ESG: A Way to Reduce Downside Risk

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

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ESG: A Way to Reduce Downside Risk

  1. 1. David Orr, Portfolio Manager<br />TBLI Conference – June 2010<br />ESG: A Way to Reduce Downside Risk<br />
  2. 2. <ul><li>InvestmentPhilosophy & Process
  3. 3. Integration of ESG intoInvestmentProcess: why, and how?
  4. 4. OngoingDevelopment and Outlook</li></ul>Agenda<br />2<br />TBLI ASIA 2010 www.sparinvest.lu<br />
  5. 5. Investment philosophy<br />InvestmentPhilosophy & Process<br />Consider downside risk before upside potential<br />Long term investing<br />Buying the company, not the stock<br />No style drift – remain disciplined at all times<br />Positive returns – no relative benchmarking<br />Mission: <br />To protect and increase the capital of our investors<br />3<br />TBLI ASIA 2010 www.sparinvest.lu<br />
  6. 6. <ul><li>Documentation
  7. 7. Portfolio
  8. 8. Valuation
  9. 9. Analysis</li></ul>InvestmentProcess<br />InvestmentPhilosophy and Process<br /><ul><li>Screening
  10. 10. Screening
  11. 11. Universe: developed markets only – lower political risk
  12. 12. 100 % Bottom-up
  13. 13. Current data source is Bloomberg
  14. 14. Markets screened using value criteria such as: P/B, P/E, NDE, EV/EBITDA
  15. 15. Regular & ad hoc screenings for further analysis
  16. 16. Weekly value team meeting is central to the process
  17. 17. Sparinvest Value Model
  18. 18. Factsheet with historic figures
  19. 19. Case build-up; information search
  20. 20. Fundamental analysis: traditional, with in-house check list
  21. 21. Operational track record
  22. 22. Contact with company; alternate research sources
  23. 23. Definition – assets, earnings, or both
  24. 24. Estimate long term earnings power & asset strength from historical performance
  25. 25. Look at comparable transaction values in specific industry
  26. 26. Calculate intrinsic value (target price)
  27. 27. If discount is 40% or more, we invest. If not, we monitor
  28. 28. 90-120 companies
  29. 29. Weightings by region, sector & market cap: residual of our bottom-up process
  30. 30. Price to book ratio typically under 1.5, EV/EBITDA median of 5, & NDE average of 15%
  31. 31. Historically has included many takeover targets
  32. 32. Internal style control by investment committee.</li></ul>Internal:<br /><ul><li>Electronic files only: team shares whole investment case
  33. 33. Monitoring & review of holdings: full-review of each case at least semi-annually
  34. 34. Communication with companies
  35. 35. Portfolio statistics</li></ul>External:<br /><ul><li>Daily & monthly fund factsheets
  36. 36. Quarterly letter to shareholders
  37. 37. Presentations</li></ul>4<br />TBLI ASIA 2010 www.sparinvest.lu<br />
  38. 38. Why integrate ESG?<br />Focus on ESG values in themselves (potentially to trigger change)<br />Focus on corporate value: to make more money<br />Integrating ESG: FocusonValues, orValue?<br />Integration of ESG<br />5<br />TBLI ASIA 2010 www.sparinvest.lu<br />
  39. 39. <ul><li>Documentation
  40. 40. Portfolio
  41. 41. Valuation
  42. 42. Analysis</li></ul>InvestmentProcess: FocusonIntrinsicValue<br /><ul><li>100% bottom-up
  43. 43. Developed markets only
  44. 44. Data source: Bloomberg
  45. 45. Markets screened on value criteria, such as P/B, P/E, NDE, EV/EBITDA
  46. 46. Regular & ad hoc specialised screens
  47. 47. SparinvestFactsheet: historical data
  48. 48. Information search
  49. 49. Fundamental analysis, includingdetailedin-house check list
  50. 50. Operationaltrackrecord
  51. 51. External research</li></ul>Integration of ESG<br /><ul><li>Screening
  52. 52. Screening
  53. 53. Detailed & comprehensive check list
  54. 54. Constantdevelopmentsince fund inception
  55. 55. Examples:
  56. 56. Goodwill & otherimpairmentrisk
  57. 57. Pension liabilities
  58. 58. Contingentliabilities
  59. 59. Environmentalconcerns
  60. 60. Boardquality
  61. 61. Management trackrecord
  62. 62. Ownershipstructure
  63. 63. Shareholderreturns</li></ul>6<br />TBLI ASIA 2010 www.sparinvest.lu<br />
  64. 64. <ul><li>Quantifiable?
  65. 65. Environmental, Social, orGovernance?
  66. 66. Impactonshort-termshareprice, orlong-termintrinsicvalue?</li></ul>Little Strokes Fell Great Oaks: The Rosenfeld Effect<br />California’s electricity usage per capita is exactly the same as 30 years ago - despite the boom in electronic devices. How?<br />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.<br />Impact of ESG IssuesonCorporateValue<br />Integration of ESG<br />7<br />TBLI ASIA 2010 www.sparinvest.lu<br />
  67. 67. <ul><li>Documentation
  68. 68. Portfolio
  69. 69. Valuation
  70. 70. Analysis</li></ul>InvestmentProcess: Focuson ESG ValuesThemselves<br /><ul><li>100% bottom-up
  71. 71. Developed markets only
  72. 72. Data source: Bloomberg
  73. 73. Markets screened on value criteria, such as P/B, P/E, NDE, EV/EBITDA
  74. 74. Regular & ad hoc specialised screens
  75. 75. SparinvestFactsheet: historical data
  76. 76. Information search
  77. 77. Fundamental analysis, includingdetailedin-house check list
  78. 78. Ethical screening
  79. 79. Operationaltrackrecord
  80. 80. External research</li></ul>Integration of ESG<br /><ul><li>Screening
  81. 81. Screening
  82. 82. Ethical screen:
  83. 83. Before initial investment
  84. 84. Semi-annualscreens of existingholdings
  85. 85. Norm-based:
  86. 86. Environmentalprotection
  87. 87. Human rights
  88. 88. Labour standards
  89. 89. Anticorruption
  90. 90. Sector-based:
  91. 91. Alcohol
  92. 92. Gambling
  93. 93. Tobacco
  94. 94. Pornography
  95. 95. Weapons</li></ul>8<br />TBLI ASIA 2010 www.sparinvest.lu<br />
  96. 96. UN PRI: SRI Team<br />Enhance fundamental analysis: assessexternal ESG research<br />Developpolicies for activeownership: engagement & voting<br />Ongoing Development<br />Integration of ESG<br />Active ownership<br />Dialogue<br />Voting<br />Transparency<br />ESG factors<br />Environment<br />Social<br />Governance<br />UN PRI in Sparinvest<br />i. Focus on Value<br />ii. Focus on Return<br />iii. Focus on Risk <br />Fiduciary Duty<br />Sparinvest ”Ethical”<br />i. Focus on values<br />ii. Focus on investor demands<br />9<br />TBLI ASIA 2010 www.sparinvest.lu<br />
  97. 97. Investment Performance<br />Integration of ESG<br />10<br />TBLI ASIA 2010 www.sparinvest.lu<br />
  98. 98. <ul><li>Focusonabsolutevalue – not relative
  99. 99. Long term investment
  100. 100. Strongprocess, within-houseview of riskvsreward</li></ul>Outlook: OutperformanceEnhanced by ESG<br />11<br />TBLI ASIA 2010 www.sparinvest.lu<br />
  101. 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.<br />Disclaimer<br />Disclaimer<br />12<br />TBLI ASIA 2010 www.sparinvest.lu<br />

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