An investment management boutique, formed by Innovest founder Dr Matthew Kiernan. Poacher turned gamekeeper – Innovest clients and prospects often used to say if you really believe your sustainability approach can add value, why don’t you run some money against it, so now we are. Though no AUMs yet – building several fund strategies, and will have completed the model portfolios and test results for these by year end, with asset gathering process starting in earnest in 2011. Attracted to Innovest by Matthew’s mantra of change through the capital markets – the power of investors to influence company behaviour. Differentiator for Inflection Point is Total Portfolio Performance, where we evaluate financial and sustainability factors simultaneously rather than sequentially – more on that later
Why is such a philosophy relevant? For several years Matthew has written about new drivers of risk and opportunity, the list started with 10 mega-trends and has slowly expanded. This list is not restricted to obvious areas like climate change and resource depletion, looks at consumer attitudes, demographics [population growth clearly the biggest threat to the planet], communications….
Healthcare, economic stimulus, etc
Easier to depict these trends graphically – one immediate observation is that many of these charts show an upward trend in terms of impacts, but also reveal new opportunities, especially in emerging markets
We’ve all read about the positive prognosis for SRI, Robeco/Booz study, latest Eurosif report, but this needs to be tempered by the view that SRI strategies are not yet sufficiently advanced -
Top rated strategies are ESG1 & 2 – very low percentage across all asset classes
Barriers are linked to poor and inconsistent disclosure, lack of real SRI integration, nomenclature that causes confusion, focus on which research companies and products to use rather than clearly defined strategies
This year’s Eurosif survey, tries to break down SRI into its component parts, but even this attempt to simplify offers several choices which are overlapping, and in my experience investors may use a range of these approaches in one fund
Three key elements to our research – judicious use of KPIs and data points, and strong reliance on analyst expertise
IPCM iceberg. We want to go beyond ESG. Recent problems at BP and Toyota show that a company’s value is linked as much, if not more so, to the way a company reacts to a crisis as it is to its pre-existing policies and performance. So we have the ESG parts, but also look at adaptability/responsiveness, as well as at innovation
I mentioned at the start of my presentation that we want to select stocks using financial and sustainability filters right from the outset, at the same time, here’s how our model works. First step is to use ratings and financials to give us our alpha pool, so a company has to do well on all KPIs to be considered for the portfolio. Then we apply the human element to the alpha pool, and finally the technical and correlation analysis.
First outing for the 5 factor model was in the creation of last year’s G100 list (of the most sustainable firms globally). Good performance versus the benchmark. BP did not make it to the list this year
Introduction by Dr. Matthew J. Kiernan, CEO Innovation in Fund Structure Drives Performance TBLI Conference Europe 2010 11 November, 2010 London
IPCM - Philosophy <ul><li>Inflection Point Capital Management's mission: to re-engineer the DNA of Finance and Investment. </li></ul><ul><li>Inflection Point’s investment research precursor, Innovest Strategic Value Advisors, was founded in 1992, one week after the historic Earth Summit in Rio de Janeiro. </li></ul><ul><li>The firm’s mission then was the same as Inflection Point’s is today: to have a substantial positive, systemic impact on improving global environmental and social conditions, using the international capital markets’ influence on companies as its chief instrument. </li></ul><ul><li>Our objective is to mobilize and leverage the enormous power of the financial markets, and redirect their investment flows to promote – rather than undermine – the necessary global transition to a more environmentally and socially sustainable economy. </li></ul><ul><li>In order to achieve an impact on anything like the scale commensurate with the magnitude of the global challenge, however, the mainstream capital markets will need to be engaged, not just the 5% at the margin who consider themselves “socially responsible” investors. This was – and remains – an enormously ambitious and difficult objective, and it remains one of the central animating drivers of Inflection Point Capital’s work today, and the genesis of IPCM’s approach to the idea of: “Total Portfolio Performance” ; essentially evaluating non-traditional value drivers alongside traditional financial ones. </li></ul>
Global Mega-Trends <ul><li>Accelerating natural resource degradation, scarcity and constraints , driven to a significant extent by the explosive pace of population growth, industrialization, and urbanization, especially in emerging market economies; </li></ul><ul><li>Major demographic and economic shifts , concentrating the most rapid population and economic growth in emerging markets, where sustainability risks and opportunities are arguably the most compelling; </li></ul><ul><li>The expansion and intensification of both industrial competition and institutional investment into those same emerging markets; </li></ul><ul><li>Dramatically increased levels of public and consumer concern and expectations for companies’ performance on climate change and other sustainability issues, turbocharged by unprecedented levels of information transparency with which to assess and then communicate it; </li></ul><ul><li>Tightening global, regional, and national regulatory requirements for stronger company disclosure and performance on climate change and other “non-traditional” business and investment issues, most notably sustainability; </li></ul><ul><li>Growing pressures from international non-governmental organizations (NGOs), armed with unprecedented financial and technical resources, credibility, access to company information, and global communications capabilities with which to disseminate their analysis and viewpoints; </li></ul><ul><li>The ongoing revolution in information and communications technologies (the Internet, YouTube, Facebook, webcasts, bloggers, et al.), which has enabled and accelerated the emergence of a stakeholder-driven competitive environment for companies with unprecedented transparency and, therefore, business and investment risk; </li></ul>
