Phil Ordway of Anabatic Investment Partners discussed companies that “do capital allocation right” at Best Ideas 2019.

Here is Phil’s session preview:

Investors place a lot of emphasis on capital allocation when considering businesses as potential investments, and rightfully so — over multi-year periods there are few things more important to a company success. So why do companies pay so little attention to it?

Is it because of managerial inexperience? Most CEOs get the top job because of operational excellence or other skills that have nothing to do with allocating capital. At least in the first few years of such cases it’s not even fair to expect capital allocation success from new CEOs.

But what about the board? Isn’t the board supposed to choose and oversee the executives? Yes, but most boards are similarly inexperienced when it comes to capital allocation.

So what about shareholders? They supposedly own the company; can they do something constructive in this regard?

Whatever the reason, I will argue that there are mutually beneficial solutions.

  • Company boards could create a standing capital allocation committee to make ongoing assessments of investment opportunities and the effectiveness of prior decisions.
  • Company boards could incorporate shareholder representation in the form of one or more rational but patient, long-term shareholders.
  • Management teams could be more intentional and thoughtful in their investor relations efforts. How, when, and why companies communicate with their shareholders is important, and a good base of aligned, like-minded shareholders can be a significant asset over time.

We’ll look at several examples of companies who “do it right” when allocating capital and interacting with their investors. A smart capital allocation framework, communicated through a thoughtful investor relations function, can attract patient, long-term, rational shareholders that will be an asset to the company. It is possible to create a positive feedback loop in this regard, but precious few companies even bother to try. Studying the companies who get it right should yield a fruitful list of potential investment ideas.

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About the instructor:

Philip Ordway is Managing Principal and Portfolio Manager of Anabatic Fund, L.P. Previously, Philip was a partner at Chicago Fundamental Investment Partners (CFIP). At CFIP, which he joined in 2007, Philip was responsible for investments across the capital structure in various industries. Prior to joining CFIP, Philip was an analyst in structured corporate finance with Citigroup Global Markets, Inc. from 2002 to 2005. Philip earned his B.S. in Education & Social Policy and Economics from Northwestern University in 2002 and his M.B.A. from the Kellogg School of Management at Northwestern University in 2007, where he now serves as an Adjunct Professor in the Finance Department.