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Torchbearers: The 2016 SMA Managers of the Year

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Between the Department of Labor’s finally released fiduciary rule hogging advisors’ mindshare, increased market volatility with talk of a global slowdown, a crash in oil prices and currency devaluations around the world, advisors are stretched pretty thin. Keeping their clients calm and focused through all this is a full-time job, never mind finding ways to make them money.

The portfolio managers and analysts running separately managed accounts take some of that off advisors’ plates, allowing them to focus on clients’ individual needs while meeting their investing goals. According to the Money Management Institute, the managed money industry represents over $4 trillion as of 2015, after increasing over 3% last year.

Investment Advisor has been working with Envestnet | PMC for 12 years to identify the best managers in the space every year. Envestnet’s analysts narrow down the universe of strategies available on its platform to 17 finalists. It’s not enough to outperform their benchmarks; to be considered, the managers must consistently outperform with repeatable processes. They must be widely available on multiple platforms (not just Envestnet’s) and allow for customization to meet individual clients’ needs. As you’ll see in the profiles that follow, they must also work well as a team to bring value to the advisors and clients who use their strategies.

Using Envestnet | PMC’s rigorous analysis, the selection committee, which includes representatives from Envestnet as well as editors of Investment Advisor, choose the best of these finalists in several categories.

The winners were announced in May at the Envestnet Advisor Summit in Chicago. Look for video interviews with the winners on in the coming weeks.

Overall and International

Rick Schmidt, Harding Loevner Global Equity ADR

Rick Schmidt, Partner and Portfolio Manager
Harding Loevner Global Equity ADR

Harding Loevner’s Global Equity ADR portfolio is this year’s big winner among the SMA Managers of the Year. It won not only the award for best global and international strategy, but also the award for the overall Manager of the Year, beating out all the other category winners.

Its Global Equity ADR Strategy uses an extensive bottom-up stock-picking approach to create a concentrated portfolio of typically 50 to 60 foreign and domestic high-quality large-cap stocks that have sustainable growth and a competitive advantage.

Securities are first selected by a team of 21 analysts in a four-stage decision-making process that ultimately ends with an unconstrained virtual portfolio, which is then assessed by portfolio managers who make the final buy and sell decisions.

The firm’s “first priority is to find what we think are the best companies in the world that meet our criteria of quality and growth,” said Rick Schmidt, partner and portfolio manager. “After that, and only then do we look at valuation […], and we build portfolios from the bottom up using the work of our 24 investment professionals.”

The criteria the analysts use to choose stocks include liquidity, outlooks for growth in sales, earnings and dividends, quality of management, strength of free cash flow and balance sheets, competitive market position, business risk and more.

“The analysts do the work on companies, then they rate the stocks, and their job ends,” said Schmidt. “The portfolio managers take those ratings and build their portfolios along the risk constraints that we have for all our portfolios.”

Several portfolio managers are involved — two co-leaders plus three others who don’t control the final portfolio but are running paper portfolios in the background to provide some succession planning, risk reduction and a source of new ideas and training for future managers, said Schmidt.

The “secret sauce” to this recipe, he said, is the way the team of analysts and portfolio managers interact, a process known as “collaboration without consensus.”

“We don’t necessarily want agreement,” said Schmidt. “We think some of our best decisions are made in building portfolios where there is a slight disagreement as long as there’s ownership.”

Analysts don’t have to agree with each other; nor do portfolio managers have to agree with the analysts or each other. The process is “very empowering,” said Schmidt.

Each portfolio manager then builds his own portfolio, which is ultimately combined with the portfolio of the other manager, creating the final model that goes to the client.

The result is a diversified portfolio that has outperformed the benchmark Russell Global Large-Cap Index in six of the last nine years, and places in or near the top quartile of its peers over the past seven and 10 years.

The portfolio typically captures about 99% of the gains in the index but only 96% of its losses over a 10-year period. It performs best in slow, laggard or declining markets, said Schmidt.

