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 ESG 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 we believe 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 longterm 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 so for over 20 years.

 
 
 
Investment Process
1
Identify High Return Companies (post exclusions)

• High unlevered returns on operating capital employed (ROOCE)

• High gross margins (pricing power)

• Capital-light business models driving free cash flow (FCF) generation

• Strong balance sheet

• Exclude tobacco, alcohol, adult entertainment, gambling, civilian firearms or weapons, bulk commodities, fossil fuels, and gas or electric utilities

2
Make Sure Returns are Sustainable

•  Ability to remain relevant through powerful intangible assets including brands and networks, sustaining high barriers to entry. 

•  Returns sustainable against material threats or improvable through material opportunities, including Environmental or Social factors

•  Dominant market shares helping to protect against new entrants

•  Stable sales – often repeat business driving recurring revenues

•  Steady organic growth & geographic spread

3
Confirm Management’s Commitment to Sustaining Returns

• Focus on return on capital rather than sales or EPS growth

• Capital discipline (reinvest at high returns or return the excess capital to shareholders)

• Committed to innovation and investment in franchises

• Review management incentives

• Sound Governance structure

• Engagement on material issues or opportunities where relevant, including ESG factors

4
Valuation

• A focus on free cash flow, not accounting number

• FCF yield, DCF, EV/NOPAT

(EV = Enterprise Value (Market Value plus Net debt. NOPAT = Net operating profit after tax)

Global-Quality-Global-Franchise-Global-Sustain-Investment-Process
 
 
Investment Team  
William Lock
Head of International Equity Team
28 years industry experience
Bruno Paulson
Managing Director
26 years industry experience
Nic Sochovsky
Managing Director
22 years industry experience
Vladimir Demine
Head of ESG Research
18 years industry experience
Dirk Hoffmann-Becking
Executive Director
22 years industry experience
Nathan Wong
Executive Director
20 years industry experience
Marcus Watson
Executive Director
12 years industry experience
Alex Gabriele
Executive Director
11 years industry experience
Richard Perrott
Executive Director
14 years industry experience