St Andrews Partners is a team of investors focused on global emerging markets equities.
We have a long history of investing in emerging markets since 1992. Our focus is simply on owning the best companies we can find, where we believe a business is governed effectively and in the interests of all stakeholders and where valuations are acceptable.
For us, ESG (Environmental, Social and Governance) is not a screen added to an investment process, it has always been a core part of our philosophy. Measuring environmental and sometimes social impact has come a long way in the past ten years; measuring ‘integrity’, (i.e. what the “G” of ESG should truly mean) is just as challenging today as ever but it is the part that is most important to us.
We have no numerical objective – everything is fully embedded within our investment process and our overall approach based on the principle of stewardship.
‘Stewardship’ is central to our philosophy – the idea that we treat client money as our own and therefore see risk as losing money over the longer term rather than underperforming a benchmark in the short or medium-term.
This absolute return mindset allows us to spend our time finding the highest quality companies to invest in, rather than tracking an index.
We obsess about the people who own and manage the companies we invest in. Backing the wrong people is a far quicker and certainly more permanent way of losing money than paying the wrong price (although we don’t like paying too much either).
We spend a huge amount of time looking at a company’s treatment of employees, the environment, and suppliers. We do this not only because strikes, environmental shut-downs and bankrupt supply-chains hurt profits, but also because a company mistreating one stakeholder is likely another day to mistreat others – and eventually us as minority shareholders.
Finally, we see ourselves as owning stakes in companies on behalf of our clients, not as traders watching tickers flash red and green on computer screens. This means we take our voting responsibilities seriously and enjoy meeting and engaging with company management. We feel privileged to have these meetings and use them to improve our understanding of motivations and values as opposed to second-guessing earnings per share for the next quarter. We don’t build detailed financial models for any of our investments – we worry that it promotes numerical perfection above qualitative analysis, and it is the latter that we believe reduces the risk of costly mistakes.
Stewardship: what we mean
Good stewards are custodians who understand and carry out their responsibilities with integrity and respect for the people who rely on them and who they rely. To us it means two things:
- Firstly, it is about looking after our clients’ savings as much as we’d look after our own – with good judgment and extreme care and consideration. It’s also about understanding our rights and responsibilities in respect of the companies we have a share in.
- Secondly, in relation to investee companies, good stewardship relates to owners and managers with the competence, integrity and desire to make good long-term decisions on behalf of their businesses as well as the community and environment around them.
In our view, management transparency, a diversity of views – such as a range of social, cognitive and ethnic backgrounds and good gender representation – a willingness to learn from mistakes, and a keen consideration for customers, their workforce, suppliers, the wider community and the environment are all good omens with regard to the question of stewardship.
The Hippocratic Oath plays a central role in anchoring the team’s philosophy and culture; it is there to remind us of our role in society and in the investment industry.
By signing the Hippocratic Oath, the team pledge to uphold the principle of stewardship through their conduct and work practices.
It also includes a commitment not to pursue returns if doing so will knowingly harm others. Any investments that may have unacceptable adverse impacts will be discounted by the investment team as part of their analysis.
Our interactive map illustrates the types of stewards we look to align ourselves with as well as the reasons we own shares in these companies on behalf of our clients. These range from third generation owner-managed companies, multi-national and local family partnerships to free float companies with an unusually strong cultures of ownership.
We have started with the largest holdings in our Latin America strategy and will build out across our Global Emerging Markets strategies in due course.
We have always found issues presently labelled as “ESG” to be integral to understanding how a company and its management behave.
An environmental weakness or a labour issue is not only a risk to the financial value of the business, in nearly all cases it is a sign that corners are being cut, and that when put under stress, the interests of controlling shareholders will be put above the rights of minority investors.
Because we are genuinely bottom-up investors and do not need to own a company just because it is in a benchmark we are able to ignore corporate “greenwash”. if we don’t believe a company is as ethical as it claims, we shall not own it for clients regardless.
When we consider the quality of management, financials and franchise, we think about the impact sustainability could have on the business and how management is addressing risks and opportunities. Management’s approach to sustainability risks is often a proxy for its quality in other areas, for example, franchise quality is impacted by operational efficiency and the environmental efficiency provided by its products. We are unable to form a view about a company’s cashflow growth for example without assessing its relationships with communities, customers and suppliers. We are particularly interested in companies which embrace the underlying spirit of sustainability, rather than simply taking a box-ticking approach.
