Governance Core to Stewart’s Emerging Markets Strategy
The sustainable fund consistently outperforms its benchmark while maintaining a low-carbon intensity, and finds the right management teams to mitigate risk.
The central role that corporate governance plays in investment manager Stewart Investors’ Global Emerging Markets Sustainability (GEMS) Strategy has been underscored to mark the 15th anniversary of the fund’s launch.
The firm has been investing in Asia since 1988, and emerging markets since 1992. It first launched a sustainability strategy for Asia in 2005, followed by GEMS in 2009 – both of which were driven by client demand. In addition to Asia, the GEMS strategy has invested in Europe, Africa, and Central and South America, with investors including large pension funds.
GEMS targets the generation of long-term, risk-adjusted returns by investing in the shares of high-quality companies deemed to be well-positioned to contribute to, and benefit from, sustainable development. The strategy has US$1.7 billion in AUM, while Stewart Investors’ total AUM stood at US$18.6 billion as of 31 March.
“Corporate governance was at the centre of how we invest, simply because you have to if you’re investing in emerging markets and Asia over long periods,” Jack Nelson, Portfolio Manager and GEMS Co-manager at Stewart Investors, told ESG Investor. “Our average holding period is more than five years [and] the quickest way to lose clients’ money is to invest with the wrong people in emerging markets, as you don’t have the same protections.”
As such, the firm has been prioritising investments in high-quality companies with good corporate governance, resilient cash flows and solid balance sheets, Nelson explained.
“When things go wrong in emerging markets – which they very often do – our companies tend not to decline in value as much as others,” he added. “That’s been the bedrock of our approach for 30 years.”
Beating the odds
The GEMS strategy has generated an annualised return of 10% for the 15-year period through March 2024 for Stewart Investors, consistently outperforming the MSCI Emerging Markets Index which returned 7%. It has also beaten the index in 11 of 14 full calendar years between 2010 and 2023.
GEMS is currently invested in 53 holdings across a range of different industries, with the strategy holding shares in an average 30-75 companies at a time. Stewart Investors’ global team of 50 analysts backs up the fund’s strategy by analysing existing holdings and highlighting prospective opportunities.
“We tend to beat the market in moderately rising markets and falling markets, but we lag slightly in very fast-rising markets,” said Nelson. “We are considerably less carbon-intensive than our benchmark as a consequence of our approach to picking stocks. This can lead us away from certain types of companies that do well at certain times.”
Nelson also noted the importance of focusing on the right investment management teams to drive successful emerging market investments. “We look at the quality of people, which is something that gets neglected a bit by the broader market because it doesn’t fit many people’s processes,” he said. “Most of our industry is geared towards quantitative analysis, ranking, scoring, and anything that can be put into excel, while shunning qualitative assessment.”
Although the practice of assessing people can leave room for ambiguity and be viewed as subjective, doing so is integral to Stewart Investors’ strategy, particularly for emerging markets.
“If you invest with the wrong people, that’s the quickest way to lose all of your client’s money,” Nelson added. “Most of our portfolio is invested in companies that have identifiable stewards, and we use the word stewardship a lot [because] it aligns superbly with sustainable thinking.”
Stalled African potential
In January, the International Energy Agency’s (IEA) annual report underscored the importance of emerging markets in the investment landscape and in meeting climate change targets. It also warned that the goal of tripling renewable energy use by 2030 set during last year’s COP would not be met unless further financial support was provided to them.
According to the IEA, the world gained an extra 50% in renewable energy last year compared to 2022 levels, but group of 20 countries accounted for nearly 90% of global renewable power capacity. The agency has previously said that US$4 trillion of yearly investments in renewable energy would be needed globally until 2030 to achieve net zero by 2050 – of which at least US$1 trillion should go to emerging markets and developing economies.
Africa has often been singled out for its solar energy potential, which could help drive the expansion of renewable energy, for example. However, the promises the continent holds in that respect have so far failed to materialise.
“We had hoped 15 years ago that Africa would become a much more important part of the universe over time,” said Nelson.
As a continent housing entrepreneurs and economies at opportune stages of development, Africa had the potential to develop into a more stable and prosperous part of the world, with many – including Stewart Investors – anticipating fruitful investment in companies that contributed to, and benefited from, its growth.
“Unfortunately, that hasn’t happened for a variety of reasons,” Nelson added. “It has to do with macroeconomics, political governance and a lack of new listings in equity markets. If anything, the opportunity set [in Africa] has narrowed materially over the last 15 years.”
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