Nick Coles - MarketMeter

Nick Coles is the co-founder and Managing Director of MarketMeter a service that allows listed companies to clearly see in just a few charts where they are outperforming or underperforming their peers across 5 key categories: ESG, management, financials, strategy and shareholder engagement.

MarketMeter has 27 performance categories about things like "How good is the CEO?", "How good is the CFO?", "How desirable is the company to invest in?" Professional investors score each of the companies that they cover within the top 300 companies on the ASX.

It's basically a score out of 10 in 27 categories across 300 companies. It's a large matrix of data and at the end of it you can see "Who are the best CEOs?", “Who are the best CFOs", "Which company is the most desirable company to invest in?" All through the eyes of the professional investors.

You can see MarketMeter’s 2021H1 Institutional Investor Sentiment Research that we talk about in the podcast at this link.

EPISODE TRANSCRIPT FOLLOWS BELOW

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EPISODE TRANSCRIPT

Chloe (3s):

Shares for Beginners

Nick Coles (6s):

Best fund managers seem to be very good psychologists as well. I think in reading body language, reading people. So I think they can tell pretty quickly whether management is under the pump or not. And management from their side, I suppose, want to hide their body language and trying to always put on a positive front. So it is a little bit of a dance, a bit of a game in some ways that you're always trying to put the best spin on things and they're trying to de-spin, the fund manager's job is to unspin what's coming out of the corporate.

Phil Muscatello (33s):

G'day and welcome back to Shares for Beginners. I'm Phil Muscatello. Perception is everything as Yogi Berra, the great philosopher and baseball player said, you can observe a lot just by watching. My guest today is from MarketMeter, a company that undertakes investor sentiment research benchmarking ASX and NZX listed companies by measuring and interrogating investor perceptions from a data pool driven by superfunds, industry and corporate support. Now that may sound complicated but my guest today will make it all clear. Right Nick?

Nick Coles (1m 3s):

Yes, that is correct. Phil.

Phil Muscatello (1m 8s):

I'm glad we're in agreement. A furious agreement on this now Nick Coles is the managing director of MarketMeter that does all those things I just mentioned. He's also a fellow bass player, we've got a bass playing background together, and a former goth as well. And somehow he got from gothdom into the financial services industry.

Nick Coles (1m 26s):

Yes, that was a very interesting start in life, I suppose, for not something that you'd expect. I actually started off selling insurance after my goth years with National Mutual. Would you believe? And I had the dreadlocks and I used to slick the dreadlocks down with hair gel so that I could look semi-presentable in a corporate environment. This is fresh out of an arts degree at UNSW.

Phil Muscatello (1m 50s):

Oh, so you started out like me, an arts bum as well.

Nick Coles (1m 53s):

I was, I did economics first and I found that completely boring and uninspiring at the time, very theoretical. And so I, I relished the arts degree and the culture at the time, well subculture. The Gothic subculture was quite noticeable and I was attracted to that. My girlfriend was into that scene and we used to listen to Triple J and I think you were working with Triple J weren't you Phil?

Phil Muscatello (2m 17s):

Many, many years ago. So then you got into the financial services industry and selling insurance. And then what happened after that?

Nick Coles (2m 23s):

So then I joined my father who was in recruitment at the time, mostly focused on the investment banking industry. So he used to love chasing the big fish, the brokers, the guys on the big salaries and you'd take a percentage of that. So it was a decent fee. But of course if you didn't make a recruitment, you didn't make any money either. So it was very "flying by the seat of your pants" kind of stuff back then. He did some research to back that up on the broking industry and basically that research morphed into what we're doing today on the ASX 200.

Phil Muscatello (2m 54s):

And so are you, are you a founder of MarketMeter? A co-founder?

Nick Coles (2m 58s):

Yeah, I'm a co-founder with Rebecca Thompson, who's had a lot of experience in, in the markets as an analyst stand also in corporate affairs and investor relations. I'm very fortunate to have convinced her to join me in this venture and I've learned a lot from her and I think we've made some great upgrades to what I was doing previously through her experience.

Phil Muscatello (3m 20s):

And how long has MarketMeter been around for?