Global Mega-Trends (cont’) <ul><li>The growing economic, socio-political, and competitive impact of major public health issues such as HIV/AIDS, malaria, and tuberculosis; </li></ul><ul><li>A substantial reinterpretation and broadening of the purview of legitimate fiduciary responsibility to include – and, increasingly, require – sustainability factors to be integrated into investment strategies; </li></ul><ul><li>An institutional and high net-worth investor base which is increasingly sensitized to sustainability issues , newly equipped with better company disclosure and information, and both willing and able to act on their concerns with new asset allocations; </li></ul><ul><li>A growing body of both academic and empirical evidence illuminating the tightening nexus between companies’ performance on sustainability issues and their competitiveness, profitability and share price performance. </li></ul><ul><li>Worldwide, a series of national economic stimulus packages, with a “green” component estimated by Société Générale to exceed $1 trillion. In China alone, the package is nearly $600 billion, and over 15% of it is targeted for climate change solutions – by the end of 2010! </li></ul><ul><li>In the aftermath of the global financial crisis, an increased dissatisfaction </li></ul><ul><li>with conventional investment approaches, and a search for innovative new solutions. </li></ul>
The Opportunity <ul><li>The commercial basis for our firm is the powerful worldwide trend among investors to incorporate sustainability or “ESG” (environmental, social, and governance) risk and return drivers– including climate change and a number of social issues – into their investment strategies. </li></ul><ul><li>A report by asset manager Robeco and consulting firm Booz & Company, Responsible Investing: A Paradigm Shift, suggests that by 2015 responsible investing will reach 15% to 20% of global assets under management, and generating over USD 50 billion in annual fees. . </li></ul><ul><li>Eurosif study this year found that 89% of investment consultants anticipate an increase of client interest in ESG issues. </li></ul><ul><li>The direction of the trend is very clear. Moreover, recent research has confirmed that UHNWI clients are particularly attracted to this particular investment style. </li></ul><ul><li>The extraordinary market opportunity which presents itself today springs from an acute dearth of institutional quality products and strategies to both catalyze and meet the demand. Indeed, a recent Mercer Consulting survey of over 3,500 “sustainability” strategies judged that under 10 percent of them were of sufficiently high quality. </li></ul><ul><li>We believe that there are at least five primary causes of this lack of high quality, sustainability-enhanced investment products: </li></ul>
Barriers to Integration <ul><li>Poor quality underlying sustainability research, most of it based on non-verified, questionnaire-based information and virtually no sector-specific performance criteria , industry competitive analysis, or factor-specific risk/return attribution. </li></ul><ul><li>Lack of effective integration of this sustainability research with the rest of the investment process. The research is generally obtained from external sources; poorly understood by the portfolio manager, and “bolted on” awkwardly after the “real” financial analysis is complete. </li></ul><ul><li>Lack of robust research, analysis, and metrics which adequately capture the social and environmental impacts which the investment strategies may have actually achieved. </li></ul><ul><li>Confusing terminology – Eurosif study highlights how difficult it is to get this right, also finds that investors are a bit vague on the issue on ‘integration’. </li></ul><ul><li>A focus on the inputs, i.e. the product options – screening, best-in-class etc – rather than strategy and context for sustainable investing. </li></ul>
Terminology Core SRI versus Broad SRI “ The concept of integration remains a challenge to pin down, and its understanding may vary from one asset manager or country to the next” Integration SRI Engagement Broad Simple exclusions, including norms and values/ethical screening SRI Positive screens, including best-in-class and SRI thematic Core Multiple exclusions, including norms and values/ethical screening
IPCM – A Focus on Materiality and Value-Add <ul><li>Selective in use of data points </li></ul><ul><li>In developing, refining, and applying the model, we have attempted to be as parsimonious as possible. We have closely observed the “indicators arms race” among research providers, and remain unconvinced that the 900+ indicators which are becoming increasingly prevalent provide either actionable investment insights or a meaningful information advantage. </li></ul><ul><li>Identifying meaningful KPIs </li></ul><ul><li>The trick, of course, is to know which performance indicators truly add value, in which sectors, and at which points in the market cycle. IPCM uses no more than 8-10 “universal” performance and strategy indicators for each of the 5 factors, plus a roughly equal number of sector-specific ones. The key, of course, is to select the most relevant indicators, as well as the most robust and forward-looking data points with which to assess them. </li></ul><ul><li>Recognising the value of analyst knowledge </li></ul><ul><li>The only way that one can acquire this knowledge is through actual experience, and the analysis of empirical market results, gathered over many years. Inflection Point Capital Management’s principals have over 30 years’ hands-on experience in this regard, and IPCM’s 5-Factor model has been the beneficiary of that practical experience. The single most important part of the entire IPCM value proposition is the selection of both high-impact indicators and the data points with which to assess them. </li></ul>
IPCM – Overview of our 5-Factor Model Today, 75-80% of companies’ true risk profile and value potential lies below the surface, and cannot be captured by traditional financial analysis. 1 5 Key Sustainability Factors: 1 Baruch Lev (2001) Intangibles: Measurement, Management, and Reporting . Brooking Institution Press.
IPCM – Summary of our Investment Process Investment Process: Integrating Financial and Sustainability Factors – From the Outset