Longbow's ON POINT with Nadine Terman & Sonia Kowal | March 2023

Thank you, Nadine. You must be having a field day if you're looking at financials right now.

Yeah, the quality aspect of what we invest in is definitely front and center of our process. Philosophically, we're very patient. We're prudent capital allocators. We don't feel that pressure to create portfolio turnover just for the sake of showing activity. We're pretty style disciplined — we have a strong sense of what we're good at, and we stick to that playbook. So that includes finding those highest-quality businesses to invest in, paying close attention to a variety of risks, adhering to that consistent valuation framework, and then allowing those learnings from our ESG analysis and company engagements to inform our decision-making.

Yeah, that's the really tricky thing. So we don't do this via data mining through the ESG research providers. We do subscribe to them, but they're just one small input, and it's really a red herring. I used to work for one of these research firms, and the information in these data providers is very backward-facing. It only gives a very superficial view of what's happening within a company. It's useful for a quick check, but to base an investment decision on that is a terrible idea. So instead of relying on external research, we're conducting primary research on various issues and locations, built up from decades of experience in the field, listening to advocacy organizations and stakeholders on the ground. That's how we build up our ESG view of a company. And E, S, and G are so separate — people like to put them together, but they're totally different.

So we have fundamental research analysts, equity analysts that are really looking at the financials of the underlying holdings, and then we have people that are more concentrated on the ESG side of things. But they work very closely together to identify ideas, to go through risks, that sort of thing.

Yeah, we actually don't look at metrics very much. We don't think that these issues are easy enough to distill down into numbers. And so we're looking at more the qualitative side of things. Obviously, something like environmental issues — sometimes a company will report enough data to analyze quantitatively their performance, but that's pretty unique and you can't really do it comprehensively across the board and compare and contrast companies that way. It's not like doing the same thing with a company's financials.

Yeah, so it's interesting. We tried to work with Bloomberg a few years back to try and pull out the alpha from our ESG work, and especially in a global portfolio, it's really hard to do that. There's just not enough coverage and the data is really not good enough.

Yeah, so we have not been able to prove — we think that we have added alpha through ESG analysis, and we have various stocks that we either stayed away from or we've sold because we've noticed deteriorations. But we can't prove that comprehensively through looking at kind of a big picture in numbers. And so I'm always really interested to hear about others that have. I mean, you have all this meta-analysis from all these different academic studies which seems to show that you can look at ESG and outperform over time. I don't know how much causality there is there, because it really depends how good you are at analyzing these factors, right? Especially since last year, if part of your ESG had a belief about certain things in energy — we have clients who had boundaries around it, you couldn't invest in energy, and that was the one performing sector last year.

That's what we found. We didn't own fossil fuel companies, but we did really well regardless of that.

Yeah, it's tricky when you have a broad kind of blanket screen on especially a few sectors — that makes it really tough. Luckily, we don't have that. Fossil fuels is the one area where we're not comfortable investing, because they don't meet our environmental criteria or our social criteria. And on governance, they're still being compensated for growing, and growth through exploration and production. And what we would like to see these companies do to really adapt to the future is shrink, throw off all that cash to investors, and let investors do what they want with it. Because we don't think that they can really transition to be energy companies the way that they need to for the world to hit net zero.

So we just bought a building materials company, for example, that focuses on reducing the carbon of cement and other materials that are used in renovating buildings to make them more energy efficient. That's a pretty positive holding. Not all of our holdings are that kind of aligned with a net-zero environment, but that's an example. Or we'll hold a renewable stock, or we'll hold a utility that's forward-thinking. But we need to keep volatility at a minimum and we need to focus on quality, and not all of these energy transition companies have met our quality criteria.

Typically in the portfolio. But we don't want too many of these small, super volatile companies in a portfolio.

Yeah, so they are pretty large-cap. We have a minimum large-cap criteria of 10 to 20 billion. Pretty concentrated, 30 to 50 names. We're benchmarked against the ACWI, and really the portfolio construction is all around managing risk — looking at correlations around the portfolio into risk factors, managing position size and diversification, and then trying to reduce portfolio downside resulting from exposure to different regions, countries, sectors, that sort of thing. And then really focusing on ESG in terms of trying to figure out who's going to face future liabilities from this. And then on the stock level, focusing on avoiding potential significant losses of capital because of excess valuation or declining cash flows, minimizing exposure to excessive financial leverage — that's a really key one right now — lower returns on capital, and declining profits.

