Expert Investor: Emilie O’Neill – The Research Process For ESG Investing

HOSTS Alec Renehan & Bryce Leske|23 July, 2020

Meet your hosts

  • Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

Emilie O’Neill is an ESG and equities analyst for Perennial and does a large portion of the research for the eInvest Future Impact Small Caps Fund (Managed Fund) (ASX:IMPQ).

In this episode we were interested in understanding the day-to-day work of a research analyst, and the process Emilie follows to uncover stocks that fit in the ESG universe, and eventually end in her portfolio.

In this episode, you will learn:

  • The story of Emilie’s first investment
  • What the Future Impact Small Caps Fund is, and
  • What the fund is trying to achieve
  • How Emilie and eInvest define ESG and the difference between a dark green and light green company
  • About negative and positive screening, and exclusion lists
  • The research process Emilie follow to uncover stocks
  • The key characteristics they look for in small cap stocks
  • Plus much, much more!

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Bryce: [00:00:57] Welcome to another episode of Equity Mates, a podcast where we help you learn to invest in 45 minutes or less. We break down the world of investing from beginning to dividend so that you can hopefully make some returns. My name is Bryce and as always, I'm joined by my equity buddy Ren. How's it going? [00:01:11][14.3]

Alec: [00:01:11] I'm very good. Bryce very excited for this episode of Sustainable Investing. ESG investing is obviously a big topic in our community, something that we're very interested in as well. Yeah, and we're going to unpack it further in the show. So I'm very excited to get started. [00:01:24][12.5]

Bryce: [00:01:24] Our guest today is Emilie O'Neill, who is the ASG and equities analyst at Perennial and a large portion of the research for the Invest Future Impact Small Caps Fund, which will be digging into today. So welcome to the show, Emily. It's great to have you here. [00:01:40][16.0]

Emilie: [00:01:41] Thank you. And good job pronouncing the fund's name. But I did, just want to quickly start off the conversation by saying all of my comments say a general in nature, this is not financial advice. You should always check out the investor. Come today and speak to an advisor before you consider investment products [00:01:58][16.9]

Alec: [00:01:58] Full credit. Nice one. That's a good reminder. All of our shows are that everything we say on any platform is that important. Important reminder to kick off the show. Now, before we get into your fund and some of the research you're doing and RSJ, we'd like to start the show with a bit of a game. We've had Adamsville away from Future Super on before and we had a bit of a twist on the game. Rather than overrated or underrated, we played ethical or unethical, where we threw out a number of companies and asked whether they met the ethical test or didn't meet the ethical test. And we want to bring that back today because we had a bit of fun with it and there was some interesting result, shall we say. So I want to play. [00:02:35][36.7]

Emilie: [00:02:35] Yeah, let's do it. [00:02:36][0.7]

Bryce: [00:02:36] We're going with a sustainable focus on this one. [00:02:38][1.9]

Alec: [00:02:39] Yes. Yes, we will do sustainable. Unsustainable. Okay, so that's the [00:02:42][3.9]

Emilie: [00:02:43] preferred it is for us. Yeah. We can say a more more sustainable or not sustainable as opposed to ethical. But let's go for a nice one. [00:02:49][6.1]

Alec: [00:02:49] All right. Well, Bryce and I have a very good mate that works for DHL, the delivery company. He always wants us to talk about DHL on the show. So we kick it off ethical or unethical, sustainable [00:03:00][11.0]

Emilie: [00:03:01] or sustainable or sustainable [00:03:04][3.1]

Emilie: [00:03:05] digital. All right. So DHL is an interesting one in AF and we probably wouldn't invest in it because we're kind of focussed on more positive contributors and the nature of what companies are doing. And obviously you have to consider the emissions associated with delivering parcels, although it does seem that DHL is doing some cool things with using bikes and electric vehicles to kind of lower their emissions, which is great, but it would be not for us. [00:03:27][22.2]

Alec: [00:03:27] Nice DHL, not a positive contributor, just like our housemate. [00:03:31][3.2]

