The evaluation of the management of companies by stockmarket analysts and fund managers

Abstract

The management of a company plays a critical role in determining whether a business will be able to produce superior returns to investors. Little research has however been undertaken to establish how fund managers and financial analysts assess management when making investment decisions. This exploratory study aimed to identify the main constructs underlying the assessment of management by investment analysts and fund managers.Following a literature review a survey was conducted using a judgement sample of 15 South African and London-based analysts and fund managers. In depth interviews were conducted with this sample using a pre-piloted set of questions and the results analysed using data mapping techniques and content analysis.The survey showed that an assessment of the management of a company plays an important part in investors’ decisions. The weighting given to an assessment of management over other factors was seen to vary according to the size of the company, the stage in its life cycle and the sector in which it operated. This study identified the main criteria against which management is judged. It also showed that the most common approach to incorporating a judgement on management into the assessment of a company was to adjust the results of financial models, resulting in a down-rating of the stock of companies perceived to be poorly managed in comparison to their peer group.