one of the tricks, right, is that, unfortunately, you'll never fully be an expert in absolutely everything and have the answer to absolutely everything. If somebody asked you like, what is this company's depreciation policy in XYZ , you know, you can stare at them blankly. So unless you've spent all your life looking at this stock, and going through every single footnote you've ever thought of. So it's really about trying to focus on what's material. And that is so important in this job, because as I said, like you're never going to be an expert. So it's about knowing enough that you give confidence that we can make this investment decision. And so then you focus on what is material, what's going to really move the share price for this company,
What process do you go through when it comes to picking a stock to invest in?
So every fund manager or institutional investor will have different ways of investing. And even within a company or within the institutional investor, I should say, different teams can have different approaches. So some have what is called a top-down view. So this is where they're taking a view about the macroeconomics of a region, or they're taking a view about the industrial sector, and then finding which companies to invest in. And then you have others, which are called bottom-up. And this is where they're not making any particular call, or having a really strong view about what's happening in the macro economy or the sector or industry, but rather they're looking at company fundamentals, to determine which companies they should then invest in. And then the other thing to note is that different funds promise - or promise is a strong word actually no one promises! - but like different funds, say they do different things. So some funds will say that our aim is to provide income. So they tend to invest in companies that have really high dividend yields, because they want to see that regular income coming in that they can then pay their underlying clients or investors, and then other funds are more safe growth. So for example, the fund that I work on, we look for very high-quality companies that are growing, and we want to see them transition from being a small or mid-sized company into becoming a large cap. So our tagline is "Buying the future leaders or buying tomorrow's leaders today". And then you have other funds, which they look for long-term quality, for example, but they want to make sure that you're buying these companies at what they consider to be a reasonable valuation. So different funds have different investment philosophies, and therefore their process can vary depending on what that philosophy is.
What made you choose equities over the other asset classes?
Oh, that's a good one! I wish I could give you some like really well thought-out answer for that. But honestly I don't think I even like made an active choice or decision, I sort of just fell into equities. So I was working at the Bank of England and my area of focus was GFC banks, which is basically a really fancy way of saying like, really, really big banks, which are, you know, if they fall over are going to cause massive ripples in the economy. So we don't want them to fail. And I used to focus on kind of capital and liquidity matters. And then when I moved over to being a stockbroker, I actually funnily enough covered a completely different sector. I went from being a banks analyst to being a general retail analyst. But I can tell you like general retail is definitely more fun from the perspective of, you know, you can't go stand outside Canary Wharf and have a great epiphany about what's happening to Morgan Stanley or Barclays that day, but you know, we're all consumers. So you can go and see like: "Oh these shops are doing really well. And this one, their product is terrible. And oh my god, like, I would never buy clothes from there. That's where my grandma shops." You know, whatever it is! Yeah, I ended up becoming a general retail analyst and focusing on the stocks. So I'm sorry to say that it wasn't really thought-out. It just happened. But I don't regret it. And then again, I'm going to make a massive generalisation. I think, if you enjoy getting to know companies really well, equities is really interesting. And I think if you're, say, more inclined to think about macro, economic things like bond yields, inflation, yield curves, etc. Or currencies, like fixed income might be interesting. So I wouldn't say like, you should actively pick one over the other. I think actually having experience of both can be interesting. But I think, perhaps equities is conceptually easier to understand, perhaps a tad.
I guess, leading on from some of the skills that you like to use, what are the key things that you like about your job, Anjli?
Do you know, this sounds like such a cliche, but I actually really love what I do. And I'm really fortunate to do it. But what I love about it is the variety. I like the fact that it's a mix of a bit of number crunching, and looking at numbers, but also a mix of kind of writing, and talking to people. So I think that's one thing I really enjoy is you go out and you meet so many interesting people. So whether it's like sell side analysts who are just so knowledgeable about their sector, and can talk to you at great length about the trends that they've seen over the last however many years and how the industry has really changed. A good example of this is when you think of general retail growing up, we'd all be really used to going to shops to buy our outfit for the weekend, whatever it was, but now we've got things like online shopping, which is just much more prevalent, and we're used to doing click and collect, etc. So that industry's seeing great change. And also, you get to meet some really interesting people at the companies themselves. So consider, you're a lot younger than, say, the average Chief Executive or Chief Financial Officer, but you have access to these people who are making really, really important decisions. And you get to have really interesting conversations with them and quiz them. So I think that's really interesting. And yeah, I just, I really like the variety. And I like the fact that every day on the market is different, although like it can sometimes feel like: "Oh, we're seeing a repeat of XYZ cycle in the past." Every day is slightly different. And that really does keep you on your toes. You will always learn something, and you will always find something that challenges you. But I think that's a good thing, because it definitely alleviates any taste of boredom.
