What exactly goes on in the portfolio managers’ room?


Investing is not a noisy room full of people intensely staring at stock price movements. At least not in Evli's Global Equities team.

In this series of blog posts, we dive into the strategy and daily life of Evli’s Global Equities team. The Global Equities team invests in underpriced companies that generate cash flow and have strong debt coverage.

As members of the Global Equities team, we manage equity funds. Sometimes other people wonder what’s really happening in our room in the corner of the office, or whether there’s anything happening at all, as it’s so quiet.

Well, there’s really nothing mystical happening here. Nor, at the very least, is there any kind of big commotion.

It’s a place where we read companies' annual reports, drill into financial statements, and make sure that we have included all the necessary cash flow and debt figures in our analysis. We review to see if the companies meet the requirements that we set for them. And then we assess if the share price is sufficiently attractive in light of the company's performance. If so, the share will be accepted into the portfolio. We buy shares that are not already in the portfolio. We sell those that don't satisfy our criteria. We carry out systematically agreed work based on an agreed process. It’s as simple as that.

Discussions and dividing lines

Of course, sometimes we do also talk things over. One of us may encounter a particularly tricky case that requires our colleagues’ support. That’s when we discuss how each would tackle the problem and agree on a common line of attack for when similar cases arise.

Last autumn, for example, we examined the dividing line between debt and equity. How should our analysis treat financial instruments with both debt and equity features for an issuer? This is the type of question that seems to cause grey hair even for those who set the accounting standards. Would there be a need to clarify the accounting rules as to where such an instrument belongs in the balance sheet?

So far, the issue remains unresolved, both for us and for those who set accounting standards.

Some of us have already had the view for years that if a financial instrument resembles equity in enough respects, it should not be classified as debt. There is one challenger to this view, who instead thinks that debt is debt, no matter how you package it. Yet another, on the other hand, prefers to consider it a balance somewhere between the extremes.

Anyone on our team can get their point of view across, as long as it is well-founded, logical, and in line with our strategy. Over the years, countless similar demarcations have been made. In general, we tend to be cautious. We set up “what if” scenarios. Would a company be an interesting investment target even if we chose to apply our most severe scenario to it?

We don’t formulate market views

Yet another interesting question is, what doesn’t happen in our corner office?

No market views are formed here. We have no clue as to which direction the stock market is heading. We do not make industry forecasts or allocations based on macroeconomic figures. We don’t even know in which direction the prices of the stocks in our portfolio are heading.

However, we believe that in the long run, the probability of achieving good returns increases when you buy a diversified portfolio of companies that generate cash flow, have strong debt coverage, and are moderately priced, while also taking responsibility factors into account.

All of the above held true until March of last year. After that, one thing changed: the corner room of the office has been spread across the Helsinki metropolitan area in order to work remotely. Otherwise, the work continues as before, but the conversations are now handled by messages and video calls. And as the screen isn’t exactly the same thing as sitting together, you do miss being with your co-workers in that quiet little room in the corner.