Five Oceans Asset Management is an international equities fund manager that uses concentrated, non-index relative approaches to building portfolios of listed global equities. The company has integrated environmental, social and corporate governance analysis into its investment process since its 2005 inception. Ross Youngman, CEO and Kim Tracey, portfolio manager, speak with The Sustainability Report about their approach, their positioning in the market and why ESG analysis matters to risk and return considerations.
Q: How does Five Oceans integrate ESG into its investment processes?
KT: First and foremost, I should say that we’re not about negative screening. It is about assessing each company on its merits. We do screen on ESG, but it’s really looked at on a company by company, case by case basis, rather than a wholesale screening process. Having said that, we do exclude armaments and tobacco – those are the two broad exclusions we have. Outside of that, it’s really on a case by case basis. We’ve incorporated ESG into our qualitative analysis at the company level. So every time an analyst looks at the stock, they look within the three broad headings and identify any ESG issues that we feel will impact the risk/return profile of the stock. We don’t necessarily exclude a company if it comes up poorly in one of those areas, if we believe it has been priced in – it’s quite a commercial approach.
RY: We do look at each company on its merits. It’s fully integrated into the way that we think about the businesses’ positioning and we have spent quite a lot of time on our template on how we examine companies.
Part of that analysis incorporates how a company thinks about environmental, social and corporate governance issues, because sometimes poor ESG but an improving profile can be an opportunity for us. But obviously, if we think there are ongoing issues that mean increased risk, we’re likely to pass on investing.
KT: we can do that because we run quite concentrated portfolios; we’re not index-relative. We invest in between 60-80 stocks in each fund.
Q: how do you gather research? Do you use external providers or internal research capabilities?
KT: We use both. Our first cut, if you like, is MSCI ESG research – we use them as the first stop. We always do our own research on top of that. We’ll go and read the company’s documents, we’ll do a web search. There are various sites that do their own reporting on companies regarding issues that the companies don’t necessarily flag, and if we find something that’s quite negative, but we’re still interested in the company, we’ll get feedback on the issues from the company.
Q: How does ESG play in overall at Five Oceans? Is ESG analysis one of a variety of signals for Five Oceans?
RY: [Responsible investment] is a guiding principle for the company. It was something we felt strongly about from when we started the company in 2005. Culturally, we felt it was an area we wanted to emphasise in terms of positioning and how we would manage money for institutions. It was a conscious decision, but I would go back to Kim’s point about how we manage ESG in a commercial way. A lot of how we think about this is risk management, rather than the opportunity.
We do look at a range of different technologies and a range of different industries and we look at companies that have benefited from changes in terms of clean-tech or clean energy, but really a lot of it is looking holistically at a company and thinking about what could go wrong, what has their track record been, what risks, the factors and what does that mean in terms of a potential investment? Is it in the price?
When the UNPRI came along, we were quite happy to sign up for it, because we’d already established a pathway to how we thought about managing ESG. It was something we were doing well before UNPRI came along.
Q: I’m particularly interested in how you integrate ESG into your Asia portfolios – can you describe how you generate your research into those markets and to what extent/how is ESG weighted?
RY: I’d say that the starting point is very much governance when it comes to Asia. You’ve got a lot of major shareholders that are family groups or vested interests. Governance is a big starting point for us. Traditionally, over time, we’ve seen a number of governance-related issues that come out of Asian companies. We do have the external research, but the depth of research does tend to fall away when you get into Asia, so we end up doing a lot of that work ourselves, and that’s why we have hired experienced analysts for that team. Our two analysts have been in the business for 15 years each. So, again, we’re experienced in Asia, but the starting point in Asia always is that corporate governance is a really major starting point when we start thinking about Asian equities.
Q: How does that impact on investment decisions in Asia? Are there companies that you exclude, or companies where you invest when the price has reached the appropriate discount level in your opinion?
RY: The beauty for us is that because we’re a high conviction stock picking company, our Asian portfolios hold around 45-55 company names, so we are not index relative, we don’t have to think about holding a stake in everything. We can exclude companies and we can exclude sectors and we are actively picking stocks where we like the business, where we think the risk and return profile of the biz gives us the potential for a suitable outcome for our portfolios.
Q: How about engagement and monitoring for the companies within Asian portfolios? How does that work?
RY: A lot of what we do actually tends to skew to the larger companies because we tend to find that with our criteria and the way we manage money, the companies we invest in, are by nature, larger cap companies. We don’t invest in a lot of small- or mid-cap companies. What you find there is that the information flows are quite strong, and a lot of the companies manage their investor relation capability such that you can talk to their people about issues, but again, ESG is a more complex issue on all factors when dealing with Asia.
Q: You referenced UNPRI before? To what extent have you integrated the UNPRI principles into your operations?
RY: We have adopted each of the six principles, and we basically believe that we’ve got a strong approach to each of the principles in what we do. In terms of collaboration, we collaborate both within the industry and we make a strong stance with deliberations with companies that we have this particular ESG positioning. For example, we’re a signatory to the Carbon Disclosure Project. We also are a member of the Investor Group on Climate Change and I sit on the executive of that. We try and wave the flag in the way we talk about this with companies. ESG is part and parcel of that questioning. It helps with the analysis of companies, it helps with the way that we run the business and the investments and it helps with the dialogue that we have with our clients.
Q: In terms of some of your clients, you have mandates with LGS and with Catholic Super as well as the Skandia mandate – to what extent does your positing in responsible investment make an appreciable difference with clients?
RY: It’s fair to say, and it’s publicly disclosed when we won each of those mandates, that each of those businesses were looking for commercial managers that had good investment results and had the potential to generate strong returns in the future, but also with a strong approach to ESG. I would say that we fit both criteria. Certainly LGS and Catholic Super are also UNPRI signatories and they have internal staff that looks at this area, and it’s important to them.
