Global Sustain Strategy

Global Sustain Strategy

Global Sustain Strategy

 
 
Summary

The Morgan Stanley Global Sustain Strategy is a high quality, ESG-integrated global equity portfolio that is strong on engagement, light on carbon and built on quality. The Strategy invests in high quality companies at reasonable valuations that can sustain their high returns on operating capital over the long term. The portfolio typically invests in intrinsically carbon-light companies and has a significantly lower carbon footprint than the broader market, with a robust carbon-related exclusions policy and filtering process. It has a number of restrictions, including fossil fuels, alcohol, tobacco and weapons. The investment team views long-term portfolio manager-led engagement as a critical underpinning to an active investment process. 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
REASSURINGLY CARBON LIGHT

The investment process offers investors the reassurance that Global Sustain will maintain a significantly lower carbon footprint than the broader market, and the team actively engages with company management on their decarbonisation strategies.

A ROBUST, ACTIVE, ESG-INTEGRATED PROCESS

ESG considerations are a fundamental part of the investment process and assessed directly by the portfolio managers using a proprietary ESG scoring framework: the Material Risk Indicator (MRI). The MRI helps to identify material risks and opportunities at company level, consider them in valuation and portfolio construction where appropriate, and identify priority areas for future engagement. 

INTEGRATING ESG WITHOUT COMPROMISING QUALITY

The investment team looks for companies that they believe have sustainably high return businesses that can compound over the long term. The team looks for any risks or opportunities (including ESG factors) that may materially influence long-term returns on a case-by-case basis as part of their 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

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 protect against new entrants

•  Stable sales–often repeat business driving recurring revenues

•  Steady organic growth and geographic spread

3
Confirm Management’s Commitment to Sustaining Returns

• Focus on return on capital rather than sales or earnings per share (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
William Lock
Head of International Equity Team
30 years industry experience
Bruno Paulson
Bruno Paulson
Managing Director
28 years industry experience
Nic Sochovsky
Nic Sochovsky
Managing Director
24 years industry experience
Marcus Watson
Marcus Watson
Managing Director
14 years industry experience
Alex Gabriele
Alex Gabriele
Managing Director
13 years industry experience
Nathan Wong
Nathan Wong
Executive Director
22 years industry experience
Marte Borhaug
Marte Borhaug
Head of Sustainable Outcomes
12 years industry experience
Vladimir Demine
Vladimir A. Demine
Head of ESG Research
20 years industry experience
Richard Perrott
Richard Perrott
Executive Director
16 years industry experience
Isabelle Mast
Isabelle Mast
Executive Director
17 years industry experience
Anton Kryachok
Anton Kryachok
Vice President
12 years industry experience
Fei Teng
Fei Teng
Senior Associate
Helena Miles
Helena Miles
Senior Associate
Jinny Hyun
Jinny Hyun
Analyst
 

Team members may be subject to change at any time without notice. The investment team currently has 14 members; information on additional team members can be found on MSIM.com.

 
 
 
 
 

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