Looking for Long-term Stewards of Capital

    Stewart Investors has a long tradition of managing high-conviction active equity portfolios, and sustainability is core to its investment approach. The Edinburgh-headquartered firm has applied a consistent philosophy since launching its first investment strategy in 1988. Perhaps best known for its Asian and Emerging Markets funds, the asset manager has expanded its product portfolio gradually over the years to incorporate worldwide and, most recently, European strategies.

    Lorna Logan
    Co-fund manager European Sustainability Strategies
    Stewart Investors

    NordSIP reached out to Lorna Logan, who co-manages Stewart Investors’ European Sustainability Strategies alongside Rob Harley, to hear more about the way she and her colleagues endeavour to find great sustainability leaders and invest in them for the long run.

    Logan is part of a small but diverse team of experienced analysts and managers who have all been sworn to a strict code of conduct, a proprietary ‘Hippocratic Oath’, pledging to uphold the principle of stewardship through their conduct and work practices. According to Logan, being located all around the globe doesn’t prevent the group of dedicated professionals from continuously debating their investment ideas in an open, lively, and collegiate manner. “We are all passionate about sustainability, and believe it is also a key driver of investment returns,” she says.

    Partnering for the long term

    Stewart Investors’ portfolios are relatively concentrated and purely conviction based. “We start with a blank sheet of paper and seek out high-quality companies that are also sustainability leaders,” explains Logan. “For us, it’s not a question of either one or the other; both requirements are equally important. There are plenty of great sustainability companies out there, but we are only interested if they also have strong and competitive franchises, exceptional people and cultures, and resilient financials.”

    According to the manager, the quality of the people running the companies is essential. “Our investment time horizon is ten years or longer, so we look for companies owned and operated by people with similar time horizons, who we can trust with our clients’ capital,” she says. “We dedicate a lot of time to getting to know the people behind the businesses we invest in and to understanding their motives, their approach to sustainability, and their track record.” A critical question to ask, according to Logan, is how they treat their various stakeholders – customers, suppliers, employees, and the communities where they operate. “Do they walk the talk?” she says.

    “Our long-term horizon often leads to a preference for companies that have a family founder, or foundation at the helm, as these stewards tend to have a similar long-term focus,” reflects Logan. “Many of these owners are there to look after the company for the next generation, not just the next quarter,” she adds. This approach seems to work, judging by the fact that some of the companies in Stewart’s portfolios have been held for more than 25 years.

    What is a sustainable company?

    “We favour a broad and rounded approach to assessing sustainability; the opposite of an ESG ‘tick-the-box’ approach,” says Logan. Many investors are turning to third-party data providers nowadays to help them with their ESG analysis and even to help them decide whether a company is sustainable or not. While Logan admits that some ESG data can be useful in certain circumstances, she believes that an overreliance on simplistic scores can be dangerous when building investment portfolios. Moreover, it is unlikely to help reorient capital towards more sustainable companies, according to her.

    “At Stewart Investors, we look to invest in companies that can help reduce our ecological footprint, or advance human development, or ideally both. These attributes are difficult to identify by relying solely on ESG scores, so we prefer to do our own research, which is highly qualitative in nature and based on a wide variety of information sources, including bespoke commissioned research.”

    To illustrate the type of companies that Stewart Investors selects, Logan leads us through a couple of topical investment cases. Both holdings that she picks up, Nemetschek and DiaSorin, are great examples of sustainable companies that might be overlooked by investors who only focus on ESG scores, according to her.

    Reducing buildings’ ecological footprint

    Nemetschek’s products help incorporate energy and resource efficiency into building and architectural plans, including circular economy principles. They also aim to optimise the ongoing operations of buildings to reduce energy and resource requirements. The idea to invest in the company was born on a trip to Germany, exploring various investment options, recalls Logan. Set up and managed by an inspirational founder who provides long-term stewardship, it is an entrepreneurial company focused on innovation and driving industry change. Professor Nemetschek, who founded the company in 1963, still sits on the Board, and his family owns half of the business. Nowadays, the venture has grown into a conglomerate of 13 companies which are involved in making software used in the construction industry.

    “The buildings and construction sector is one of the most resource-intensive industries, and contributes between 30 and 40% of global carbon emissions”, explains Logan, “so the positive impact of Nemetschek’s software can be huge.” As it turns out, it is a high-quality franchise as well, exhibiting high returns, recurring revenues, and consistent cash-flow growth. “The company is also well-positioned to benefit from changing regulations, such as the Circular Economy Action Plan (CEAP), one of the main building blocks of the Green Deal,” Logan points out.

    “George Nemetschek has also set up a Foundation and dedicates a considerable portion of his wealth to charitable purposes,” adds Logan. There should be no lack of money flowing into the philanthropic venture, given that the share price is up 340% in the last five years and 2900% over the previous ten years.

    Advancing human development by setting the correct diagnosis

    “One of our favourite healthcare companies is DiaSorin, an Italian-listed maker of in-vitro diagnostics,” says Logan, moving on to a somewhat different investment case. DiaSorin offers one of the largest menus of speciality diagnostic tests in the world, including gastrointestinal infections, oncology, and autoimmunity tests. Having recently acquired Luminex, the business is advancing into the fast-growing ‘multiplex molecular diagnostics’ segment. Another growth area is offering solutions for localised ‘point of care’ diagnostics, such as pharmacies and clinics.

    “DiaSorin’s products and services help improve early diagnosis and treatment of diseases as well as reduce costs in the healthcare system,” comments Logan, explaining the sustainable rationale behind the investment. “Accurate and early diagnosis can also reduce the use of unnecessary medicines such as antibiotics, helping to reduce the ever-increasing risk of antimicrobial resistance,” she adds.

    The investment case is underpinned by stable and long-term focused stewardship, as 45% of the business is owned by the Denegri Family. “The long-tenured executive team and the family have a 20-year track record of working together successfully, and the executives also have ownership stakes in the business,” says Logan.

    “The franchise is robust, with recurring revenues in the region of 90% and cash flows that are typically strong through the cycle. Consumable sales are growing due to an expanding installed base of machines and their increasing menu of new tests,” she adds.

    Daring to be different

    Given the substantial contribution to solving material environmental and social problems, and the stellar long-term performance of both Nemetschek and DiaSorin, one would expect to find them in any sustainable investor’s portfolio. And yet, these and many other similar companies might get a rather average ESG score in the mechanical assessment of data providers. A qualitative process and a broad and deep assessment of sustainability help uncover cases like these and channel more capital into the right companies.

    Logan believes Stewart Investors’ portfolios offer something different. “Our highly qualitative, bottom-up approach tends to produce portfolios that have an active share of over 90 or 95%; meaning they differ quite substantially from the benchmarks,” says the portfolio manager. “Our comprehensive approach to assessing quality and sustainability helps us find interesting companies that might be less well-known or might operate further up or down the supply chain than the usual high-profile sustainability names. We believe this highly active approach is the best way to deliver good risk-adjusted returns for our clients over the long-term,” concludes Logan.


    Image courtesy of Oliver Henderson oliverhenderso
    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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