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ESG: A Way to Reduce Downside Risk

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David Orr, Portfolio Manager - Sparinvest Asset Management Ltd. - Denmark …

David Orr, Portfolio Manager - Sparinvest Asset Management Ltd. - Denmark

Published in: Economy & Finance, Business

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  • 1. David Orr, Portfolio Manager
    TBLI Conference – June 2010
    ESG: A Way to Reduce Downside Risk
  • 2.
    • InvestmentPhilosophy & Process
    • 3. Integration of ESG intoInvestmentProcess: why, and how?
    • 4. OngoingDevelopment and Outlook
    Agenda
    2
    TBLI ASIA 2010 www.sparinvest.lu
  • 5. Investment philosophy
    InvestmentPhilosophy & Process
    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
    Mission:
    To protect and increase the capital of our investors
    3
    TBLI ASIA 2010 www.sparinvest.lu
  • 6. InvestmentProcess
    InvestmentPhilosophy and Process
    • Screening
    • 10. Screening
    • 11. Universe: developed markets only – lower political risk
    • 12. 100 % Bottom-up
    • 13. Current data source is Bloomberg
    • 14. Markets screened using value criteria such as: P/B, P/E, NDE, EV/EBITDA
    • 15. Regular & ad hoc screenings for further analysis
    • 16. Weekly value team meeting is central to the process
    • 17. Sparinvest Value Model
    • 18. Factsheet with historic figures
    • 19. Case build-up; information search
    • 20. Fundamental analysis: traditional, with in-house check list
    • 21. Operational track record
    • 22. Contact with company; alternate research sources
    • 23. Definition – assets, earnings, or both
    • 24. Estimate long term earnings power & asset strength from historical performance
    • 25. Look at comparable transaction values in specific industry
    • 26. Calculate intrinsic value (target price)
    • 27. If discount is 40% or more, we invest. If not, we monitor
    • 28. 90-120 companies
    • 29. Weightings by region, sector & market cap: residual of our bottom-up process
    • 30. Price to book ratio typically under 1.5, EV/EBITDA median of 5, & NDE average of 15%
    • 31. Historically has included many takeover targets
    • 32. Internal style control by investment committee.
    Internal:
    • Electronic files only: team shares whole investment case
    • 33. Monitoring & review of holdings: full-review of each case at least semi-annually
    • 34. Communication with companies
    • 35. Portfolio statistics
    External:
    • Daily & monthly fund factsheets
    • 36. Quarterly letter to shareholders
    • 37. Presentations
    4
    TBLI ASIA 2010 www.sparinvest.lu
  • 38. Why integrate ESG?
    Focus on ESG values in themselves (potentially to trigger change)
    Focus on corporate value: to make more money
    Integrating ESG: FocusonValues, orValue?
    Integration of ESG
    5
    TBLI ASIA 2010 www.sparinvest.lu
  • 39. InvestmentProcess: FocusonIntrinsicValue
    • 100% bottom-up
    • 43. Developed markets only
    • 44. Data source: Bloomberg
    • 45. Markets screened on value criteria, such as P/B, P/E, NDE, EV/EBITDA
    • 46. Regular & ad hoc specialised screens
    • 47. SparinvestFactsheet: historical data
    • 48. Information search
    • 49. Fundamental analysis, includingdetailedin-house check list
    • 50. Operationaltrackrecord
    • 51. External research
    Integration of ESG
    • Screening
    • 52. Screening
    • 53. Detailed & comprehensive check list
    • 54. Constantdevelopmentsince fund inception
    • 55. Examples:
    • 56. Goodwill & otherimpairmentrisk
    • 57. Pension liabilities
    • 58. Contingentliabilities
    • 59. Environmentalconcerns
    • 60. Boardquality
    • 61. Management trackrecord
    • 62. Ownershipstructure
    • 63. Shareholderreturns
    6
    TBLI ASIA 2010 www.sparinvest.lu
  • 64.
    • Quantifiable?
    • 65. Environmental, Social, orGovernance?
    • 66. Impactonshort-termshareprice, orlong-termintrinsicvalue?
    Little Strokes Fell Great Oaks: The Rosenfeld Effect
    California’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.
    Impact of ESG IssuesonCorporateValue
    Integration of ESG
    7
    TBLI ASIA 2010 www.sparinvest.lu
  • 67. InvestmentProcess: Focuson ESG ValuesThemselves
    • 100% bottom-up
    • 71. Developed markets only
    • 72. Data source: Bloomberg
    • 73. Markets screened on value criteria, such as P/B, P/E, NDE, EV/EBITDA
    • 74. Regular & ad hoc specialised screens
    • 75. SparinvestFactsheet: historical data
    • 76. Information search
    • 77. Fundamental analysis, includingdetailedin-house check list
    • 78. Ethical screening
    • 79. Operationaltrackrecord
    • 80. External research
    Integration of ESG
    8
    TBLI ASIA 2010 www.sparinvest.lu
  • 96. UN PRI: SRI Team
    Enhance fundamental analysis: assessexternal ESG research
    Developpolicies for activeownership: engagement & voting
    Ongoing Development
    Integration of ESG
    Active ownership
    Dialogue
    Voting
    Transparency
    ESG factors
    Environment
    Social
    Governance
    UN PRI in Sparinvest
    i. Focus on Value
    ii. Focus on Return
    iii. Focus on Risk
    Fiduciary Duty
    Sparinvest ”Ethical”
    i. Focus on values
    ii. Focus on investor demands
    9
    TBLI ASIA 2010 www.sparinvest.lu
  • 97. Investment Performance
    Integration of ESG
    10
    TBLI ASIA 2010 www.sparinvest.lu
  • 98.
    • Focusonabsolutevalue – not relative
    • 99. Long term investment
    • 100. Strongprocess, within-houseview of riskvsreward
    Outlook: OutperformanceEnhanced by ESG
    11
    TBLI ASIA 2010 www.sparinvest.lu
  • 101. 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
    12
    TBLI ASIA 2010 www.sparinvest.lu