Absolutely. So all sounds like sunshine and rainbows, but what don't you like about your job? There must be something!
Oh gosh, well, I think it would be like dishonest or unrealistic to say that there isn't anything wrong at all, ever. But I think sometimes it's perhaps not as glamorous as everyone thinks. So I'll give you a good example. I started covering off Southern European companies and American companies. And part of that involves travelling to these countries to go and meet the management of the companies, attend conferences, etc. And everyone's like: "Oh my God, you're so lucky, you can travel and isn't it fun and etc, etc." I tell you honestly the moment you get off the plane, you're straight into a meeting, and you're doing back-to-back meetings, and then you're going back to the airport. So you don't actually get to spend much time in the city that you're in. So sadly, you don't get to do any of the tourists fun stuff. That's a great shame. But I think that other things in terms of what's perhaps least fun, is that day to day, there will always be an element of the job, which perhaps is more administrative in nature or more related to compliance etc, which you have to do and you have to be on top of. And it's not the case that it's grunt work shifted to a junior member of the team that is basically stuff that nobody else wants to do. It's something that even my boss who's very senior, even he has to do it because it's just part and part of the puzzle of running a fund that you want to make sure all the documentation is ready and appropriate and you're doing everything by the book. Because at the end of the day you are handling other people's money, so rightly so that you should be on top of that stuff. But it's definitely not the fun side of the job. If I can put it that way.
What would you say personally that you find most challenging about your job?
Probably just like making the right call. So you think you've done loads of work, and: "Yeah, I've really thought this through and I'm going to buy the shares of this company, I've persuaded everyone else in the team, this is a really good investment." You go ahead and you buy the shares, and then oh, no, the shares are doing terribly, and it's not going well, and everything you thought was going to happen, that was going to make you money is not working. So that can be quite difficult to take. But what I would say in that situation is that nobody, nobody, even if they're really, really senior, nobody makes the right call 100% of the time, if we did that, we'd all have a crystal ball and be living as multimillionaires, having the time of our lives and the market wouldn't really function to be honest. So it's completely fine. To make the wrong call, you just have to try to be right more often than you're wrong. And where something has gone wrong, you need to try and learn from those mistakes or think what could you have done differently? Or was there something glaringly obvious that I perhaps missed in the financial statements? Or should I have not given the company the benefit of the doubt and exited the position as soon as I heard the bad news? Like, there's never a kind of straightforward answer. But that can be challenging when you think you've done a good job, but the market's just going against you and actually like, now is a good example of that. So we've just had Biden win the US presidency, people are getting more optimistic that the vaccines will help end lockdown. And as a result, the economy will start recovering again. So what we're seeing in the markets is a lot of cyclical stocks. So companies that do really well when the macro economy is doing well, they're starting to outperform and do really well. But if you're invested in really good, high- quality companies, which are really defensive, they're now starting to underperform. And it's not that they've suddenly gone from being a good company to a bad company, or that you've done your work wrong. It's just that the market style is not in your favour at the moment. And that can be sad on a day-to-day basis. If you're looking at a screen, which is just a sea of red as I was doing earlier today. That can be sad, but nothing lasts forever in financial market.
And I guess given that you've given the big reveal that we don't have crystal balls to be good at the job. What do you think are the key skills that are needed to be a good equity investor?