Nick Coles (3m 22s):

We've only been around for about three years. And we've had to build the technology. I did have some technology prior to working with Rebecca, but we've basically started all over again and made it made a lot better. And the technology basically gathers data on the ASX 300 companies. There's 27 categories that we've got and those performance categories are things like "How good is the CEO?", "How good is the CFO?", "How desirable is the company to invest in?" And we basically get the investors, the professional investors, to score each of the companies that they cover within the 300 out of 10.

Nick Coles (4m 4s):

So it's basically scores out of 10, 27 categories, 300 companies, a big matrix of data and at the end of it, you can say, okay, well, "Who are the best CEOs?", “Who are the best CFOs", "Which company is the most desirable company to invest in?" All through the eyes of the professional investors.

Phil Muscatello (4m 21s):

How do you get them to fill out this information? I guess what's in it for them to help you out to gather, this kind of information?

Nick Coles (4m 28s):

Yeah, look, that that's a good question. And that that's the most natural question that everybody asked, because as you can imagine, it's something they really don't want to do. They don't want to share what they see as their intellectual property with anybody, because what they think about these companies is going to determine whether or not their portfolio outperforms someone else's portfolio. So it's a competitive environment and getting them to share those views with you is incredibly difficult. So how do we do it? First of all, we make it really fast and easy, the interface, to share that data with us. And secondly, we provide them with really detailed feedback on where their views sit relative to their competitors.

Nick Coles (5m 12s):

So if you're a fund manager, let's say fund manager X, you might want to know where you sit in terms of the investment desirability of a given company that you cover with respect to fund managers A, B and C. And you'll get that detailed feedback from us, not one on one, but as groups. So this group of fund managers has this view on this company, and that's different to your view in this way. And that's what they like about it. And there is another way that we encourage them to participate and that's through the super funds. So everybody contributes money to superannuation. It's mandatory in this country, that's probably something everybody knows. There's literally billions and billions of dollars sloshing around in superannuation money.

Nick Coles (5m 54s):

Where does it all go? Well, it goes to your super fund and then they give it usually, some of them manage it internally as well now, but usually they'll give it out to a whole bunch of what we call fund managers or investment managers. They're the people who actually make the decisions on which companies to invest in and which companies not to invest in. It gets a bit more "Do you go underweight or do you go overweight?" Then most of them invest in most of the big companies and then it's just very "Well, am I putting more into this relative to the index or less relative to the index?" But then those super funds get our data and they'll encourage their investment managers to participate in our research. So that's another way that the data sample is collected.

Phil Muscatello (6m 35s):

This is a really interesting insight into how big super works. You the kind of think that the money goes in there every paycheck and then they're investing it on your behalf. But obviously that's way too much for them to do by themselves so they farm out that kind of work to other managers to manage those particular finances. Is that a fair assessment of how it works?

Nick Coles (6m 58s):

Yeah, absolutely. So you might have a super fund that's got maybe $150 billion

Phil Muscatello (7m 3s):

Give or take a couple of bucks.

Nick Coles (7m 4s):

Give or take a few billion yeah that's it. And so obviously some of that will go into Australian shares, some of that we're going to international shares, some will go into Australian property, some foreign properties, some into bonds, into debt markets, some of the cash. But a chunk of it'll end up in Aussie equities. And of that, some of that is now more and more being managed internally by a team within the super fund. But also a lot of it is managed externally by other fund managers, the whole group. So for instance, one of the super funds that supports us has about 150 billion and they've got about 12 investment managers. And they have a team that they've just started up internally that might have a few billion of the Aussie equities money under their auspices.

Nick Coles (7m 49s):

And then the rest of the Aussie equities will go out to those 12 investment managers. It does end up all over the place, the money. They're getting more sophisticated at tracking where it lands, but it is a complicated process. And yeah,

Phil Muscatello (8m 5s):

So the information and the data that you're collecting, this is not for people to base investment decisions on this is more in terms of, I suppose, the word is qualitative analysis of how good a company is and how well it's run.

