People, planet, profit: investing with a stewardship mentality

Why do you think Wellington’s Global Stewards strategy is one to watch? And how could it work in investors’ portfolios?

In recent years, co-Portfolio Manager Mark Mandel and I have had an increasing number of discussions with clients focused on whether there’s a better way to balance return and responsibility when investing for the long term. Specifically, clients asked how environmental, social and governance (ESG) factors should be incorporated in portfolios. These discussions revealed significant and growing demand for investing with an emphasis on stewardship.

By stewardship, we mean how companies weigh the interests of all stakeholders — such as customers, employees, communities, supply chains and the environment — in their pursuit of profits and how they incorporate material ESG risks and opportunities in their corporate strategy. We believe companies’ stewardship can be assessed by how successfully their boards and managers invest in people, positively impact the planet and build sustainable profit while creating long-term advantage.

Global Stewards is a global large-cap equity strategy that we believe could be core to any investor’s portfolio. Global Stewards is distinguished from many other strategies by its very long investment mindset. We believe this long-term lens is needed to analyse companies that will consistently generate strong returns on capital and take a strategic view by investing in the future of the business and prioritising sustainable growth over short-term gains. We evaluate companies using a 10-year investment horizon, which matches the strategic planning horizon of the world’s best companies. This long-term view is intrinsically linked to ESG and stewardship.

In our opinion, many ESG-focused strategies look like growth strategies masquerading as sustainability strategies. Our strategy is not an index tracker or a closet tech approach. Rather, it has a high active share and is differentiated from the broad market, as defined by the MSCI All Country World Index. The portfolio is constructed to reduce country, sector and factor biases, so that the main drivers of risk and return are stock-specific.

As a result, we believe the Global Stewards approach can play several roles in client portfolios, including:

• As a large-cap global core portfolio giving what we believe is well-diversified exposure across industries, countries and factors
  
• Providing potential downside mitigation or lower-volatility exposure, given its high-quality, lower-beta profile
• As an ESG or sustainability allocation, as it is an Article 9 strategy under the EU’s Sustainable Finance Disclosure Regulation

What is your strategy trying to achieve for investors, what is your investment process and what is the make-up of the investment team?

Global Stewards aims to generate excess returns against the MSCI All Country World Index by investing responsibly, and to achieve net-zero carbon emissions by 2050 in alignment with the Paris Agreement. We give equal consideration to companies’ fundamental merit (focusing on high return on equity) and corporate stewardship, over an extended time horizon. We rely on portfolio construction to enhance the odds of success, emphasising stock selection as the primary source of risk and return while minimising unintended biases. Ultimately, we seek to provide a concentrated, well-balanced, lower-risk core portfolio of large-cap stocks from around the world that investors can confidently own for the long term.

We do not rely on screens or third-party ESG ratings to limit our investment universe. We view Global Stewards as a positive inclusion ESG integration approach — to be included in this concentrated portfolio, every investment candidate must meet our high bar for stewardship and financial strength.

To narrow our opportunity set, we start with a universe of the world’s largest and most liquid stocks. This predisposes us towards stocks of higher quality and lower beta than the overall market. The companies in this universe are mature and generally have secure competitive positions, above-average ESG profiles and long track records of sustainable financial returns. That said, we can’t guarantee that a company in a position of strength today will remain successful in the future, which is why company engagement is key to our process. These companies tend to be leaders in their field, with thousands of employees and millions of customers. They can therefore have a large positive impact on the communities where they operate. After rigorous analysis, we construct a concentrated portfolio of stocks that meet our exacting fundamental and stewardship criteria.

Global Stewards is a portfolio-manager-driven approach. Between us, Mark Mandel and I have nearly 60 years’ investment experience. We draw on research and insights from Wellington’s broad range of resources from around the world, interacting extensively with our ESG research analysts, sustainability team, global industry analysts, equity research analysts and other portfolio managers. These resources provide tremendous support to our research efforts by offering differentiated insights and viewpoints based on their areas of expertise.

In addition, Wellington’s size gives us easy access to companies’ management and board members. We actively engage with the companies we invest in, holding those in charge to account and encouraging companies to commit to net zero carbon emissions targets in alignment with the Paris Agreement. We also seek to limit our contribution to climate change by targeting a carbon footprint that is at least 50% lower than the global economy’s (as measured by the MSCI ACWI). In 2020, we had over 150 engagements with portfolio companies and over 350 engagements in total.

Can you identify a couple of key investment opportunities you are playing at the moment in the portfolio?

While Global Stewards is not managed as a thematic investment approach, the past 18 months have shone a spotlight on how companies approach stewardship. We are convinced that the health pandemic represents a seminal moment for sustainable investing. We organised an extensive list of questions to help us understand how companies are navigating the crisis financially and how they are balancing the needs of all stakeholders. We carefully track companies’ responses to the crisis across global large-cap stocks, evaluating their capital allocation decisions and the wide range of actions taken to protect employees, customers, suppliers and communities during this difficult period.

We believe our company engagements are very relevant for evaluating long-term shareholder value. Companies’ actions in this crisis will be remembered for a long time. Their ability to hire, rehire and retain talent will be shaped by reputations developed now, and brand loyalty will be built or lost based on how customers are treated.

We want to emerge with our shareholder capital in the hands of the companies which are best positioned to benefit from a rebound in business overall and to capitalise on new opportunities and reshuffled market shares. We also want to ensure that shareholder capital is entrusted to responsible companies, and there is no better time than a crisis to test a company’s commitment to long-termism and its resolve to prioritise all stakeholders.

We have been inspired by the actions that the companies we hold in the portfolio have taken in the pandemic. For example:

•  A bank offered all 5 million of its Singapore customers complimentary COVID-19 insurance coverage.
•  A retail company increased paid sick leave for full-time and part-time workers, doubled overtime pay and pulled all N95 respirator masks from shelves and donated them to those on the front line.
  
•  A health care company collaborated with the Gates Foundation to accelerate the development, manufacture and delivery of vaccines, diagnostics and treatments for COVID-19.
  

We believe leadership which invests in the future and strengthens bonds with all stakeholders makes companies more resilient, more adaptable and therefore more valuable over time.

Please refer to the investment risks page for information about each of the following risks: 

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