Turnover is extremely low — often under 20% — resulting in multi-year holding periods for most stocks and ADRs.

As of year-end 2015, a little over half the portfolio was invested in the U.S. and Canada, 22% in Europe, 15% in Asia, including Japan, and the remainder in Latin America, Eastern Europe and Africa. The portfolio is not required to be invested in any country or region but only in many countries, said Schmidt. Top holdings as of year-end 2015 included Nike, Alphabet and AIA Group.—Bernice Napach

Click here to watch a video interview with Rick Schmidt.

U.S. Large-Cap Equity

Ken Stuzin, Portfolio Manager Brown Advisory Large-Cap Growth

Ken Stuzin, Portfolio Manager
Brown Advisory Large-Cap Growth

Brown Advisory’s Large-Cap Growth strategy is a concentrated portfolio of about 30 names and it will only own between 30 and 35 names. That’s because all investors, even institutional ones, are human and make mistakes. One of those “classic mistakes,” portfolio manager Ken Stuzin said, “is falling in love with names that we own and we’re comfortable with.”

Research has shown that “long-tenured portfolio managers will migrate to ever higher numbers of names,” Stuzin told Investment Advisor in June. “I think part of that is just a natural, behavioral finance response.”

A portfolio that grows from 30 to 50 names might not sound like too much, “but it changes the characteristics of the portfolio.”

Because of that, the portfolio uses a one in-one out strategy. “If we want to add a new name to our portfolio, we force ourselves to sell a pre-existing name.”

Stuzin calls this “Darwinian capitalism.” He said, “We want our investors to know that intellectually, we want business models to compete for their capital.”

In addition to being highly concentrated, the portfolio also holds positions for the long term. Stuzin said over the last decade or so, the average holding period for a stock is a little over five years. “Over the holding period of one of these [stocks], our total returns ought to approximate essentially the trajectory of earnings,” he said.

The portfolio only invests in companies that can “reasonably support 14% or better” growth in earnings per share through a full market cycle.

That’s “not a random number,” Stuzin said. Fourteen percent “represents double the long-term earnings growth rate of the broad market as measured by the S&P.”

“The twin pillars from my perspective are the quality and the sustainability of these growth business models, as well as what we paid for them,” he said.

Stuzin has been on the portfolio since its inception in 1996. There are 23 analysts supporting Brown Advisory’s equity strategies, but Stuzin works closely with about 10 or 12 researchers. “We don’t believe in research analysts working in isolation,” he said, to avoid creating an implicit competition between analysts whose stock picks dominate a strategy.

In analyzing names to pick up for the portfolio, Stuzin and his team don’t rely on the sell side. “The sell side should cater to their best customers, and a long-only manager like myself, whose average holding period is five years, frankly is a terrible customer in terms of paying the sell side a brokerage commission,” he said.

Instead, the team looks at the “underlying drivers of the business model,” he said, studying the customers, suppliers, competitive advantage and, of course, managers.

The team begins with an “inside out investing” approach, studying the publicly available information to determine whether it’s “reasonable to assume” the company can meet the initial 14% EPS growth mandate. “If it’s not, we don’t want to waste the time of our research team.”

For names that make it past that first hurdle, the team begins modeling their businesses, taking a one- and three-year view of each company, and creates an upside and downside target. It then follows up with a manager interview. Stuzin shrugged off arguments that manager interviews will only result in the positive side of the story.

“If you go in to those meetings fairly well schooled in those business models, then I think you can get something out of them,” he said. Specifically, that’s management bias. “If we don’t understand management’s tendencies, their biases, in past situations, how can we as investors understand or model what that company will perform like in the future?”—Danielle Andrus

U.S. Large-Cap Equity

Jennifer Chang, Executive Director and Portfolio Manager Schafer Cullen High-Dividend Equity Strategy

Jennifer Chang, Executive Director and Portfolio Manager
Schafer Cullen High-Dividend Equity Strategy

One of two awards in the large-cap category, Schafer Cullen’s High-Dividend Equity Strategy focuses on high-quality companies that are able to deliver — and grow — dividends over several years. Envestnet | PMC’s analysts found the strategy’s one-year performance and 10-year risk-adjusted return were in the top quartile of firms in Envestnet’s large-cap value SMA universe.