Sustainability risks are investment issues
ESG is not a screen added to an investment process, it is a core part of our philosophy. We spend a huge amount of time looking at a company’s treatment of employees, the environment, and suppliers.
We do this not only because strikes, environmental shut-downs and bankrupt supply-chains hurt profits, but also because a company mistreating one stakeholder is likely another day to mistreat others – and eventually us as minority shareholders.
Analysing sustainability risks is an integral part of the investment process and is carried out by the team. Interacting with company management on sustainability issues becomes a powerful tool in driving shareholder value and protecting and enhancing the long-term value of portfolios.
Sustainability is a key part of our thought process in, firstly, trying to avoid risks and, secondly, in taking advantage of opportunities. All stock decisions are impacted by sustainability assessments within our overall company analysis. We focus heavily on subjective analysis and common sense, rather than screens or ESG scoring systems. We have no magic formulae, instead we analyse as broad a range of factors as possible. Here are some of the company specific criteria we look at during our ongoing analysis of companies.
Sustainability risks are part of our quality assessment
Our quality focus brings us back to people every time, the quality of management, followed by the quality of the franchise and financials. In order to form a view on a company we need to be able to assess, not just how it generates cash flows, but also how management or the owners interact and behave with all their stakeholders. We believe meeting companies is central to assessing their quality and would usually meet a company at least once before investing clients’ money in it. In practice we meet companies repeatedly to reassess quality from different perspectives. We feel privileged to have these meetings and use them to improve our understanding of motivations and values as opposed to second-guessing earnings per share for the next quarter. We don’t build detailed financial models for any of our investments – we worry that it promotes numerical perfection above qualitative analysis, and it is the latter that we believe reduces the risk of costly mistakes. If a company does have sustainability issues then we would factor that into our valuation methodology for the company and this in turn would determine our conviction in the overall quality of the company and the weighting we may or may not apply in terms of portfolio construction.
We rule out the majority of companies
Poor governance, a lack of integrity, a willingness to take shortcuts, a failure to take responsibility for social or environmental impacts and a company culture which reflect this are reasons we rule out a huge number of companies.
We are all prisoners of recent history which often has very dangerous consequences. Both for companies and for investment managers. As stewards of capital we should extend our historical perspective as far as we can so as to prevent us from becoming too enthusiastic or depressed.
Climate change and fossil fuels
We consider any risks or opportunities related to climate change with each company on an individual basis within our bottom-up company analysis, research and engagement. We not only need to understand the environmental risk for each company, we also find management attitudes to carbon emissions and other environmental externalities are often a clear indicator of the overall management quality of companies. Better management teams tend to be early adopters or originators of best practice and try to anticipate and plan for future changes; weaker management teams tend to be reactive and reluctant to take steps to reduce their environmental impacts which might put into question their franchise and potentially even their going concern longer term. The vast majority of companies fail our quality criteria and climate change aside, most fossil fuel companies in the GEM universe have ownership and governance failures so severe that a debate on oil prices, climate change, or stranded assets is almost not worth entering into. Some fossil fuel companies do have acceptable ownership and governance, and here we are very interested in ESG risks including climate change. In terms of a company’s future success and especially the translation of this to gains for minority shareholders such as our clients, we believe environmental conduct and labour relations are better leading indicators than any trend in market share or margins, and we spend a great deal of our time looking into these and none of our time building convoluted models guessing oil prices, currencies or interest rates. Where we face grave uncertainty, we demand far higher returns in making investments.
Governance in China
It is difficult for us to allocate substantial client capital to the Chinese stock market because we struggle to identify companies with acceptable corporate governance. Where we do find companies of acceptable quality, valuations are often prohibitively optimistic. The result of this is that we currently have extremely low direct exposure in our portfolios to China.
We have never enjoyed investing in companies close to the commanding heights of any economy, especially in autocratic regimes where the dominance of the state often puts national interests first, after that of minority shareholders.
There are very few businesses with transparent histories showing how family owners have behaved over extended periods. Companies and families often show their true colours only under economic stress which China has not, officially, faced for two decades. We are also particularly uncomfortable with the involvement of listed companies in the well-documented curtailment of human rights, not least of the Uighur population of Xinjiang province.