Nick Coles (8m 20s):

Yeah, that's right. Exactly. It's not financial advice at all. It is basically just research that we conduct on the opinions of the professional investors. And we aggregate that data to come up with. What you'd say is I suppose, consensus views of, of a group of professional investors taken at a point in time would usually four to six weeks that we collect the data. So it's retrospective, it's not forward looking. And it's just this group that we happen to sample in our research. So whilst you might say that these are the people making the investment decisions. So their viewpoints are obviously interesting to understand because they're the ones driving the share prices.

Nick Coles (9m 4s):

You know, you can understand that if a group of investors that own 70% of a company decide that they don't like the company as a group, and they start selling those shares, the share price will obviously go down and it's a bit more complicated than that. And there's a wide variety of viewpoints, which show up in our research across a wide variety of funds. And we're only getting some of those viewpoints. So you do need to take it with a grain of salt. And I wouldn't be putting investment decisions based on,

making investments based on our data.

Phil Muscatello (9m 48s):

So apart from the investors and the fund managers and the big institutions, this data is used by companies as well. How would they look at this data and how would they use this?

Nick Coles (9m 59s):

So basically it's called investor sentiment data. So it's the sentiment, the opinions, the perceptions of those professional investors who are the fund managers and the investment managers. So what they think will move the share price collectively. So if there's a sentiment that's building on a particular company in a particular area, and that sentiment will ultimately affect the share price depending on what area of the company they're talking about. So we break it down into five groupings, those 27 categories, we look at it, there's ESG, which has been very topical lately, environmental social and governance factors. There's management, which is obviously the CEO, the CFO, things like the credibility of the company, the leadership.

Nick Coles (10m 43s):

Then there's financials, which are things like earnings, quality and investment desirability, and value. And then you've got strategy. So you've got execution quality and clarity of strategy, and you've got engagement, shareholder engagement. How well does the company communicate with investors and the investment community? So depending on which area you're talking about, if sentiment is weak in any of those areas, it can potentially tank share price and takings a bit of a hyperbolic statement. If it did just go on a slow slide or a decline, and that will obviously be of concern to leadership and the company is obviously always in their best interest to have their share price going up. So you need to know if it's going down, why is it going down and how can we stop that?

Nick Coles (11m 23s):

How can we turn it around? And that's what our data does. It helps them understand that. Then they can come up with a strategy to communicate better to the market in the areas that the market's concerned with.

Phil Muscatello (11m 33s):

So it's kind of an interesting form of a beauty contest. Really, isn't it?

Nick Coles (11m 40s):

Yeah. I wouldn't promote that particular sort of interpretation of it but we do probably leaderboards. We did recently put out the top 10 CEOs, CFOs and boards of the top 100 and the 101 to 200. And they were actually surprisingly, well I guess not surprisingly, extremely popular. So we had literally hundreds of people going to our website and that's the first time we've ever published that data and we've never had any real strategy around putting that data out there and it got widely viewed. So obviously some of those areas, there's not a lot of recognition for the people working in those areas. Particularly the 101 to 200, I think people pick over the 100 a lot, but the CFO's in the 101 to 200 I think don't get a lot of recognition for their work.

Nick Coles (12m 24s):

And I, I think we can provide that by showing people who the investors feel are doing the best jobs in those areas.

Phil Muscatello (12m 36s):

Like you say, ESG is something that investors are really interested in at the moment. How is ESG assessed under your criteria?

Nick Coles (12m 46s):

Yeah, so Rebecca and I actually did some work with the responsible investment association of Australasia a few years ago, and we helped work on their benchmark reports, responsible investment benchmarking reports and super industry benchmarking reports. And it looked at the various ways fund managers use ESG in their investment processes. And there are about seven different ways that you can incorporate ESG into your investment process. Probably the most popular, the fund managers will come up with a perception of the quality of the ESG of a given company and then run that in tandem with an engagement policy where they would talk to the companies behind closed doors to try and get them to improve in the areas of ESG that they might be lacking in.

Nick Coles (13m 35s):

And those areas in particular, or the ones that we look at: the climate risk management, culture and conduct effectiveness of board, remuneration policy, social license, supply chain risk management, and sustainability reporting. Sustainability reporting was one that we worked on with an industry partner of ours, the Australasian investor relations association. AIRA A-I-R-A and we've worked quite closely with them and they've been very helpful to us. They represent companies. So they're interested obviously in what investors think as well, they need that open dialogue and communication.

