After spending New Year in Tasmania I returned to Sydney and met up with the Stewart Investor Sustainability team who have relocated from the Commonwealth Bank building at Darling Harbour to the Rocks area of Sydney (see picture). This historic part of Sydney became established shortly after the colony’s formation in 1788, but was not glamorous as it was on the arriving convict side of town, often frequented by visiting sailors and prostitutes and gained a reputation as a slum area. Debate ranged for many years about the merits of re-developing the area with control given to the Sydney Cove Redevelopment Authority in 1968. Today renovations have transformed the area into a commercial and tourist precinct with many of the old historic buildings preserved. The Stewart Investors office is located in Hickson Road, home to the ASN Warehouse. This building was originally the Australasian Steam Navigation company and was constructed 1884–1885 and included living quarters at the upper levels. This is the building in the centre with the turret. The Metcalfe Bond Stores (to the right in the picture) are the original warehouse buildings constructed in 1912-1916 and were the place where imported goods remained in storage until a customs duty was paid on them, a situation which may become more common today in the United States if Trump enacts protectionist trade policies. Michael Metcalfe was one of the original founders of the ASN Company. Today the Rocks area and surrounding wharfs are being revitalised and the Stewart Investor team share a building with a variety of businesses including some other boutique asset managers.
The meeting was an opportunity to catch up with new lead manager Nick Edgerton of the Worldwide Sustainability fund and team member Douglas Ledingham who works on the Asia Pacific Leaders mandate. Last year saw a change of responsibilities in the Stewart team with Angus Tulloch handing over responsibility on AP Leaders to David Gait, who in turn handed the Worldwide Sustainability fund on to Nick. To assist in the change David Gait has relocated to Sydney for an 18-24 month period, meaning he is working directly in the same office with Nick and is in the same time zone as the Deputy Manager on AP Leaders Sashi Reddy. At Stewart Investors all research is shared across both the Sustainability and GEM/Worldwide teams.
Around a year ago Stewart Investors announced that they would unbundle payments for research from trading commission and pay for this research from their own resources. This was to improve transparency and also gain greater insight into the value research providers were adding to the investment process. This innovative move looked to provide better value for investing clients. The Stewart team are now shaping their own research agenda, looking to broaden opportunities and form long-term partnerships. In particular, they will often commission third party reports on technical industries where a generalist fund manager may not have enough specialist knowledge. These research reports are put out to tender and it included issues such as diversity in corporate Asia, labour practice at Asian manufacturers and assemblers, water scarcity and US remuneration practices.
The Stewart team believe companies need to both serve society whilst also generate returns. On research trips to the States they have been concerned about the inequality currently prevalent in the States, where winners and losers have rarely been further apart in modern times. Society has not been this divergent since the 1920s and historians will know what the 1930s brought. The Stewart team reported that in every city visited, which included Seattle, Chicago, Minneapolis, Washington DC, Philadelphia and Dallas it was evident that there were many Americans whom globalisation has left behind. The Stewart team felt these were mostly African Americans and noted that in almost all instances executive management met were white males. On a typical research trip the team would meet 20 companies, but would often only come away with 1-3 of these that tick the boxes as being potentially good long-term stewards of investors’ capital. In the US in particular management are often very short term.
This is not an ethical or green mandate, so has a wide variety of investment options with no areas quantitatively screened out. Whilst mining can be a difficult area for a sustainability investor, the team look for companies that produce and encourage sustainable economic development. Countries need some metals and minerals to achieve this, although gold has low value to society. When looking at miners for example the team assess the use of the company to society and externalities, which can be particularly important in third world countries. One area that is not held is coal as the team are extremely negative on the long-term prospects for fossil fuel. However, at the moment there is no standout company in the sector with a company such as BHP having shown itself over a number of cycles to be pro-cyclical, buying businesses at the top and leveraging up at the wrong time.
Whilst renewable energy might be an interesting area for the team, this sector continues to be plagued by regulatory uncertainty and often attracts management that are very short term in nature. Even though renewable energy stocks have sold off post the Trump election victory the sector had enjoyed a good run for a number of years. Within Asia there are some large wind energy businesses such as Goldwind which are being monitored. At present the team prefer to invest into companies feeding into these sectors such as ABB in Switzerland.
The election of Trump has not promoted any seismic change in the portfolio’s mix as the approach is purely bottom up. However, quality companies have got cheaper and have provided some buying opportunities in names such as Henkel, Novo Nordisk and Edwards Life Sciences, together with topping up of some positions in India. Thus the team have used the setback in high quality names to increase exposure to a number of companies they believe are well placed for the future. There is a focus on companies with brands, sustainability and strong balance sheets, with the majority of names held having net cash positions.
In India, whilst the economy has suffered a short term shock from de-monetisation, Premier Modi has showed himself an adherent of rule of law in that country, which should be positive over the longer term. Consumer names such as HDFC and Kotak, together with Dabur have been either purchased or added to.
Whilst no Australian banks are held, as they are felt to be highly leveraged and dependent on an overvalued property market, Australian listed blood plasma company CSL is a market leader in its field. The US is responsible for 90% of the world’s plasma, which is essential for surgery and burns treatment with no artificial alternative. The reason behind this is that the States is the only developed country where plasma can be paid for. CSL also provides all of Australia’s snake anti-venoms, and fortunately to date I have not had to personally utilise any of their products. This has been an excellent long-term investment for the Stewart team, who were the second largest shareholder and are due to present to the Board on why it is not a good idea for a company to leverage up its balance sheet.
One area the Stewart funds do not invest in, whether sustainability mandates or not, is tobacco, arguing this is actually a high risk sector. In Australia many pension funds have been convinced by work undertaken by an NGO that this is a sector to avoid and in fact many investment institutions including Commonwealth Bank ban investment in the sector across all mandates. At the meeting Nick Edgerton argued that data showed tobacco usage and smoking fell as countries moved up the chain of prosperity and so as Third World countries catch up, and especially if they provide free healthcare to the population, smoking levels are likely to fall. In Australia smoking levels are below that of the UK and European countries with many arguing that the plain packaging rule has eliminated brand appeal in the country.
The Stewart team continue to view the global economy cautiously and as a result the protection of clients’ capital is something the team focus on, even though in today’s world it becomes ever more difficult. They believe globally debt levels are dangerously high, whether an investor looks at the US corporate sector, China, or consumer debt in smaller Asian countries such as Thailand.
The team believe in active company engagement and as discussed are presenting to the Board of CSL. Colgate-Palmolive have been engaged with on the use of triclosan in toothpaste as it contains antibiotics. This substance is actually banned in Europe. The team believe that by engagement they will not only better invest client money, but also improve corporate behaviour. The focus of the team remains on generating absolute rather than relative returns and performance versus competitors has always been far stronger in down or sideways markets than strong cyclically driven market rallies, making these funds suited to more cautious investors with most companies held having demonstrated resilience over a number of economic cycles.