Philosophy & Process
ESG Approach
Risk Management
“We have great faith in our ability to continue to deliver superior outcomes for our clients over the long-term, provided we invest with conviction, creativity and humility”
Rob Marshall-Lee, CIO  

WHY EMERGING MARKETS

Many of the world’s most exciting capital growth opportunities are found outside of the developed markets. In the emerging markets, industries are often driven by multi-decade structural tailwinds, such as demographic shifts or technological revolutions. Cusana’s emerging market universe centres on businesses that occupy globally enviable competitive positions, oftentimes underpinned by leading-edge technology.  By contrast, the emerging market benchmark is blemished by a great number of far weaker businesses, frequently operating in unattractive sectors. We therefore believe that the emerging markets are a fertile environment for a truly active manager to add exceptional value to client portfolios. 

PHILOSOPHY

In virtually all global stock markets over the long term, most investment returns have been driven by a small cohort of stocks. From 2011 to 2021, ten stocks contributed 38% of total shareholder value in the emerging markets whilst the top 50 stocks contributed 51%.  Cusana believes that active managers must endeavour to allocate investor capital to these exceptional, value-generative businesses and own them over the long term. We therefore spend our time seeking such businesses; we hunt for companies that are able to compound economic returns at sustained high rates over an extended period of time on a per-share basis. In purchasing shares in these businesses at a material discount to their intrinsic value, we believe that we will be able to continue to deliver sustained outperformance for our clients. 

PROCESS

The emerging market indices contain over thirty thousand companies. At Cusana, we consider only a small fraction of these businesses investable. To distil this vast universe down, our principle input is our thematic outlook: Cusana views the world not through sector classifications or geographic boundaries but instead through global themes. Where we identify pockets of long-term thematic support, we conduct deep, bottom-up fundamental research. This research in turn establishes the subsets of businesses that consistently generate economic value, allocate capital shrewdly and treat minority shareholders equally. These subsets of businesses form our investable universe. We buy shares in companies within this investable universe only when we perceive there to be a significant decoupling between a company’s share price and its intrinsic value. This presents us with highly asymmetric prospective returns. When evaluating intrinsic value, we consider a five-year horizon and employ rigorous scenario testing as well as balance-sheet stress testing. 

BENCHMARK AGNOSTIC

Benchmark-hugging in the emerging markets does not reduce risk. From our decades of experience in these markets, to hug the benchmark is – by definition- to seek to mirror the performance of a comparatively greater concentration of weak or even corrupt businesses. In contrast, we believe that the best way to reduce risk in the emerging markets is to prudently select a portfolio of high-quality businesses. In assessing the balance sheets, corporate governance, and management teams of our investee businesses, we believe that the Cusana portfolio exhibits far lower absolute risk when compared to benchmark-aware emerging market funds. As a result, our returns are highly differentiated - not just from the benchmark, but so too many of our peers.

UNIFIED THINKING

The sustainability of each company is integral to our assessment of value as long-term investors. We therefore place at least equal emphasis on ESG considerations as we do financial metrics. Indeed, a thorough analysis of one cannot exist without a solid understanding of the other. Cusana exercises judgment and experience to ensure that the portfolio’s investee businesses are run in the interests of all shareholders. We seek to invest in good corporate citizens that contribute to the societies in which they exist.

PRINCIPLES-BASED

We believe that a principles-based approach enables Cusana to better assess highly complex issues for which available data may be inadequate or even misleading. Principles aid our judgment, so that we do not become lost in well-meaning but misguided quantification. Our principles guide us to invest in a manner that prioritises ESG in substance, rather than being lost in a process of metric computation, false precision and box-ticking.

ESG PROCESS

Whilst implicitly at the heart of most of what we do at Cusana, ESG is explicitly integrated into the Cusana investment process at several stages. First, Cusana excludes businesses which derive any more than the following proportion of revenues from: adult entertainment (5%); armaments (10%); gambling (10%); tobacco (10%); thermal coal (30%). More significantly, all existing and prospective holdings in the Cusana portfolio are assessed against a detailed investment checklist, several sections of which relate to ESG factors. From this checklist, the investment team highlight the three-to-five most material factors as relates to the investment thesis under consideration. Frequently, we find that corporate governance factors are identified as one of these more material considerations.

ENGAGEMENT

The investment industry is key to driving behavioural change, as it can direct the flow of capital to good actors and conversely divert it away from the bad actors. We will therefore actively engage with our investee companies where we perceive their activities or failure to consider fully the impact of sustainability as a risk to shareholder value. Engagement is therefore a fundamental part of the Cusana process, normally undertaken through correspondence or, if necessary, company meetings.

 

Our ESG Policy is available upon request.

FOCUS ON ABSOLUTE RISK

Risk management starts with Cusana’s fundamental equity analysis.

  • Risk is assessed on a company-by-company basis. A culture of risk management is thus embedded within the investment team. Stock specific risk is primarily identified through an appraisal of a company’s profitability, cash conversion, reinvestment requirements, liquidity position and leverage. The treatment of minority shareholders is also assessed throughout our stock-specific due diligence.
  • At a portfolio level, we carefully review factor risks in the portfolio so that we understand the component parts of our risk profile.  Whilst we are comfortable taking factor risks, we must be confident that we are sufficiently compensated for taking that risk. Risk profiling never informs stock selection. 
  • At a business level, the Risk Committee will review business risk – including a review of macro events, historical trading and FCA matters. It is imperative to appraise all three: stock, portfolio and business risk – and to operate an independent risk committee to review each of these three aspects each month. 

ACTION WHEN NECESSARY

We strongly believe in swift action when necessary. In recent years, there have been two examples of the merit of this approach: first, once the seriousness of COVID became apparent, two positions were quickly exited due to cash flow and balance sheet concerns; second, the strategy sold its residual holdings in Russia in advance of the invasion of Ukraine as the probability of this event – and thus a large impairment to the positions – was deemed sufficiently elevated to warrant action. Both decisions have been vindicated in the months and years since. Cusana will act with similar decisiveness should such a time necessitate it.

RISK COMMITTEE

The CEO is responsible for monitoring firm-level risk statistics. The Risk Committee is comprised of the Chairman, the CEO and a designated non-executive member of the board. The CIO reports into the Risk Committee. It is the responsibility of the Risk Committee to review the factor risk profiles of Cusana’s portfolios. The Risk Committee meets monthlys. 

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