Big investors like Warren Buffett have the clout, time, and resources to evaluate a potential investment's management face to face. You may not have quite such a mighty address book, but that shouldn't stop you from assessing the people in the executive suites.
When sizing up management's mettle, I always start with two simple measures: ownership and returns on invested capital. I want to know whether management has skin in the game, aligning its interests with mine. And I want to learn how well executives have allocated shareholders' hard-earned capital. If management owns a significant stake in the company, and can generate value-creating returns on invested capital, I call that a win-win!
Recently, Federated Investors
|
Company |
Insider Ownership |
ROIC |
|---|---|---|
|
Federated Investors |
11.3% |
34.5% |
|
Affiliated Managers Group |
1.2% |
7.3% |
|
Legg Mason |
0.7% |
3.1% |
Source: Capital IQ (a division of Standard & Poor's) and author calculations.
Insiders own 11% of the shares outstanding, and returns on invested capital have consistently exceeded 15%. Since the cost of capital for most companies is between 8% and 12%, depending on their capital structure, Federated Investors is creating value for its shareholders.
Studies also show that competition erodes returns over time. Yet Federated Investors has generated those impressive returns while vying with Affiliated Managers Group and Legg Mason. That impressive achievement suggests that management knows what it's doing.
Good execs? Check!
From the data above, it certainly looks like Federated Investors' management has been creating value for its shareholders. Given its top-notch leadership, I'd suggest you give Federated Investors a spot on your Watch List.
