Global Sustain Strategy
Global Sustain Strategy

Global Sustain Strategy

 
 
 
Summary

The Morgan Stanley Global Sustain Strategy is a concentrated global equity strategy that invests in 25-50 high-quality, world class companies at reasonable valuations that can sustain their high returns on operating capital over the long term. The portfolio has a low carbon impact and scores well on environmental, social and governance (ESG) factors as measured by third parties, such as MSCI ESG, relative to broad equity indices such as MSCI World Index. The strategy seeks to provide attractive long-term returns with less long-term volatility than the broader market.

 
 
Investment Approach
Philosophy

Global Sustain offers the same long-term focus on high-quality companies and integration of material ESG factors – both threats and opportunities to long-term returns – as the team’s other global equity strategies. The strategy has explicit restrictions against investments in companies with a core business* in tobacco, alcohol, adult entertainment, bulk commodities (coal, iron ore, etc.) and fossil fuels, gas and electrical utilities, controversial weapons and civilian firearms.

The team believes investing with a conscience is fully compatible with generating attractive long-term returns and that the best way to compound shareholders’ wealth over the long term is by owning very high-quality companies with sustainable and high returns on operating capital. Material social and environmental risks to the sustainability of high returns are more important than ever, given political and technological change. Leading the way on such issues can be a positive force for corporate success if it drives consumer and/or employee engagement. The higher the quality of a company, the more important the governance, as management has more degrees of freedom to mismanage the business.

*A core business activity is one that accounts for more than 10% of the relevant company’s revenues.

 
Differentiators
A robust active process

Our bottom-up stock picking approach, ongoing access to management and use, where appropriate, of external sources such as MSCI ESG and Sustainalytics data, enable us to review material ESG issues with companies and engage with management where relevant.

Integrating ESG without compromising quality

We look for companies that have sustainably high return businesses that can compound over the long term.  We look for any risks or opportunities (including ESG factors) that may materially influence long term returns on a case by case basis as part of our investment process.

A proven investment team - successful record of engagement

As bottom-up long-term investors, the team interacts directly with company managements on issues they believe are material, and has done for over 20 years.

 
 
 
Investment Process
1
Identify high return companies (post exclusions)
  • High and unlevered ROOCE
  • High gross margins (pricing power)
  • Capital-light business models driving free cash flow (FCF) generation
  • Strong balance sheet
  • Return of cash to shareholders
2
Make sure returns are sustainable
  • Ability to remain relevant trough intangible assets – portfolio of strong brands, copyrights, licenses or networks, able to sustain high barriers to entry
  • Returns sustainable against material threats, or enhancement through material opportunities, including Environmental and Social factors
  • Dominant market shares protecting against new entrants
  • Stable sales – often repeat business driving recurring revenues
  • Geographic spread
  • Steady organic growth
3
Check management looking to sustain returns
  • Committed to innovation and investment in franchises
  • Focus on returns on capital rather than sales or earnings-per-share growth
  • Capital discipline (reinvest FCF at a sustainably high ROOCE or return the excess capital to shareholders)
  • Appropriate management incentives
  • Sound Governance structure
  • Engagement on material issues or opportunities where relevant, including ESG factors
 
 
Investment Team
Head of International Equity Team
27 years industry experience
Managing Director
25 years industry experience
Executive Director
21 years industry experience
Managing Director
21 years industry experience
Executive Director
17 years industry experience
Executive Director
19 years industry experience
Executive Director
11 years industry experience
Executive Director
10 years industry experience
Vice President
13 years industry experience
 
 
Insights
Global Equity Observer
Multiples Are Down, Risks Are Not
Jan 15, 2019
Could falling earnings and a liquidity squeeze prove toxic to asset prices? Where to hide? Asks Morgan Stanley’s International Equity Team.
Macro Insight
The Power of Compounders with William Lock
Sep 27, 2017
William Lock explains why he believes a company’s intangible assets are integral to achieving sustainably high returns.
Macro Insight
Quality Companies in Today’s Market Environment
Apr 25, 2017
Bruno Paulson explains why consumer staples performance is more about earnings than interest rates.
 
 
 
 

RISK CONSIDERATIONS

Diversification does not protect you against a loss in a particular market; however it allows you to spread that risk across various asset classes.

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, government regulation and economic conditions may adversely affect global franchise companies and may negatively impact the strategy to a greater extent than if the strategy's assets were invested in a wider variety of companies. In general, equity securities' values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. Stocks of small-capitalization companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. Option writing strategy. Writing call options involves the risk that the Portfolio may be required to sell the underlying security or instrument (or settle in cash an amount of equal value) at a disadvantageous price or below the market price of such underlying security or instrument, at the time the option is exercised. As the writer of a call option, the Portfolio forgoes, during the option's life, the opportunity to profit from increases in the market value of the underlying security or instrument covering the option above the sum of the premium and the exercise price, but retains the risk of loss should the price of the underlying security or instrument decline. Additionally, the Portfolio's call option writing strategy may not fully protect it against declines in the value of the market. There are special risks associated with uncovered option writing which expose the Portfolio to potentially significant loss.

 

This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Past performance is no guarantee of future results.

A separately managed account may not be suitable for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Any views and opinions provided are those of the portfolio management team and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

All information provided has been prepared solely for information purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

OTHER CONSIDERATIONS

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

The MSCI World Index is a free float adjusted market capitalization weighted index that is designed to measure the global equity market performance of developed markets. The term "free float" represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. The index is unmanaged and does not include any expenses, fees or sales charges. It is not possible to invest directly in an index.

The information presented represents how the portfolio management team generally implements its investment process under normal market conditions.

Weights and holdings and tracking error provided are a typical range, not a maximum number. The portfolio may exceed this from time to time due to market conditions and outstanding trades.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.

 

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