The portfolio had almost $11 billion in assets under management as of Dec. 31, 2015, and is a “very concentrated portfolio” of only 30 to 40 stocks, according to Jennifer Chang, executive director and portfolio manager of Schafer Cullen.

“We feel as though if we’re doing the work, we want to have meaningful positions in some of our highest-conviction ideas,” she said. The amount of capital in one position is limited to about 4% or 5%, though, because “we know we can be wrong at certain times.”

The strategy is co-managed by Chang and Schafer Cullen’s chairman and CEO Jim Cullen, along with a team of 10 generalist analysts.

“We’re looking for catalysts that we think would be able to drive the earnings growth and multiple expansion story over the next three to five years because we’re long-term investors.”

There are three main criteria to the high-dividend strategy, Chang said.

First, portfolio managers follow a “low P/E discipline” and look for stocks at the bottom 20% to 30% of the market based on P/E, she said. That helps the strategy benefit from “those stocks being defensive in down markets but also in up markets, both from earnings growth and multiple expansion” perspectives.

The second criteria is that stocks have at least a 3% dividend yield. “Dividends are really a huge part of total returns. They’re about 30% to 40% of total returns over the last 70 years,” Chang said.

Higher dividends also indicate higher-quality companies, which leads to the final criteria for selection.

“We’re looking for companies that pay strong dividends that are growing because it’s really a reflection of the type of businesses that we want to be involved with,” Chang said.

Schafer Cullen also looks at dividend growth relative to earnings growth to screen for companies that might be buying back stocks to pad earnings reports. Chang said companies with higher dividend yields and slower earnings growth should show slower dividend growth with those higher yields.

For example, she said, “We’ve been finding some great companies in spaces like technology where the dividends are slightly lower, still meeting our 3% threshold, but they’ve been generating double-digit dividend growth over the last five-plus years.”

The strategy outperformed its benchmark, the Russell 1000 Value Index, by about 400 basis points last year. High-dividend stocks didn’t do well compared to growth stocks in the first quarter of last year, Chang said, but several factors, including a slowing economy, China’s devaluation of the yuan and emerging markets “blowing up,” have led investors to look for more stability in consumer staples and telecom, she said. “The fact that we were underweight in more cyclical areas like energy and industrials, that really benefited the strategy.”—DA

Click here to watch a video interview with Jennifer Chang.

— Corrections: An earlier version of this article misstated the value of dividends to total returns and misquoted Chang. This article has been updated to reflect those changes.

U.S. Small- and Mid-Cap

Mark Wynegar, Managing Director and Portfolio Manager Tributary Capital Management Small-Cap Equity

Mark Wynegar, Managing Director and Portfolio Manager
Tributary Capital Management Small-Cap Equity

Tributary Capital Management, winner of the SMA Advisor of the Year in the small-cap category for its Small-Cap Equity Strategy, has been known to hold some individual stocks for as long as seven or 10 years. “If the investment thesis remains intact and the valuation remains attractive […], we can hold that stock until it graduates into mid-cap,” said Mark Wynegar, one of two portfolio managers working on the strategy along with four analysts. “That is the ultimate outcome for us,” he said.

The Small-Cap Equity Strategy is a traditional bottom-up stock-picking strategy that consists of 60 to 70 high-quality stocks chosen for their value proposition. The stocks are held for as long as that proposition holds, until the stock price reaches its target price, the market cap reaches $5 billion or the company is taken over.

