Speaking at the Stewart Investors Forum in Sydney on Thursday, the group’s Sydney-based fund manager David Gait explained that the company has a simple proposition: “We should all take our risk budgets and benchmarks and throw them out the window as quickly as possible.”
“We don’t look at the index at all,” Mr Gait said. “I recently got asked in a meeting what our tracking error was. I don’t actually know how tracking errors are even measured. The minute we start looking at that it starts to get into your psyche. So we just don’t look at benchmarks at all.”
The sustainable funds group, which is headquartered in Edinburgh, spends much of its time researching sustainable companies in emerging markets and assessing their risks. The Hong Kong-listed Vitasoy milk company, which has extensive operations in Australia via a joint venture with beverage giant Lion, is one of Stewart Investors’ largest holdings.
“In terms of assessing risks it’s about getting out and meeting the companies and considering what would happen to Vitasoy, for example, if a sugar tax came into play in China,” Mr Gait said.
“We were looking at dairy companies in emerging markets and our fund level carbon footprint was huge. We thought that was odd, because we don’t own any oil and gas companies, we don’t own any miners. But actually, the dairy companies were very significant and that led us to do more work on them.”
This ‘work’ often involves a fair amount of activism and can lead the group to reduce its holding or exit the investment completely if it doesn’t meet the group’s quality test for sustainability.
“Our job very simply is to deliver above average returns over the long-run with below-average risk,” Mr Gait said. “We just think the best way to beat the benchmark is to completely ignore it.”
Risk is simply defined as the loss of client capital, he said.
David Gait and his colleague Nick Edgerton are both portfolio managers of the Stewart Investors Worldwide Sustainability Fund. Mr Edgerton said that the many complex issues around sustainable investment is usually centred around regional and local issues and a nuanced approach is required. Something ETFs and smart beta aren’t able to do, he said, pointing to specific stocks traditionally held in sustainability ETFs as an example.
“One flagship sustainability stock is Veolia, the global water provider,” Mr Edgerton said.
“The problem is they have just been found out for fabricating water quality results in the US and have been exposing customers to excess lead. They have also been found to be fabricating accounts in Romania.”
By contrast, Stewart Investors has chosen to invest in Manila Water, owned by the Philippines-based conglomerate Ayala Corporation, which Mr Edgerton believes is more closely aligned with the fund manager’s sustainability metrics.
