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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Corporate stewardship is increasingly recognised as an important concept across the investment industry, but how exactly does it generate value and what can investors do to maximise its potential?
Simply put, we think that good stewardship practices help companies sustain attractive returns on capital, by enabling them to lower their cost of capital over time. When companies with high returns on capital reinvest in their stakeholders, this virtuous circle, or “flywheel” effect, increases the potential to sustain and improve financial returns and stewardship, and ultimately enhance share prices. A stewardship-driven investment approach can help optimise that potential by:
Putting stewardship centre stage — In our experience, companies that balance the pursuit of growth with the needs of employees, customers and the supply chain and who value the environment in the pursuit of profit may potentially achieve better and more sustainable long-term outcomes. When companies are led by an engaged board and a strong management team, they allocate capital wisely and invest for the long term and in the best interest of all stakeholders. With robust stewardship, they have greater potential to reinforce their competitive advantage and sustainably enhance returns over time.
Extending the investment horizon — A long-term focus directs research towards companies that have dominant market positions, stable industry structures and sustainably high returns on capital that compound over time. We believe that the stability and persistence of returns is often underestimated by the market, as the less measurable but equally important benefits of stewardship accrue over decades. A company that reinforces its returns through ongoing investment in its stakeholders helps reduce the volatility of earnings and boosts the benefits of long-term compounding. A long-term focus has the potential to move a company from delivering a high return on investment over one or two years to achieving high returns year in, year out. Focusing on building culture, reducing employee turnover, investing in innovation and ensuring preparedness for the energy transition are all likely to help drive long-term payoffs.
Using a broader lens — A long-term focus on returns and stewardship aligns with building a diversified core portfolio where the main drivers of risk and return are stock-specific. This diversification and focus on stock selection reduces country, sector and factor biases and strengthens the potential to generate above-market returns (alpha) in a variety of market environments.
Applying an active research-based approach — A robust stock selection process and engagement strategy together with a separate and intentional risk-aware approach to portfolio construction help ensure that the portfolio is built to navigate macroeconomic volatility despite owning names for the long term. We recognise that the value created by each of the companies in a stewardship portfolio will not be linear, so holdings will need rebalancing based on relative valuation. For instance, in our own portfolio, we aim to hold positions for 10+ years if returns and stewardship continue to meet our high bar, but the active weight of each position fluctuates significantly over its holding period due to our portfolio construction framework.
Stewardship strategies can also take advantage of the market’s inefficiency in valuing the more qualitative aspects of ESG, as these cannot easily be indexed or analysed from a quantitative perspective.
In our view, attractive candidates for inclusion in a stewardship-driven portfolio can be found across all segments of the broader market. They are typically high-quality businesses that are leaders in their sectors and offer attractive and relatively stable return profiles. Specifically, we believe good stewards:
In combination, we think that allocations to stewardship leaders are likely to translate into a diversified core equity portfolio that is generally less volatile than the broader market.
The below two examples highlight the breadth of the opportunity set and the role of stewardship in supporting companies that not only achieve a high return on capital but also act responsibly towards all their stakeholders.
* The examples shown are presented for illustrative purposes only and are not to be viewed as representative of actual holdings. It should not be assumed that any client is invested in the examples (or stocks similar to the examples), nor should it be assumed that an investment in any of the examples has been or will be profitable.
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