Edinburgh-based Stewart Investors is betting that companies in emerging markets — unlike their developed market peers — will be able to build sustainability into their processes from the start.
“If today’s developing countries followed the same path of high resource use, we wouldn’t have much of a planet left. This is not a moral argument; it’s a practical one,” Jack Nelson, who is the lead manger for the firm’s global emerging markets sustainability strategies, told Institutional Investor.
“Many of the largest companies in the developed world [have] operated for decades on unsustainable linear models of production and consumption and are now having to reinvent their businesses to become more sustainable,” Nelson wrote in a recent paper.
Stewart Investors also uses an active bottom-up approach and defines risk as the possibility of losing money outright.
“We believe once you orient yourself toward absolute rather than relative returns and [understand risk] as the risk of loss of capital rather than volatility or deviation from the index, [you’ll] begin to look at the challenge of investing in emerging markets very differently,” Nelson said.
Sustainability has helped the strategy produce returns that have beat major indices. Since its inception in February 2009, the firm’s SI Global Emerging Markets Sustainability Composite returned an annualized 10.6 percent against the MSCI Emerging Markets Index, which returned 6.9 percent, according to data the firm shared with Institutional Investor.
Its SI Asia ex-Japan Sustainability Composite, initiated in January 2006, returned an annualized 10 percent against the MSCI AC Asia ex-Japan Index’s 4.7 percent. The oldest fund shown in the data, the SI Indian Subcontinent Sustainability Composite, has returned 18.9 percent since its inception in December 2002, compared to the MSCI India Index, which has returned 12.8 percent over the same period.
Stewart Investors, which has $17 billion in assets under management, doesn’t invest in markets that are highly regulated, due to the often cozy ties that exist between the government and company owners in some emerging countries. Many companies are often controlled by governments or families in the developing world. “We think any business that can be destroyed with the stroke of a regulator’s pen is, in the final analysis, not a strong one,” Nelson said.
Nelson cautions that it’s critical to focus on the motive and track record of owners and whether they have the integrity to allow minority shareholders to benefit over time. “This is the bread and butter of a bottom-up stock picker in emerging markets, since the fastest way of losing clients’ capital is to invest alongside the wrong people,” Nelson said. “Emerging markets is a particularly diverse asset class, with some of the best companies in the world and some of the very worst.”