No, we take sector bets, absolutely. We're not closet indexers by any stretch. Historically, we've had a fairly large allocation to IT. That's come in in the last year, so we're fairly kind of market right there. Underweight financials — we really don't like the banks, we never have, and that's held us in really good stead right now.

Yeah, so we have somebody on staff who's an econometrician, and so he really has the job of looking and being our macro analyst. That helps inform our decision-making and provides insights for the PMs and the equity analysts on how different regions around the world are faring. We think if you're a global investor, it's really important to look at the macro factor. What he does is run various global business cycle scenarios through a proprietary econometric model to help us identify different regions and sectors of opportunities and risks. To be honest, I'm not really sure how he does that, but he's been working on this since 2008 and has provided a lot of value.

Yeah, so we've written about it a couple of times in the last year, and obviously it's important, but we're trying to not be so reactive to what's happening in markets right now. Obviously there's a lot of skeletons coming out of the closet, and there's obviously certain sectors that are more exposed to an economic cycle. But we're really looking at fundamentals, and we understand that sometimes sentiment gets in the way based on where a company is located or whatever. We're trying to ride out all these ups and downs and don't focus on them too much, even though we're watching interest rates and market sentiment like a hawk.

Yeah, so it's kind of how I mentioned — we think about portfolio construction, we're looking at risk from a portfolio angle, an asset angle, region, sector, ESG, and then down to the stock level.

Well, I guess everything has risk, right? So it's a question of how much you want to be paid for taking that risk.

So we're really trying to figure out — we're looking at valuations for sure, how much different sectors, regions, asset classes have moved in the near term, and is there any kind of opportunities, any dislocations that we can take advantage of. But we're not churning portfolios. As I mentioned earlier, we're adding a few names a year, so we're not actively being tactical.

So that's certainly — we've got conviction.

So typically people seek us out because we're known for the work that we do on the impact side, in shareholder advocacy. We do have clients that are just interested in performance, not excited about ESG at all, but for the vast majority, that's why they find us. And the majority of our clients — we have a lot of families, family offices, that's probably about half of our clients, and the other half are foundations, endowments, faith-based institutions, and platforms. So they've already self-selected to be all in to ESG.

Yeah, so we put out a fair bit of materials, most of them on our website, but sometimes we do client communication only — like we just did yesterday with what's happening in the financial sector. We'll write on investment themes where we think we have something additive to say. Once a quarter, we also put out an impact update to discuss what we've been doing with our corporate holdings and how we've been pressing them for change. We also do some public policy work, so we talk about that. And then every two years we issue a big, fat impact report — we do it every two years because over a shorter period of time you're not really getting the full scope of what's happening, because true impact takes change and it takes longer than two years typically, but you can look at a trend that way. We also publish reports more frequently, typically once a quarter, on some kind of social or environmental theme. And we do also send out emails about stocks that we hold — typically a new portfolio holding, we'll talk about why we like it from a fundamental perspective, and then here's what we think about it from a thematic or ESG perspective, and here's what we're thinking about how the company can improve and how we're going to help them get there.

Yeah, so we manage 700 million dollars, so we're a pretty small investor in the scheme of things, but we get really large companies to change the way that they do business, and that's I think really impressive given our size. I don't remember if it was last year or the year before, we got Apple to change their executive compensation plan to include a focus on sustainability factors that wasn't there before. So now Tim Cook and other executives have part of the cash portion of their bonus tied to sustainability, and especially DEI factors. Even though we filed a shareholder proposal for two years and got a pretty low vote, the company reached out to us and said, we think you have something here, we'd like to talk to you about it. That took about six months of dialogue, and then they announced that that's what they were going to do. We had the same result with Google, with Alphabet — they've also changed their exec plan, although not as strongly as Apple has. We file shareholder proposals, sometimes we get a majority vote, sometimes we don't, but it's all about pushing a company and its board to really understand the risks and opportunities from the factors that we've identified.

You can absolutely look for filings, but it's all on our website and our impact report. The last bit of our impact report is a detailed table of here are all the companies we're engaging with, here's why it's important, here's how far we are so far.

I think the advice that I had was, do what you're interested in. And I was really interested in ESG when I was a portfolio manager, but back in the early 2000s there wasn't a lot of appetite for that kind of work. And I really didn't know how to talk about it or how to research it, but I really kind of went with that. And I actually wrote a blog post last year about it, because if you're passionate about something you can figure it out, and often you'll be ahead of the curve. And so that's what I felt I've done in my career.

Absolutely. So we have a website, zevin.com. People are welcome to follow us on LinkedIn or Twitter — we're pretty active on social media, and feel free to link in with me as well.

Thanks for your interest, Nadine.