“We’re buying good businesses with attractive valuations, good balance sheets and free cash flow,” said Wynegar. “Those become attractive candidates for either strategic or financial buyers, [but] we’ll never buy a stock explicitly because we think that it’s a takeout candidate,” said Wynegar.

Another attribute of Omaha, Nebraska-based Tributary’s $1 billion flagship strategy is the consistency of its management. Wynegar has been managing the portfolio since 1999, and co-manager Mike Johnson has worked alongside him since 2005. Four analysts are also on the investment team, which continuously monitors holdings, maintains valuation, and estimates and identifies new names and fresh ideas, said Wynegar.

Performance has been strong since 2004 with the exception of 2012.

The Tributary Small-Cap Equity Strategy focuses on companies with market caps between $1 billion and $2 billion whose stock prices are deemed to be trading at a discount to their intrinsic value, even if the stock is not statistically cheap. That differentiates Tributary from other small-cap value managers. The investment team is also willing to purchase growth stocks if they believe the market is underpricing the prospects of those stocks.

In addition to a market cap below $2 billion and valuation, the investment team looks at profit margins, leverage and earning revisions when screening for names. That analysis yields about 200 to 250 stocks that will be further analyzed to learn about potential catalysts that can drive stock prices in the future and about the stocks’ financials and valuations. Once stocks pass those tests, based on a three- to five-year time horizon, they become the subject of a full research report, after which they can be purchased or placed on watch for a future purchase, but only if both portfolio managers agree.

Stocks that are purchased tend to hold a 1% to 1.25% position in the portfolio and positions are trimmed if they reach 5%, which would be unusual. Turnover is low, between 25% and 35% a year.—BN

Click here to watch a video interview with Mark Wynegar. 

U.S. Small- and Mid-Cap

Paul Viera, EARNEST Partners Mid-Cap Value

Paul Viera, CEO and Partner
EARNEST Partners Mid-Cap Value

EARNEST Partners, winner of this year’s SMA Manager of the Year award in the small- and mid-cap category for its Mid-Cap Value Strategy, has a highly unusual investment team. Rather than buy- or sell-side analysts, it hires individuals with real-world experience who have worked in the sectors that they cover.

“Most asset management firms hire finance people,” said Paul Viera, founder and CEO of the firm. “We wanted to hire practitioners in the industry that we’re asking people to cover.”

The unusual approach has its virtues: “When we are interviewing management teams we can ask more differentiated, nuanced questions than what others would ask,” said Viera. “We ask operational questions; we can make an assessment as to whether what they’re suggesting is likely to occur or unlikely to occur.”

It’s important for the firm to have accurate assessments because the Mid-Cap Value strategy includes a limited number of stocks, between 45 and 60, and its goal is to invest in companies that will provide an additional 400 basis points, or 4%, in returns relative to its benchmark, the Russell Mid-Cap Value Index.

The firm divides the world into 34 different industry groups, then focuses on the characteristics of each group that allow a company to outperform its peers. “The criteria that we use is not universal but very specific for each industry,” said Viera.

The Mid-Cap Value Strategy initially identifies about 150 companies that are likely to outperform, then works to develop an investment thesis for each by talking with the management teams, reviewing company financial reports, and creating an analysis of the industry as well as company-specific studies and independent field research.

Eventually that universe is whittled down to around 50 names with developed strategies, talented management, sufficient funding and strong financial results that are expected to outperform while effectively managing risk. The target weight for any one company is 1.5% to 2%, and positions are capped at 5%.

Mid-cap stocks have been outperforming large-cap and small-cap stocks so far this year, but that wasn’t the case last year when they lagged both. Still, it was a good year for EARNEST Partners’ Mid-Cap Value Strategy, which beat the Russell Mid-Cap Value Index by 682 basis points, or 6.82%, placing it in the top sixth percentile of its peers.

When asked about any changes to the portfolio this year, Viera said there have been a few directional changes, including a move from underweight to slightly above-market weight in the energy sector as oil prices rebounded.

