What is the appeal of the Australian market?
It is actually an interesting market in terms of the structure of it from an investment management perspective - it's very similar to the United States. It is a consultant-driven market, which we have in the United States. Our business in the United States is very institutionally orientated [like that], so it makes a lot of sense to come here from a business standpoint.
We are not coming here trying to break into and run Australian portfolios that local people have a better knowledge of than we do. We have been running international or ex-US portfolios for a long time, we have been running emerging market portfolios for a long time, we have a fairly good track record of success and if Australians want to invest in that, then we are happy to offer it.
What is your investment strategy?
We are long-only equity investors and we manage global equities portfolios in developed and emerging markets. We have been doing emerging markets for a while, and we are basically offering this to investors here [Australia].
What we bring to market in terms of approaches is that we are focused and methodological about what we do, and we have been doing it for quite some time and have a pretty long track record of managing money.
Our investment approach is really to invest in high quality growth companies and [we are] looking for it globally - [they are the] best of breed kinds of companies that can grow over a long period of time and have good management and good balance sheets, which we think are superior investments.
How important is ESG analysis?
The ESG part of what we are is quite important, as it targets the question of management. The E and S part of what we do are long-term risks to a company. If you are not cognisant of the risks of how you are using environmental inputs, you are going to run out of clean water or whatever it is you need to run your business. If you are abusing labour, that is ultimately not good for your business. So as a shareholder, I want you to think about the long-term risks to your business. But, a majority of what we look at in ESG is the G part, which is governance.
The beginning of the process and the things that we look at in terms of investing in companies is really what creates long-term value for shareholders. And what that means to us is at the end of day, whether we are looking at growth in revenues, or margins or returns on capital, is really about how much cash flow the company generates and what management does with it. At the end of the day, free cash flow is what creates value for shareholders because you can take that money and re-invest it in a growing and profitable enterprise, or you can give it back to shareholders - it is about cash.
The transmission mechanism to get that cash from a company to a shareholder is about management and that is all about corporate governance. The reason that ESG is important to us and we do a lot of work with corporate governance is that it's what gets the value creation at a company level into my hands as a shareholder.
What are the difficulties in assessing this?
In our large cap portfolio we have engaged a company called GMI that does a lot of diligence on the ESG factors in these companies. They have modelling on corporate governance and ESG issues. If you look at their models, probably twenty to thirty per cent are on environmental or social issues, while seventy to eight per cent are on governance. This is what they have discovered is important in their back testing.
What about small caps?
We have focused [personally on] evaluating management for a very long time. In our large cap portfolio they are all ranked by GMI, whereas in the small cap ones we rank them ourselves and make the subjective assessment about management - whether we like them and trust them. It is sometimes difficult to do, but I think that the success rate that we have had is relatively high because we try to miss the real disasters. I tell people I don’t mind, from a portfolio sense, that I miss a stock that doubles. It does not matter as much as if I own one that goes in half. Keep away from the disaster because that is what kills my performance. Our analysts spend a lot of time evaluating management and trying to figure out if we are we are investing in something that we should be investing in.