Phil Muscatello (14m 11s):

How does that communication work? I mean, is this something that's comes up at annual general meetings or are people talking to the companies directly about their ESG concerns for that particular company?

Nick Coles (14m 23s):

Yeah, so they do speak to companies directly. So fund managers will often meet with companies. Obviously CEOs are very busy and fund managers are very busy so it's not always possible for them to get together. But the investor relations team at a company will usually be the way that those communications take place. AIRA is the industry association for investor relations. And they do a lot of great work in educating their members. And I think they've got trillions of dollars of market cap represented in their membership. I think it's something like 160 of the top 200 companies are on their books as members. And they hold a lot of conferences and educational workshops for their members. And with sustainability reporting is one of the areas that's growing, obviously.

Nick Coles (15m 5s):

So they get a lot of questions on what should we be doing to satisfy investors around that? And everybody, I think now most of the big companies will have a sustainability report but they need to go further than that. And they need to issue more data around that. So we look at the transparency and completeness of the reporting and the disclosures. And there's the TCFD, I think it's the task force on climate-related financial disclosures that's come out. And so there's actually a lot of bureaucracy around it that they have to work their way through. So it's just a lot of work for investor relations. So I think a lot of ESG has come under the investor relations auspices now so they need to get up to speed on it. And I think AIRA has done a great job in helping their members with that.

Nick Coles (15m 46s):

And hopefully this category that we've put in our research will help everyone as well to get feedback on whether they're doing it properly or not in the eyes of the investors.

Phil Muscatello (15m 54s):

There's two points that are coming out of that for me, as first of all, ESG is a very broad category. I mean, there's a lot of difference between governance issues as opposed to sustainability issues. And the other thing of course that's coming out is we're talking about investor relations here. So people that own shares in a company are investors and presumably they can go and talk to the investor relations departments of these companies about any concerns they might have or to find out any more information. Is that the case?

Nick Coles (16m 23s):

Yeah, so there's, there's usually a split depending on the side of the company between the retail and institutional investor relations teams. The, obviously the institutional teams tend to be bigger and the retail investors often will be pushed off in a different direction to a registry to make their inquiries to put through. 'Cause there's obviously thousands of retail investors and probably beyond the scope of any one person to deal with that many people's inquiries. So they, they tend to use share registries to answer any queries of that nature. Whereas institutions, you've got a large amount of money concentrated in the hands of a few people. So it makes sense for them to put a small team together to answer those queries because those investors are moving billions and billions of dollars.

Nick Coles (17m 8s):

Whereas you say an ordinary, humble, everyday retail investor might only have a few thousand bucks worth of shares and it could be thousands of those people. So it's just the way that the dynamic is structured that the teams will be facing the institutional investors inquiries rather than retail investor inquiries.

Phil Muscatello (17m 25s):

Let's talk about institutional investors. We hear the term instos, institutional investors. Just give us a brief overview of that so that we can come away with a little bit more wisdom on some jargon in the industry.

Nick Coles (17m 37s):

There's a lot of jargon and it took me quite a while when I started to try and understand it. People could say the same thing with five different words and yet those five different words in a different context could mean something completely different. So English is terrible and great in that respect as well, but also very hard for people coming in new to get a handle on it. An institutional investor is just a company or organization that invests money on behalf of other people. So you'll get mutual funds, pension funds, insurance companies that are the biggest examples of those. And they just aggregate other people's money. So ultimately it goes back to retail investors but it's just through an organization that concentrates that money. And they make the decisions on behalf of those millions of investors behind the money.

Phil Muscatello (18m 21s):

So the other big measurement is management and of course you'd expect that management would be one of the biggest factors in the success or failure or non-performance of a company. How do you look at management and the quality of management?

Nick Coles (18m 34s):

Yeah, so we break management down into five categories: credibility, effectiveness of CEO, effectiveness of CFO, leadership depth, and operational management. Far and away the most interesting of those is obviously the CEO and there's a lot of media focus on the CEO and it's a lot of pressure in that job. I think you wouldn't really want to be a CEO given the media spotlight.