So I think, first of all, passion, passion for getting to know companies, a passion for financial markets, what's going on in the world, passion is what will make you wake up every morning, look through it, do the work and keep coming back for more even when something's not gone in your favour. And that's not to be underestimated. I think the other thing is being analytical. So as I said, being able to see two sides of a story, so some companies are more notorious for this than others. But when you're meeting the Chief Executive Officer, he's always keen to give you a positive spin about everything that's happening. And you kind of come out feeling like: "Yeah, great, this company is doing everything right." And actually, you realise it's more of a sales pitch, and you've got to kind of dig deeper into what he was saying, or the financial statements, etc to really understand: does that match up with what that company is saying? So you need to be analytical and think about different angles on something. So actually, one of the common things that you do have to do is, even when you're saying: "Oh, we should go out and buy the shares of this company, and it's going to make us money." You still, within the note that we have to write, you have to write a section on downside risk. So that is basically if this goes wrong, how is it going to potentially go wrong? And what's going to be the impact? So it does really force you to consider all angles, which is pretty important. I think being a good communicator, or having good interpersonal skills is important, because let's say this from a different perspective. So first of all, being able to go out and have the confidence to talk to sell-side analysts, ask the right questions, meet the management of the companies who are typically very, very senior and much more experienced than yourselves and really ask them tough, challenging questions. But also, you'll go away and you'll write your stock note and do all the work. But then you still need to be able to pitch your idea to your colleagues and your teammates. It's no good just writing a note. You need to be able to have the confidence to kind of stand up in a meeting and say: "This is my stock idea, and this is why I think you guys should buy it." And again, often your colleagues are a lot more senior than you are and much more experienced. So that can be daunting. But being a good communicator and having good interpersonal skills, I think really helps with that. And of course, the other element, which as you get more senior, you'll get more involved in pitching to potential clients. So basically trying to get them to invest in your fund. And again, in order to do that, you need to have good interpersonal skills, you have to be able to understand what the client's mindset is and what they're looking for, and be able to pitch to them at a level that they're going to understand.
Absolutely. So when we watch TV shows or see films, in terms of the working environment, we see really high heels, hair done up, really long working hours, really stressful. What do you actually wear to work? And what are your average working hours?
I think anyone who's ever met me can tell you, I'm probably the least glamorous person there is. Yeah, just like all this stuff about hair straighteners, and whatever, I honestly can't be bothered. My hair's in a pony most of the time. But in all honesty, you wear clothes which are appropriate for a professional working environment. Typically, because you are meeting external people whether it's sell side analysts or companies or potential clients, you can't rock up in a hoodie and jeans, unfortunately. Often you are wearing professional clothes: so a smart pair of trousers and a shirt and a jacket is quite normal. Certainly don't need to wear high heels. I live in Edinburgh, it would be completely impractical to get freezing cold and not fall over and all the cobbled stones.
Yeah, dangerous! Definitely not on that one! So I would say smart work attire. And in terms of the working hours, so again, honestly it varies from what company you work for. Some companies tend to work or have this culture of needing to work longer hours, and others are much more laid back. And it's more about if you've achieved the results then fine, to determine your hours. And again, to add complication, there's no such thing as a typical day. So I often find, when a lot of my companies are reporting their quarterly results, I'm typically a lot busier because we've got loads of companies coming in with their results. There's various analyst calls thereafter, you're seeing what the company's announced whether that impacts your investment case, and all the time, the share prices can be moving quite significantly. So those days are typically more busy than others. Or say if you're attending a conference, or you have lots of client pictures, and other times, it can be really quiet. So it can vary day by day. But for me at the moment, I'd say a typical day probably log in around 7.45am and then I probably log off around 5:30/6pm, which can sound a bit long, but it's not like you're working solidly 100% for every single minute during that period. Often I find a lot of my European companies have news flow or results coming out in the morning. So it's that initial morning period, which is busy, then there's a bit of a lull in the day, and then it's all my American companies in the afternoon. So it really varies, but definitely better than when I was a stockbroker. That's for sure. I was getting into the office at 6am when I was a broker. This is a walk in the park in comparison.
Oh my gosh, what would you say are the key things you wish you'd known before you started your job?