“We wanted to look for companies that were going to benefit the most,” said Viera. So the portfolio favored those oil companies that didn’t decline the most during the price slump — “those in the most peril,” according to Viera, or at least those with the “least upside” — and instead focused on those companies that placed in the middle. Like all moves in the EARNEST Partners Mid-Cap Value strategy, it was deliberate and well thought out.—BN

Click here to watch a video interview with Paul Viera. 

Fixed Income

Cory Robinson, Vice President and Portfolio Manager Tom Johnson Investment Management Intermediate Fixed Income

Cory Robinson, Vice President and Portfolio Manager
Tom Johnson Investment Management Intermediate Fixed Income

“Fixed income should be your safe money,” Cory Robinson, vice president and portfolio manager at Tom Johnson Investment Management, told Investment Advisor at the Envestnet Advisor Summit in Chicago in May.

The Intermediate Fixed Income strategy, for which TJIM won the SMA Manager of the Year in the fixed income category, invests in bonds that are rated A or better, with durations of 10 years or less.

The managers also focus on bonds with high liquidity. “We generally only buy bonds that have $500 million or larger issue size outstanding, so there are generally multiple dealers making the market in those bonds so they’re easy to buy and sell,” Robinson said.

The strategy’s trailing returns have substantially outperformed its benchmark, the Barclays U.S. Intermediate Government/Credit Index, and Envestnet | PMC’s analysts found that from a capital preservation standpoint, it has beat both the benchmark and over 90% of its peers in maximum drawdown, down market capture, and worst four-quarter return over the trailing five years.

“We kind of carve out a very conservative part of the bond market and stick within that portion,” he said, “but we’re very opportunistic as far as moving within that portion of the bond market, changing our duration, changing our structure relative to the index, moving between Treasuries and corporate bonds, depending on credit spreads and how attractive they are, and then quality, as far as finding individual issuers that present attractive opportunities.”

Currently, the strategy is “marginally underweight” Treasuries and government bonds, Robinson said, opting for a higher than normal cash position instead.

The strategy is also working with a shorter duration, a little longer than three years, which gives it about 75% exposure to the index.

“We manage our duration within plus or minus 25% of the index,” Robinson said. “We can go from 75% to 125%, but most of the time we tend to be shorter than 100%.”

Robinson said duration is the primary criteria for choosing bonds in the strategy. “We anticipate rising interest rates [and] want to be well-positioned if that happens.”

Structure is also important, and the team looks for where bonds are on the yield curve. “We’ll try to pick the most attractive points on the yield curve for roll down,” he said. “Say if you’ve got a five-year bond, in a year it becomes a four-year bond. If a five-year bond currently yields, say, 2% and a four-year bond yields 1.5%, that bond that you buy in a year is going to reprice at 150 [basis points], so you get price appreciation in addition to that higher coupon.”

Quality is another major criteria, “which really is more driven by the attractive individual issuers that we’re finding,” Robinson said, in addition to the team’s screen for A-rated or better bonds with a one to 10-year duration and a $500 million minimum.

“Anyone on the team can bring an idea,” Robinson said. “We’ll have an investment meeting and discuss it.”

The manager who presented the idea will do a follow-up report to answer any questions that come up, then the team decides to either buy it or look for an alternative.

“We all have to get on the same page,” he said.—DA

Click here to watch a video interview with Cory Robinson.


John Forlines III, JAForlines Global Tactical Solutions

John Forlines III, Chairman and CIO
JAForlines Global Tactical Solutions

Boutique investment manager JAForlines Global stands out among the many firms that have benefited from the growth of ETFs, a market that currently tops $2 trillion. Its Global Tactical Portfolio Strategy, one of two winners of the SMA Managers of the Year in the strategist category, is a four-product suite of portfolios composed almost entirely of ETFs plus a cash allocation.

