Lombard Odier on the Art of Picking Sustainable Winners in Asia

Odile Lange-Broussy, Senior Portfolio Manager at global wealth and asset manager Lombard Odier, gave a presentation to the delegates at the Investment Solutions Forum on the search for alpha in Asia, highlighting the importance of sustainable investing. While the total Asia ex-Japan market valuation was only 10% of the global markets in 2003, today it is 25%; that is not yet at the 39% level of the US but it is already nearly 50% larger than the 17% of Europe. With such compelling figures at hand, investors cannot ignore the Asian equity markets of today, and if they can buy into sustainable business models exhibiting impactful principles, then that is a win-win.

Lange-Broussy began by explaining that she and her team of three, all based in Asia, run the roughly USD400 million Lombard Odier Funds Asia High Conviction. “We have five years of track record,” she reported, “and the fund is rated five stars by Morningstar. Asia is growing so rapidly, as you see from 10% of world market capitalisation about 15 years ago to one quarter today, making it the fastest growing region in the world.”

And that excludes Japan, which is of course also in Asia, although historically a far more advanced economy that was until recent years many decades ahead of the emerging economies of the region.

Asia - bigger than the indices

But Lange-Broussy explained that in terms of the MSCI indices, Asia ex-Japan remains under-represented, accounting for only 10% of the MSCI all countries global index. “This,” she said, “means that investors who rely on indices to extrapolate their exposure to Asia are significantly underweight, but we believe that within a decade the GDP of Asian economies including Japan are going to represent more than 60% of world GDP, compared with little over 35% back in 1970.   

There are three key drivers that will sustain this growth, she explained, namely access to capital, improving education and technological advancement.

Yet Lange-Broussy also highlighted how the Asia ex-Japan market valuation – the pricing relativity compared to the rest of the world – remains below historic norms. This, coupled with higher growth rates, should mean that outperformance will follow.

A defining value

She then turned her focus to sustainable investment in Asia. “Sustainability is a central and defining value at Lombard Odier, deeply embedded into our portfolio management and articulated in three ways,” she reported. “We invest in sustainable financial models, meaning companies that generate a lot of excess returns, we invest in sustainable business practices which essentially means ESG, and we invest in sustainable business models which means that we look at the long-term defining trends the world is facing, such as demographics, digitalisation, scarcity of natural resources.”

She explained that it is the combination of those three aspects which defines the Lombard Odier investment philosophy to create long-term outperformance of both returns and sustainability.

Why will sustainability help?

Assisted by some detailed, insightful slides, Lange-Broussy then told the audience exactly how Lombard Odier believes sustainability will drive future returns. “The environment for corporations is already changing,” she explained, “with more and more pressure on companies to transition to more sustainable models coming from civil society, governments, investors and the stakeholders of the companies.”

Accordingly, her fund has three core pillars. The first is the assessment of sustainable financial viability and the potential to generate returns. The second is the assessment of sustainable business practices for a broader set of stakeholders. And third is the assessment of broader sustainable business models by reference to exposure to the transformative long-term structural trends.

Embedding sustainability

Lange-Broussy then delved into some considerable additional detail on how she and her team embed sustainability into portfolio management to find their high conviction selections, explaining that this is narrowed down through a combination of strong cash flow generation, strong capital efficiency/ROE, and little or modest dependence on external capital. “Combined,” she said, “this results in an optimised valuation pool of companies within the fund, companies that achieve our goals of excess economic returns.”

She then highlighted how differentiated she and her team are from the street. “We do not do box ticking,” she reported. She explained that Lombard Odier has a team that reorganises the data they obtain from the external firm Sustainalytics. “We rearrange the data into three categories,” she reported, “which is our proprietary tagging system that we call CAR, which represents Consciousness, Action and Results.”

This means that her team can overlay CAR on top of the companies that exhibit sound ESG principles to determine which of those are high conviction sustainable investments. She explained that this boils down to governance, transparency, willingness to evolve, the ability to communicate well and the willingness to be responsive.

Beating the benchmark

She then delved into some detail on the universe of stocks the fund looks at and how that is narrowed down to a portfolio of about 34 stocks today with around USD400 million invested.. “In a nutshell, at Lombard Odier we have equity strategies which enable us to capture the opportunities of companies which are in control of their sustainability and which deliver.”