That's a really good question. I think to know that it's okay not to know absolutely everything, and that it's okay to make mistakes. You're starting off in a career, you're new to it, you don't know everything, you're still learning on the job. And there will be times where you don't understand something or something doesn't quite work out how you thought it was going to work out. But it's all part of the learning experience. And actually, if you have good colleagues around you, they can really act as good mentors to guide you through that. And I think when you have say made a mistake, it is important to be honest, like try not to cover it up. And I think just learning from that mistake, and then trying not to repeat it in future. But it's okay to not get everything right, we're all human. And I think sometimes, especially as a graduate or when you start a new job, you put yourself under immense pressure to be absolutely great at everything. And I think actually it's important to sometimes take a step back and realise that you are just starting out. So don't be so hard on yourself
I think that's very sound advice for anyone who's looking to come into the industry. Up next, we have what is definitely my favourite section, it is Myth Busting. So in this section, we're going to try and tackle some of the key stereotypes associated with the industry. And we're going to use some challenging and at times controversial statements that you will need to answer with myth or fact. But feel free to talk around the subject and help us understand more around why you think that and help dispel some of the stereotypes that we see in the industry. So first up: "Small cap equity investing is extremely risky compared to mid and large cap equity investing." Myth or fact?
Myth. And I'll explain why I think that. So it all kind of comes back to what style of investing you have. I also think that coming back to what type of companies you invest in, if you look for small companies that are high-quality in nature, so not loss-making, or not very, very speculative, blue sky scenario type companies. But rather, they have a lot of predictability to them in terms of recurring revenues, or high visibility of revenues and earnings stream. That actually can be a lot less risky. So yeah, I would say that it's a myth. But it comes down to what style of investing that you have. And actually, I won't quote them to you now and like bore everyone to sleep. But there are loads of studies out there about how small cap investing, if done in the right way, can not only help generate good returns, but can be done so without really compromising on quality, or really exacerbating risk levels.
"Small cap stocks are expensive." Myth or fact?
So again, I'm gonna say that one's a myth. Expensive, like, let's take that concept, first of all. So people define what is expensive, in their own way. So for some people, for some investors, they look at the multiples of a stock. So what is its price to earnings ratio? So what is the share price divided by the earnings per share? And if it's a number over a certain amount, I don't know, let's make it up and say, it's more than like 15 times, everyone's like: "Oh, my God, it's really expensive, I can't possibly buy it." And then other people, including myself, think of valuation very, very differently. So something that just looks like it's got an optically high P:E, wouldn't necessarily put me off, it's more about understanding, what is this company's earnings potential in the future? Can it continue to grow its earnings above what the market is expecting? Is it going to see upward revisions to the forecast that sell side analysts have put together? So in that scenario, because the earnings are actually going to be a lot higher than what the market is currently thinking, if you look at a ratio, kind of P divided by E, if your denominator E is larger, that means your P:E ratio is actually in practice, lower. So I think people shouldn't get overly swayed by just looking at an optical number and thinking: "Argh!". So I think it's important to consider that. And then in terms of if the small caps themselves are more expensive or not, actually, I would say it's quite the reverse. So small, and mid-sized companies from a relative valuation perspective are actually cheaper than large cap companies. And the reason for that is, when we go through periods of considerable uncertainty or economic turmoil, a lot of investors flock to large cap companies, because they're stable, they've been around for a long time. People think they're predictable. So the scene is kind of in inverted commas, "safer", although not all of them are. But that's a separate point. Also, the other thing that we've seen is that what we call FANG stocks, so that's like your Facebook, Googles of the world. Because they've been extremely successful and they're all large companies, that's really pushed up the valuation of large cap companies as a whole. So the average looks a lot higher because of these companies. But actually, small and mid-sized companies at the moment are not super expensive versus large cap companies. And then again, as I said, within the sector class of small and mid, within that you'll have different levels of valuation. So typically, companies that are very high-quality, that are growing faster, will tend to be more expensive than companies that are more like say a turnaround story or where something's gone wrong and they're trying to correct that mistake.
In Part Three, Anjli tells us whether the investment management industry is anything like what we see on TV, why you might enjoy being a smaller companies investor in particular, and why work experience is so important.
Thanks for listening. Please join us again next episode as we hear some more truths, learn some more jargon and bust some more myths.
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