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The March of Geopolitics and ESG integration

Michael Mulcahy, Senior Consultant and Investment Manager, and Raymond Lam, Consultant visited global equity managers across seven cities during a recent research trip concluding in March – here are their key takeaways.
 

24th May 2019 / 6 mins read
Raymond Lam
Senior Consultant
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Michael Mulcahy, Senior Consultant and Investment Manager, and Raymond Lam, Consultant visited global equity managers across seven cities during a recent research trip concluding in March – here are their key takeaways.

In this article

  • High-level themes observed amongst global equity managers across Europe and the US
  • The ongoing evolution of ESG integration
  • Longer-term structural implications of geopolitics
     

As part of JANA’s regular programme of global research trips, Michael Mulcahy, Senior Consultant and Investment Manager, and Raymond Lam, Consultant, from JANA’s Global Equities Research Team recently visited Paris, Rotterdam, Brussels, London, New York, Washington and Los Angeles over late February and early March. The three broad focus areas of this research trip were:

  1. To visit incumbent and new global equity managers as part of JANA’s well-established global research programme. For incumbent managers, periodic on-site meetings held at the managers’ overseas offices complement our regular meetings with these managers in Australia and via VC/teleconferences, providing further opportunities to broaden our interaction with overseas-based investment teams. 
  2. To meet a range of global equity managers with strong ESG/SRI credentials in order to gauge the ongoing evolution of their ESG approaches against the calibre of their overall investment processes.
  3. To assess the longer-term structural implications of geopolitics on various investment themes. As part of this focus area, we met with a Washington-based political think tank, a global geopolitical advisory firm and a former Pentagon official to conduct far-reaching discussions.

Investment Insights

In addition to these focus areas, high-level themes emanating from the meetings revolved around the ongoing performance disparity between growth and value style managers:

  • Growth managers are starting to show a pronounced bifurcation between those who think that high growth companies are an absolute good investment and that the existing supportive regime will persist, versus those who discern that they will need to be nimble, watching valuations and franchise quality closely. 
  • On the other hand, value managers are feeling the heat of protracted relative underperformance and are seeing few clear areas of opportunity without commensurate risk.

Given this context, differentiating between growth managers will become more important, whilst ensuring that value managers do not succumb to style drift from their stated investment process and philosophy remains a key monitoring point.

ESG Insights

The importance of incorporating ESG considerations into investment processes is becoming more broadly accepted, even within the US investment culture which has traditionally been a laggard in this respect relative to Europe and Australia. The discussion around ESG has evolved over time from a more niche topic to a generally accepted risk-mitigation practice, with a targeted focus on the ESG factors that are most financially material to individual sectors and companies. Managers with a strong ESG/SRI focus have built up dedicated teams to assess ESG criteria across sectors, regions and individual companies, with some turning their attention to assessing sovereign ESG ratings. 

For those managers that specifically identify as ESG/SRI-focused and have built their reputations upon these credentials, we observed a wide spectrum in terms of the overall robustness of investment processes compared to what we would consider to be top echelon investors. More and more traditional managers are making evident progress in their ESG research, resourcing and philosophy however, which bodes well for the industry’s ongoing trajectory of concerted genuine ESG integration and investment outcomes.

Geopolitical Insights

On the topic of geopolitics, we sought to focus discussions beyond the US/China trade war tweets and news flow driving shorter-term market movements, instead focusing on the potential longer-term structural implications. Some noteworthy points to come out of conversations held with subject matter experts and managers included:

  • The topic of 5G – the confluence of geopolitics and technology, elicited a broad range of perspectives; from one manager labelling the new technology as overhyped, to a global geopolitical advisory firm singling it out as representative of the fragmenting of US/China technology ecosystems and all the firms that straddle these areas.
  • On the great power struggle between US/China currently being played out amidst the trade war, we spoke to the CEO of a Washington-based political think tank who summed up a prevalent US political mentality well when he said that “conflict would be catastrophic, but we can’t sit back and let them shape the world”.
  • The diversification of manufacturing supply chains away from China towards other emerging markets is a phenomenon which was already in train before the current US/China trade tensions erupted, driven by factors such as increasing domestic labour costs (especially in labour-intensive areas) and more stringent environmental standards in China. The impact of tariffs may be speeding up this process, though there is a limit to how quickly supply chains can be shifted given practical considerations around developing the necessary manufacturing scale, infrastructure and labour skills in other markets. 
  • A key topic to watch in the ongoing US/China trade war saga is the sticking point of enforcement, which may be the key. 
     

In conclusion, whilst ongoing developments in the US/China trade war have contributed towards marked short-term movements in investment markets and sentiment over the past year, there are longer-term structural investment implications to consider regardless of how the current trade negotiations play out.