Phil Muscatello (18m 60s):

Even in spite of the money that they make.

Nick Coles (19m 2s):

Yeah, would it be worth it? I don't know. Yes, they do make a lot of money. This is true. So that's well documented as well as comes. That a lot of pressure. So I don't know. It wouldn't be for me that's for sure. Not of a big company. You'd have to be very brave to take on that spotlight. Some people revel in it, as you know, with Elon Musk, would be a famous example of somebody who rebels in the media spotlight in that role. And Richard Branson comes to mind as well.

Phil Muscatello (19m 31s):

Yep, so let's get back to those criteria that you're looking at.

Nick Coles (19m 14s):

So those five criteria, like all of our criteria, they're just scores out of 10. They each come with a definition that we give to investors when they score them so that they're clear on what exactly it means. And they're probably, the lead tables that we put out, probably the most interesting ones will be the CEO and the CFO and the board of course, as well. But board is in the ESG area, not the management area.

Phil Muscatello (13m 36s):

So the scoring is based on the perception of the investors that are filling out this data. How does that work?

Nick Coles (20m 1s):

Yeah, so basically a fund manager will have a view on what they think of the performance of the CEO. And we want to tap that view to find out whether they're favourably impressed by the CEO or not. So we will ask them to score the CEO out of 10, where 10 is the best. So an investor might give a CEO they like a lot a score of 9, someone they don't like very much will get a score of 2 or 3, I suppose. And believe me that does happen and we would never name anyone. We only ever released publicly the positive stories.

Phil Muscatello (20m 36s):

Okay. And you think also that the performance of a CEO or a CFO would be closely tied with the performance of the financials as well. Are there any, ever any dichotomies there or are they usually go hand in hand?

Nick Coles (20m 49s):

So it's funny 'cause I just had a meeting with a client about the correlations of the different categories with each other and what is it that people think about when they're scoring the CEO or which categories run in tandem with the CEO? And what you do find is the correlations are most strongly with the management categories within their own category. So if you're a financial category, the other financials will be more strongly correlated with you. So the stores will run in those groupings. So credibility and CEO tend to run together, for instance. So the credibility of the company hangs a lot on the credibility of the CEO, for instance. The financials are obviously very important as well. And yes, the CEO would be judged, you wouldn't say live or die by their financials, but yes, there would be a very high correlation with the financials.

Phil Muscatello (21m 37s):

It's very important to shareholders.

Nick Coles (21m 40s):

You're right, but it's not everything. So the strategies, so investors will punish a company if the share price is going down. So the financials are important in that respect, but they'll stick with a company if they understand the strategy and they like the strategy. So, so you've got to look at those two other areas in tandem. And when we started out, we only had clarity of strategy. We've since added execution of strategy, but also you need quality of strategy. So you've got to look at those three strategic areas together as a company and drill down into those to see where exactly any problems might be if there's a drag on the share price. Let's say that financials are quite good, but the share price is going down.

Nick Coles (22m 20s):

It must be the strategy you would imagine that would be the drag and vice versa. So you'd pick a part all of those different aspects to try and work out what is driving the share price? And the most strongly correlated categories with investment desirability, let's cut to the chase. Is the company a desirable investment or not? So that category gives it to you under the glaring light of day. This is it. This is the number. And then you want to say, "okay, well what's driving that number, which categories are most strongly correlated with that number?" and of course the financials are a big part of that, but also what you've got in there is the strategy and the CEO and the credibility. So it's quite interesting data to dive into.

Phil Muscatello (22m 60s):

It's interesting. I recently did an interview with a fund manager who loves asking questions of management and CEOs. And one of the things he likes to find out is if they have a strategy, if it's changed and they haven't mentioned it between quarterly reports or half yearly reports.

Nick Coles (23m 18s):

Right? Interesting.

Phil Muscatello (23m 19s):

Yeah, no, it's an interesting way of looking at it, because you want to say a strategy, but if for some reason the strategy changes without explanation.

Nick Coles (23m 26s):

Yes.

Phil Muscatello (23m 27s):

That couldn't be a good look.

