David Orr, Portfolio Manager
TBLI Conference – June 2010ESG: A Way to Reduce Downside Risk
2 TBLI ASIA 2010 www.sparinvest.lu
• Investment Philosophy & Process
• Integration of ESG into Investment Process: why, and how?
• Ongoing Development and Outlook
Agenda
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Investment philosophy
Investment Philosophy & Process
Mission: To protect and increase
the capital of our investors
Consider downside risk before upside potential
Long term investing
Buying the company, not the stock
No style drift – remain disciplined at all times
Positive returns – no relative benchmarking
TBLI ASIA 2010 www.sparinvest.lu
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Documentation Portfolio Valuation Analysis
Investment Process
Universe: developed markets only – lower political risk
100 % Bottom-up
Current data source is Bloomberg
Markets screened using value criteria such as: P/B, P/E, NDE, EV/EBITDA
Regular & ad hoc screenings for further analysis
Weekly value team meeting is central to the process
Sparinvest Value
Model
Factsheet with historic figures
Case build-up; information search
Fundamental analysis: traditional, with in-house check list
Operational track record
Contact with company; alternate research sources
Definition – assets, earnings, or both
Estimate long term earnings power & asset strength from historical performance
Look at comparable transaction values in specific industry
Calculate intrinsic value (target price)
If discount is 40% or more, we invest. If not, we monitor
90-120 companies
Weightings by region, sector & market cap: residual of our bottom-up process
Price to book ratio typically under 1.5, EV/EBITDA median of 5, & NDE average of 15%
Historically has included many takeover targets
Internal style control by investment committee.
Internal: Electronic files only:
team shares whole investment case
Monitoring & review of holdings: full-review of each case at least semi-annually
Communication with companies
Portfolio statistics
External: Daily & monthly fund
factsheets
Quarterly letter to shareholders
Presentations
Investment Philosophy and Process
Screening Screening
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Why integrate ESG?
Focus on ESG values in themselves (potentially to trigger change)
Focus on corporate value: to make more money
Integrating ESG: Focus on Values, or Value?
Integration of ESG
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Documentation Portfolio Valuation Analysis
Investment Process: Focus on Intrinsic Value
• 100% bottom-up
• Developed markets only
• Data source: Bloomberg
• Markets screened on value criteria, such as P/B, P/E, NDE, EV/EBITDA
• Regular & ad hoc specialised screens
• Sparinvest Factsheet: historical data
• Information search
• Fundamental analysis, including detailed in-house check list
• Operational track record
• External research
Integration of ESG
Screening Screening
• Detailed & comprehensive check list
• Constant development since fund inception
• Examples:• Goodwill & other impairment risk• Pension liabilities
• Contingent liabilities• Environmental concerns• Board quality• Management track record• Ownership structure• Shareholder returns
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Little Strokes Fell Great Oaks: The Rosenfeld EffectCalifornia’s electricity usage per capita is exactly the same as 30 years ago - despite the boom in electronic devices. How?One key factor is the “Rosenfeld effect”, named after Dr Arthur Rosenfeld, a physicist and former commissioner at the Californian Energy Commission. Following the mantra that “Conserving energy is cheaper and smarter than building power plants”, he proposed many energy-conservation measures. Examples are standards in building insulation, light efficiency, energy-saving light bulbs, and so on. Household appliances were to be designed using a minimal amount of energy; producers were held responsible for motivating their customers to shift to low-energy products.
• Quantifiable?
• Environmental, Social, or Governance?
• Impact on short-term share price, or long-term intrinsic value?
Impact of ESG Issues on Corporate Value
Integration of ESG
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Documentation Portfolio Valuation Analysis
Investment Process: Focus on ESG Values Themselves
• 100% bottom-up
• Developed markets only
• Data source: Bloomberg
• Markets screened on value criteria, such as P/B, P/E, NDE, EV/EBITDA
• Regular & ad hoc specialised screens
• Sparinvest Factsheet: historical data
• Information search
• Fundamental analysis, including detailed in-house check list
• Ethical screening
• Operational track record
• External research
Integration of ESG
Screening Screening
• Ethical screen:• Before initial investment• Semi-annual screens of existing
holdings
• Norm-based:• Environmental protection• Human rights• Labour standards• Anti corruption
• Sector-based:• Alcohol• Gambling• Tobacco• Pornography• Weapons
TBLI ASIA 2010 www.sparinvest.lu
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UN PRI: SRI Team
Enhance fundamental analysis: assess external ESG research
Develop policies for active ownership: engagement & voting
Ongoing Development
Integration of ESG
UN PRI in Sparinvesti. Focus on Valueii. Focus on Returniii. Focus on Risk
Fiduciary Duty
Sparinvest ”Ethical”i. Focus on valuesii. Focus on investor demands
Active ownership
DialogueVoting
Transparency
ESG factorsEnvironment
SocialGovernance
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Investment Performance
Integration of ESG
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• Focus on absolute value – not relative
• Long term investment
• Strong process, with in-house view of risk vs reward
Outlook: Outperformance Enhanced by ESG
TBLI ASIA 2010 www.sparinvest.lu
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The mentioned sub-fund is part of Sparinvest SICAV, a Luxembourg-based, open-ended investment company. For further information we refer to the full and/or simplified prospectus and the current annual / semi-annual report of Sparinvest SICAV which can be obtained free of charge at the offices of Sparinvest or of appointed distributors together with the initial statutes of the funds and any subsequent changes to such statutes. Investments are only made on the basis of these documents. Past performance is no guarantee for future returns. Investors may not get back the full amount invested. Investments may be subject to foreign exchange risks. The investor bears a higher risk for investments into emerging markets. The indicated performance is calculated Net Asset Value to Net Asset Value in the fund’s base currency, without consideration of subscription fees. For investors in Switzerland the funds’ representative and paying agent is RBC Dexia Services Bank S.A., Zurich Branch, Badenerstrasse 567, P.O. Box 101, CH-8066 Zurich. Published by Sparinvest, 28, Boulevard Royal, L-2449 Luxembourg.
Disclaimer
Disclaimer
TBLI ASIA 2010 www.sparinvest.lu
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