During November the Ethical Partners Australian Share Fund returned -2.82% versus the S&P/ASX300 Accumulation Index of -2.18%, an underperformance of -0.64% (after fees).Since inception on 9 August 2018 the Fund has returned -6.47% versus the S&P/ASX300 Accumulation Index of -7.83%, an outperformance of 1.36% (after fees).During the month the Fund benefitted from overweight positions in IAG, ANZ Bank, Inghams and from not holding CSL and Woodside. Key detractors for the month included holdings in CYBG, CSR, Medibank, oOh Media and NIB Holdings.
During the month the Fund exited four company positions that outperformed in order to increase other existing positions that represent better relative value. We remain interested in acquiring quality companies at attractive prices in an environment that is seeing the largest weekly outflows from global equity funds on record and the largest weekly inflows into global money market funds (cash) on record (according to Goldman Sachs).
Market volatility has now returned to more normal levels after being extraordinarily low during 2017. Ethical Partners continues to have an active approach to managing the fund (we hold 30 stocks now versus the benchmark of 300), an active approach to company research and updating our views (we have had 211 company meetings year to date) and an active approach to what is included in our investable universe (we continue to apply our investment process to companies and will remove them if they no longer pass).
With the return of the volatility, the market is in no mood to ignore poor governance or poor company stewardship, with some resulting material effects on share prices.As Ethical Partners designs and owns its own approach to assessing environmental, social and governance risks, called the EPORA (Ethical Partners Operational Risk Assessment) our team is in a good place to understand developments and make those assessments on an ongoing basis for the benefit of clients. Through the EPORA and meeting company management regularly we constantly assess and make decisions about which companies will be included in our investible universe. We do this so that our investors can have confidence that we are investing based on the values they expect and that we can identify and avoid certain risks up front. We believe that good risk management and future performance are inextricably linked – those companies that are managed more carefully and thoughtfully will be the better investment opportunities over time.
In our view what should, or will over time, represent “normal investing” must include an assessment of operational risks at companies relating to management systems and processes that are in place. This can include issues like where garments or electronics products are made and what the on-the-ground conditions are like,how much transparency there is in supply chains from first tier suppliers and beyond and what safeguards are in place to ensure Modern Slavery is not taking place, what companies are doing to alleviate their potential environmental liabilities and what companies are doing to save natural resources and save expense in the process. Importantly, we do this work in-house with all members of the investment team contributing to the outcome, supported by experts in these areas. We recently read in Icebreaker’s (the outdoor apparel company) Transparency Report that was praised by the Walk Free Foundation as being game-changing, that Values and Viewpoints cannot be outsourced. Ethical Partners agrees and implements its own views and values. Analysts in our team take a view on sustainability and the risk of investing in each company as they make the assessment of whether companies are to be recommended for inclusion or remain in Ethical Partners investible universe.
We are constantly updating our views on companies and will take action when we feel the company no longer should be investible in our funds. To that end in August this year, whilst the Ethical Partners Fund has never actually owned the stock, were moved IOOF from Ethical Partners’ investible universe based on the company’s response at the Royal Commission. We did not feel that there was an appropriate acknowledgement of the wrongdoings towards customers or any commitment to change going forward. The recent action by APRA that is looking to disqualify senior members of the management team and Board vindicates this view. Another stock we talked about in our monthly report in August (that is excluded from our investible universe) has also fallen more than 60% since that time, due to governance and country risk issues. These types of risks to shareholder wealth have been around for a long time but systematically analysing them and grouping them into a practical investment process can help in identifying and avoiding them before they become a problem. Uncovering the companies that do everyday things well and encouraging others to meet and exceed those standards will be helpful to shareholders, employees, suppliers and the natural environment.
This year our team has been meeting with many of the listed companies’ Sustainability Managers and teams and looking at their approach, taking note of where the sustainability function reports to within the corporate structure (ie: Corporate Affairs, CEO or Board). We have also been gaining knowledge of the awareness of senior management and Board to the various processes and risks within companies, and there is a wide gap between those that know and those that do not. Ethical Partners is engaging with some of Australia’s largest companies around sustainability issues, particularly sovereign risk, and we have been putting our views forward, including a piece written by our Senior Analyst,Andrew Wilson on the Buy Now Pay Later industry. One management team we spoke to commented that the components of our Investment Process matched quite closely to how they assessed risk throughout the business, which was interesting to the team because the closer our thinking can be to how companies are run, the better investors we will be in the long run.
Looking forward, it is clear that the present market conditions demand a vigilant approach and we feel that our investment process that analyses company balance sheet, cash flow, management and operational risk first, before looking at valuation, is a Responsible*approach, it keeps us Accountable*and it gives us the Confidence to be Different* with respect to our research, advocacy and stock calls.
* Ethical Partners’ company values.
Nathan Parkin Matt Nacard
Investment Director Chief Executive Officer
