PLSA exclusive: ‘Investors are rediscovering developing markets’, says JOHCM’s Andrew Parry

Everyone who manages or looks after pension funds’ capital or investments is up in Scotland this week for the investment conference of the Pensions and Lifetime Savings Association (PLSA), taking place in Edinburgh today and tomorrow.

Also present at the event is the head of investments at J O Hambro Capital Management (JOHCM), London-based Andrew Parry, one of the conference's keynote speakers on day 2.

Parry, together with his global team, manages close to £23 billion of assets across a range of global and regional equity strategies, representing multiple UK pension funds and other investors.

Just before Parry took to the stage for a panel discussion on net zero, the former head of sustainable investments at Hermes IM found time to catch up with Net Zero Investor.

At a time when the global economy and markets are under pressure, what do emerging markets have to offer to investors?

After a decade in the wilderness, investors are rediscovering the virtues of developing world markets. Fiscal prudence is a feature of many developing economies, and many will have an important role to play in the transition to a low carbon world. Achieving a low carbon system is a complex endeavour but one vital to the long-term health of the global economy as well as the planet. We should look at the economics of the climate not as a series of costs but as an enormous economic and business transformation opportunity.

So stick with those opportunities, and risks; they are the main topic of conversation this week, with climate issues being high on the agenda. How do you incorporate net zero and sustainably principles in your investment strategy?

Climate and sustainability related research are important inputs into financial analysis and portfolio construction and not an overlay considered separately from economic outcomes. As a firm that runs a wide variety of different investment strategies, with varying styles and objectives, it is important to provide portfolio managers with sustainability insights and data that can be interpreted in the context of their distinct investment approaches. To help deliver on this objective, we ensure that the sustainability and climate data that we report to clients at the fund level is the based on the same information used by the portfolio managers and analysts in their company research.

So how do you go about that?

Through our own proprietary climate models, we look to understand the likelihood of a company meeting its stated climate ambitions and if it can deliver improving future returns to shareholders at an attractive valuation. Future cumulative emissions are also analysed as they represent not only the scientific danger but are also a potential financial liability for companies.

Increasingly, the climate ambitions of governments, such as the EU Taxonomy and the Inflation Reduction Act in the US, are reshaping the outlook for long term capital allocation across large swathes of the global economy. It is critical to understand how these policy incentives, designed to accelerate the transition to a low carbon world, define winners and losers in the corporate sector. Successful business transformation to take advantage of these structural changes will be a source of great opportunity for forward-thinking investors.

Are winners and losers, as you put it, also not defined by the level of engagement and active stewardship from their shareholders and the managers handling their capital. How does JOHCM find the right balance in that respect?

Acting as trusted stewards of our clients’ capital is a central objective of JO Hambro. Constructive engagement with corporate management is a natural part of many of our strategies as we believe that strong governance and the efficient allocation of capital are central to delivering not only resilient shareholder returns, but also better environmental and social outcomes. Profitable, well-managed companies are best place to handle the transformation of their business models as we transition to a low carbon world.

By focusing on the business case, we find that we can have a balanced discussion with management that recognises the challenges, as well as opportunity, from business transformation. It is important to acknowledge that not all companies will be winners given the scale of capital investment needed.

We supplement active corporate engagement with systems-engagement. Here we work collaboratively across the different parts of the value chain – companies and their suppliers, with NGOs and academics, and policy makers – to explore ways to influence better outcomes for systemic risks. Many of the sustainability challenges that face the world require collective action and the right incentives to drive better outcomes, which is why investors need to find ways to engage with policy makers.”

And how far do your managers go when engaging with the companies you invest in? How do you apply pressure?

The majority of our portfolio managers actively engage with company management, both preacquisition and on an ongoing basis as constructive long-term shareholders. Some of our strategies have an approach that leads to relatively high portfolio turnover; in this case, engagement is not a big part of the approach. The longer the holding period, the more important engagement becomes. Constructive dialogue, based on a clear understanding of the issues and linking it to a strong business case is the most effective strategy.

If we zoom out a bit, how do you see the role of asset owners in shaping the net zero agenda?

Asset owners have a pivotal role to play in shaping the net zero agenda. Unlike asset managers, they have more flexibility to set a strategy that is fully aligned with their investment objective. They exclude certain activities, if that fits with their values, or they can engage with a different set of priorities to active managers, such as putting sustainability ahead of financial returns, if their scheme rules permit. They should also use their voice more effectively by engaging directly with the companies held on their behalf by their third-party managers.