“The [ETF] industry has grown incredibly fast and we’re essentially a firm that has taken advantage of that growth,” said John Forlines, chairman and CIO of the firm as well as the lead portfolio manager of its multi-asset tactical solutions.

But unlike other tactical strategy firms, JAForlines starts with “old-fashioned” fundamental analysis rather than a “quantitative black box,” is truly multi-asset rather than having an inherent equity bias and doesn’t tend toward short-term portfolio adjustments in response to market movements.

“It’s not a matter of market timing,” said Forlines. “It’s more a matter of an allocation strategy that we essentially have the ability to tweak over time, and [that is] sensitive to rate cycles or central bank movements or something like that. It’s not a whipsaw strategy. […] There’s a monthly process [meeting on allocation] and no intramonth trading.”

The firm’s flagship Global Tactical Allocation Strategy, which accounts for about half of the firm’s $500 million in assets, is an unconstrained top-down macro strategy that includes three asset classes — stocks, bonds and alternatives — plus some cash. Designed as a core investment strategy, it tries to limit trading costs, and its expense ratios range between 25 and 50 basis points, making it one of the lower priced managers within the tactical strategist universe.

The focus is long term, though it will make portfolio adjustments based on changes in economic, business and credit cycles in the global markets.

“We’re not really concerned about security prices except as part of an overall evaluation,” said Forlines, who leads a small team of about seven. “Prices are essentially a metric you have to look at but not a reason to change your portfolio.”

Instead, at its monthly meetings of portfolio managers and advisors, JAForlines focuses on “credit dynamics, liquidity [and] which regions seem to be doing really well and which are not,” said Forlines.

The approach has paid off. The Global Tactical Allocation Portfolio has historically reaped 80% to 90% of the gains of its benchmark but only 60% to 70% of its losses, and consistently ranks in the top quartile of its peers on a risk-adjusted basis. It typically consists of 50% MSCI ACWI (All Country World Index), 40% Citi World Government Bond Index and 10% S&P GSCI (formerly the Goldman Sachs Commodity Index).

When asked which investments he favors now, Forlines responded that since post-2008, any answer he gives may change by the next month. “We live in times where situations can change very rapidly, [and] it’s not just prices that can change very rapidly. It’s sentiment, convictions of central banks and things like that.”

Still, he said the firm lately has been looking at regions where both monetary and fiscal policies are accommodative, and currently favors equity exposure outside the U.S. in “core Europe.” The overall focus of the equity portion of the portfolio favors low volatility large-cap equities in Europe and the U.S. with better dividend flows, said Forlines, noting that valuations in both equity markets have probably peaked for the short-term.—BN

Click here to watch a video interview with John Forlines.


Justin Greene, Managing Director of National Accounts Russell Investments Multi Asset Class Strategy

Justin Greene, Managing Director of National Accounts
Russell Investments Multi Asset Class Strategy

Russell Investments was honored with the SMA Manager of the Year award in the strategist category for providing quality investment solutions to investors and advisors, as well as the education and resources to offer a positive experience for users.

The firm has been managing multi-asset solutions for over 30 years, and provides such wide ranging services as consulting, investment research, portfolio management and investment services to retail as well as institutional investors.

At the Envestnet Advisor Summit, where the awards were announced, Justin Greene, managing director of national accounts, attributed the firm’s success to three things. First is Russell’s people, who are “supporting these advisors on a very frequent basis, especially in a world that’s ever changing,” Greene told Investment Advisor.

Secondly, Greene said, the firm works to create trusted investment products. There’s “almost a commoditization” going on of investment products designed for end consumers, he said. “We strive to bring our institutional heritage to the individual investor, and I think we’ve done that through our multi-asset capabilities with solution-based outcomes.”

Russell offers three separate accounts and five model strategies. The separate accounts are available with a broad-cap, large-cap and small-cap mix. Minimum investments range from $200,000 to $400,000 and each mix has between two and seven managers on the team.

Finally, Russell is able to be a partner to advisors, many of whom are “somewhat resource constrained,” Greene said, and provide them with “the resources, the educational tools and the conduits to keep up with changes occurring in the marketplace.”

The biggest issue the industry is dealing with right now, of course, is the fiduciary rule, Greene said.

“How are advisors in today’s marketplace going to navigate, in the next 12 to 24 months, all the ripple effects that this fiduciary ruling is going to cause?”

Those ripples will spread across the “asset management level, the broker-dealer level, the advisor level and the investor level,” Greene said.

“We are constantly looking at ways to innovate and expand our investment capability, because the needs and the buying habits of both investors and advisors are going to change as a direct result of the DOL fiduciary ruling,” he said.—DA

Click here to watch a video interview with Justin Greene.


Geeta Aiyer, President and Founder Boston Common Asset Management International Equity SRI

Geeta Aiyer, President and Founder
Boston Common Asset Management International Equity SRI

Investors have increasingly begun investing in companies and portfolios that use their money to do good around the world. Impact investing is a $13.6 trillion industry, according to Amber Nystrom, founder and CEO of Trinity Nexus and an impact investing pioneer. Investors poured over $15 billion into impact investments in 2015 alone, and expect to increase capital by 16% this year, the Global Impact Investing Network found. Yet a TIAA report found 46% of advisors still have never offered socially responsible investing products to their clients.

Some advisors have hesitated to put their clients into socially responsible or ESG investments because they believe they don’t provide the same rates of return as traditional investment products, TIAA found. Boston Common Asset Management believes otherwise.

The firm’s International Equity SRI Strategy was launched in 2004 and as of Dec. 31, 2015, had $1.2 billion in assets under management. It has annualized alpha of 90 basis points, and standard deviation is roughly 1% lower than its benchmark, the Russell Developed ex-North America Large-Cap Index.

The firm’s founder, Geeta Aiyer, spoke with Investment Advisor at the 2016 Envestnet Advisor Summit, where the SMA Manager of the Year awards were presented.

Choosing companies for the portfolio begins with looking at the leadership, Aiyer said. “No company is going to measure highly on every single criteria, but we pick companies that are leaders in one or more of these criteria,” she said.

Of course, they also have to be good selections for the portfolio from a financial standpoint. “We are building a quality portfolio with strong financials and fundamentals.”

The strategy is managed by a team of three portfolio managers, who are supported by a five-person traditional research team as well as a five-person team that focuses on ESG research.

Among the criteria Boston Common considers in the companies it’s looking for are those that have worked to increase access to health care and nutrition, and that are “globally responsible players.”

“These companies are better than their peers in those dimensions, but are also good, solid, quality investments for the portfolio,” Aiyer said.

Managers need to follow long-term trends that make ESG investments more relevant, Aiyer said. On the environmental side, “there’s a growing demand from emerging markets that makes resource utilization very critical — so doing more with less is very important,” Aiyer said.

Socially, companies must also treat people as assets rather than costs, Aiyer said. Governance, specifically access to good governance, is the final piece.

Boston Common believes the markets are behind, Aiyer said. “They misvalue the risks and the opportunities for environmental, social and governance factors. Company managements that can see the advantages of having products that address these issues, have policies and practices that are with the times and have good, strong governance that protects them from small-probability, high-impact events we think will be the more successful companies over the long term,” she said.

Boston Common doesn’t just invest in companies with these values; it engages with companies to help them meet shareholder concerns. Aiyer described Boston Common’s work with Norwegian gas company Statoil to get away from mining in tar sands, which Aiyer said is “long term, a less-attractive business.”

“We engaged with the company. We had other shareholders at the table. We had consulted with activist groups,” she said. Aiyer said it’s important for portfolio managers on ESG strategies to act as “the voice of the investor” and to ask the questions shareholders want answered.

Managers need to “have the creativity to find avenues where we can engage with the company and be very collaborative.”—DA

Click here to watch a video interview with Geeta Aiyer.


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