No negative screening
While we do not implement an automatic negative screening system we can say with confidence that we have no intention to hold any high risk companies. Companies operating in high risk sectors are not natural candidates for our portfolios.
There is a company policy which prohibits investments in the manufacturers of landmines, cluster munitions, cigarettes and other tobacco products.
No company is perfect and so we are looking to invest in businesses that operate with a sufficient time horizon, have a similar appetite for risk as our own, and recognise their implicit social licence to operate. All controversial issues are analysed for each individual company within our bottom-up company research and engagement.
Our engagement philosophy
Our engagement with companies is very important to our approach and we devote a significant amount of time to engaging with the management teams of the companies in which we invest.
Engagement is fully integrated into each investment analyst’s role and contributes invaluable insights into our understanding of each company. We believe this differentiates us from many of our peers who often outsource this function to a third-party or separate team within the same firm. We consider every interaction with a company to be an opportunity for engagement. We are active (not activist) managers and seek to support management in making changes which improve the quality of their businesses, reduce risk and enhance long-term returns. We engage on a wide range of issues including strategy, governance, alignment of interests and reputation.
It is very difficult to quantify the contribution such engagement makes to returns, but the more questions asked of management the better our understanding of the company, which should allow for better decision making. We believe our engagement process provides an additional layer of governance.
All company engagement is carried out by the investment team.
How we engage
We believe that the purchase of a share in a business comes with both rights and responsibilities. Should one of the companies fail to meet international best practices on the environment, human rights or social issues, we believe that we have a responsibility to engage with senior management to persuade them to address the issue, rather than to walk away from the problem.
We engage in a manner appropriate to each individual circumstance; and where such engagement does not produce the desired result, to consider other forms of engagement. We will generally look to engage with companies initially in a private and confidential manner, conducive to achieving a suitable outcome, and only if such activities fail to produce results would we consider more public forms of engagement. Our active ownership activities seek to support changes which improve the quality of our investee companies’ businesses, reduce risk and enhance long-term returns for clients.
We see engagement as a continuous process which takes place against a backdrop of a long-term relationship with the company and open dialogue, not just voting at Annual General Meetings.
Our engagement is not always about trying to be an agent of change, but rather communicating to company management that they will not suffer share price weakness for addressing issues.
In line with our collective commitment as signatories to the Principles of Responsible Investment, a number of leading global investment management companies and asset owners, in partnership with the Marine Conservation Society, we are currently in the early stages of a collaborative initiative to address the specific and growing problem of micro plastic pollution from synthetic microfibers. Our intention as a group is to achieve a tangible reduction in the amount of micro plastics entering the water ecosystem through active and constructive engagement with the manufacturing industry.
To us, each company interaction we have is an engagement, where we could be discussing many different topics from strategy, to labour issues, to pollution, to supply chains. No company is perfect and as long term-investors our engagement focus with companies is always ongoing. Below are some examples:
Source for company information: Stewart Investors investment team and company data. For illustrative purposes only. Reference to any companies mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies. Companies mentioned herein may or may not form part of the holdings of Stewart Investors.
Active ownership & proxy voting
We see ourselves as owning stakes in companies on behalf of our clients, not as traders watching tickers flash red and green on computer screens.
This means we take our voting responsibilities seriously and enjoy meeting and engaging with company management.
Voting rights are a valuable asset which we believe should be managed with the same care and diligence as any other asset. We vote on all issues at company meetings where we have the authority to do so. Our voting decisions are not outsourced. We do look at the advice from third-party sources but we come to our decisions independently on the merits of the issues. Each Portfolio Manager has ultimate discretion on voting decisions for their portfolios, ensuring that all company resolutions are reviewed and an appropriate and consistent recommendation is made in line with the corporate governance guidelines and principles.
In principle we prefer to engage companies outside the Annual General Meeting season and if our engagement is effective we should not have to vote against companies. However, no company is perfect so from time-to-time we will vote against. The types of things we find ourselves voting against most frequently include:
- Executive remuneration packages where there is a lack of alignment or the incentives are too short-term.
- Directors’ elections when we do not think the candidate has the right character or skills for the board, or they have not been turning up to Board meetings!
- Resolutions that give the Board totally unfettered rights.
View our list of investment terms to help you understand the terminology within this document
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