Nick Coles (23m 28s):

That's raising a red flag, is it? So you find the best fund managers seem to be very good psychologists as well, I think, in reading body language and reading people. So I think they can tell pretty quickly whether management is under the pump or not. And management of, from their side, I suppose, want to hide their body language and try and always put on a positive front. So it is a little bit of a dance, a bit of a game in some ways. That you're always trying to put the best spin on things And they're trying to de-spin, the fund manager's job is to unspin, what's coming out of the corporate. But in between all of that, I suppose you've got probably very frank and earnest discussions where behind closed doors, they might be a little bit more direct with each other, then what they might do in say in public so

Phil Muscatello (24m 13s):

Yeah, when everyone's watching.

Nick Coles (24m 15s):

But it would all be market available information, of course, there'd be nothing market sensitive. But they just might be a little bit more direct in their viewpoints.

Phil Muscatello (24m 22s):

So in your view, what makes a good fund manager in terms of interrogating the company?

Nick Coles (24m 28s):

Right. That's a good question. I think they do have to be psychologists. I did have a mate of mine who was actually very good at it. And he had really strong performance. He was more on the small cap side though and I think what makes a good small cap fund manager could be quite different to what makes a good big cap fund manager. I think obviously you've got to have exceptional financial skills and understanding there. But I do really believe you need to understand the psychology, not just of the company, the management, but also the markets. I think the best ones understand the beast that is the markets and they understand where the flows are, are coming and going from. But they'll understand that sentiment the longer-term sentiment.

Nick Coles (25m 9s):

I think if you're a value or growth investor, you need to understand beyond just a couple of days or weeks. You need to look at the position of the company in the market and what the sentiment is about the strategy of the company, how it's perceived. But beyond that, you need to know the market of the company as well, how it's positioned within its market with its consumers, with its stakeholders, its credibility overall, not just the CEO and CFO, but how it's relating to its consumers. And what's going on ,I suppose it depends in the market, the broader market for that company, whether it's domestic or global. But I think the coronavirus has challenged a lot of, a lot of investors and you've seen some big winners come out of that.

Nick Coles (25m 51s):

I think Zoom was one of the well noted ones, IT obviously, some health care companies as well, probably. But yeah, it's not a job that I'd like to do either. I think there's a lot of pressure. CEOs and fund managers are picked over ruthlessly day in, day out by their stakeholders. And it's a lot of scrutiny, Phil, so I don't envy these guys and girls.

Phil Muscatello (26m 16s):

MarketMeter has an app that you can download onto your mobile phone as well. Tell us about the app and what you can find out from the data that you're presenting.

Nick Coles (26m 24s):

Yeah. So the app is more for respondents or participants to our research. So it's more for fund managers for investors rather than the sort of public. My business partner would kill me for this, but I suppose we could push some of the data, the lead tables out through the app at some stage for retail, for people to look at. But at the moment it's just a mechanism for gathering data from investors. And it was something that they asked us for that would be quicker and easier for them in some instances to score their stocks that they cover. You know, when they're on the bus or the train or, you know, in bed, late at night on their iPad.

Phil Muscatello (26m 55s):

While they're still working.

Nick Coles (26m 57s):

Yes, while they're, they're still working. That's it.

Phil Muscatello (27m 0s):

Tell us about some of the publicly available data that listeners can go to and say some of these scores for their favourite companies.

Nick Coles (27m 9s):

Yeah. So what we've pushed out at the moment are the top 10 CEOs, CFOs and boards across the 100 and also the top 10 in the 101 to 200. It's available on our MarketMeter website marketmeter.com.au under "news and events". And we're also pushing out through some other affiliated media organizations, such as Listcorp, is another one, give a shout out to John Daley at Listcorp there who will be running some of the lead tables as well and Boardroom Media as well, those guys will be pushing some of the data out there. And there will be from time to time, some comments and interviews from CEOs and CFOs on the data and some of those articles as well so it could be interesting to retail investors

Phil Muscatello (27m 52s):

Nick Cole's from MarketMeter. Thanks very much for joining me today.

Nick Coles (27m 55s):

Thank you very much, Phil. Thanks for having me.

Shares for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any investments based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Shares for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation