How we select companies

We are often asked how we narrow down a universe of approximately 18,000 [1] Asian and Emerging Markets companies to a portfolio of roughly 50. It’s a good question, and since we invest globally too, giving us an investible universe of approximately 70,000 [1] companies, the challenge is even starker.

We would love to be able to say we have constructed a clever algorithm so that a black box tells us which ten companies to consider each week, but we haven’t.

In reality, we start with a blank sheet of paper, and instead of whittling down 70,000 to 50; actually we are starting from 0 and building up to 50. One analogy that we have used is the idea of walking along a beach looking for 50 of our favourite shells. We know what we are looking for in our collection, but we won’t be looking at every shell on the beach to find them. And we are likely to spot new shells each day and will continue to do so for years to come. Such is the task of operating in a universe of 70,000 companies.

What we are looking for is a function of our investment philosophy and process, which is consistent across each of our funds. We are looking for companies that we believe contribute to, and benefit from, sustainable development, and have high quality management teams, franchises, and financials. With such companies we take a disciplined approach to valuation, considering the potential growth of the company over the long-term.

We maintain a “focus list” of approximately 300 of our favourite companies that we would own at the right valuation. If a company meets our quality requirements, we begin the process of investing. We often start small and build our conviction over several years, as we meet the management team repeatedly, engage where issues arise, visit sites, and gather reference checks from third parties such as suppliers, competitors, directors, industry associations and media.

But the question remains, when we get to the beach, how do we know where to start looking? Our emphasis on long-term sustainability positioning helps in this regard. We have a strong focus on seeking out those companies which support and profit from the ongoing transition to a genuinely sustainable future. In simple terms, this means improving human development outcomes within the environmental limits of our planet.

This is where we focus. But it is not just about applying a sustainability lens. We travel widely and “kick the tyres” of around 500 companies per year; there is nothing like examining a dingy head office above a store, or a plush marble foyer of a new building. We lean heavily on our long history of investing in Asian and Global Emerging Markets (GEM). For example, we invested in a US health care company which came to our attention because we knew one of its board directors from an Indian company we held for our Asian funds. We look for referrals at every opportunity, and seek the views of businesses and directors we respect.

We also engage with companies to sort fact from fiction. For example, when a prominent palm oil company we consider “uninvestible” received poor press about its activities, we contacted them not to engage on changing their practices, but rather to determine which of their buyers had been giving them a hard time. This proved a much more effective way of comparing and contrasting the supply chain practices of large multinational consumer companies than any amount of reading of their sustainability reports might provide.

None of these methods can be achieved using a black box. Instead, our approach is simply to remain true to what is a simple investment philosophy and process, in order to patiently maintain and constantly refine our shell collection. Fortunately, there are always new shells out there just waiting to be found.

David Gait

Updated as of Dec 2024. First published Q3 2013 in ‘First State Stewart Sustainability Strategies Quarterly Client Update: Third Quarter 2013.’ Not all funds are available in all jurisdictions.

[1] Source: Stewart Investors, 31 December 2024