Emilie: [00:03:31] Not know. He knows that this is not [00:03:35][4.0]

Bryce: [00:03:36] sustainable or unsustainable. Amazon. [00:03:39][2.8]

Emilie: [00:03:40] Yeah. Okay, so this is kind of on the similar bat, like they're not necessarily doing really bad things, but you do have to think about ethical supply chain. So where are their products coming from? You're thinking about the emissions associated with the delivery and also data centres. They're huge use of energy. Amazon has data centres. They do try and run them on renewables. But again, not for us, not sustainable in how we define it. [00:04:02][21.5]

Alec: [00:04:02] Yeah, it's an interesting one with Amazon because they talk a big game. You know, they've made a lot of commitments, around 100 percent renewable and all that stuff. How much do you weigh what they say compared to what they actually do? [00:04:12][9.9]

Emilie: [00:04:12] Yeah, so that's kind of the biggest risk in Asia. Investing is kind of the term greenwashing. So it's companies and investors saying that their products are sustainable, that operation is sustainable, but that's not always the case. So we are really looking for for evidence of doing I'm one of the best ways to to do that is to just ask the CEO, you know, what, how do you think about sustainability? And you can actually tell how genuine they are by they say, oh, just got real sustainability report. Or they might go in and say, actually, we're doing this, this and this. We really believe in it. This creates better outcomes for our staff, for our community investors. So we're passionate about it. So you can really tell how genuine they are. [00:04:46][33.6]

Bryce: [00:04:46] So you have Jeff Bezos mobile number, [00:04:48][1.5]

Emilie: [00:04:49] Jeff Bezos not passionate about sustainability, but the [00:04:53][3.8]

Alec: [00:04:53] next one, sustainable or unsustainable lithium miners. [00:04:57][3.4]

Emilie: [00:04:58] OK, so lithium obviously a key component in batteries which are needed for renewable energy and also a component of electric vehicles. There's a huge need to decarbonise the community through through renewable sources. The problem with lithium stocks is that it's still mining and mining, has environmental concerns, also has safety concerns for the workers and for the communities. So for us, unsustainable. But if you are looking to invest in miners, including lithium, you do want to make sure they have a squeaky clean safety record and they're operating in non risky geographies. So for us, that is an unsustainable. [00:05:30][32.2]

Bryce: [00:05:31] So so far, we have no stocks in the fund that [00:05:34][2.7]

Emilie: [00:05:35] is [00:05:35][0.0]

Bryce: [00:05:37] sustainable [00:05:37][0.0]

Emilie: [00:05:38] on solid cash, [00:05:38][0.5]

Bryce: [00:05:40] cash, sustainable or on [00:05:41][1.1]

Emilie: [00:05:42] Facebook. [00:05:42][0.0]

Emilie: [00:05:43] Yeah, OK, so again, this is not an unsustainable stock, but not a sustainable stock. There's obviously issues around the content. There's concerns around privacy, particularly with the leaks that happened in twenty eighteen. So sorry that. That's a no from us, that one [00:05:58][14.3]

Alec: [00:05:58] we're going to get to yes, [00:05:59][0.6]

Emilie: [00:06:00] maybe we'll even know if we [00:06:04][4.1]

Alec: [00:06:04] don't get a yes, we'll put a real softball in there. All right. Next on sustainable or unsustainable marijuana stock. [00:06:10][6.4]

Emilie: [00:06:11] Yeah, a controversial one. Love it. So actually, it depends on the use. So medicinal marijuana, we would probably avoid that from a reputational risk perspective. But actually, the use of hemp in industrial sources can be really sustainable. So it's a lot more sustainable in clothes than cotton uses less water. So actually, we're going sometimes it is sustainable. [00:06:31][20.2]

Emilie: [00:06:31] They go we go get a good, [00:06:34][2.7]

Bryce: [00:06:36] sustainable or unsustainable cryptocurrency. [00:06:37][1.4]

Emilie: [00:06:39] Hmm. So mining, which is what happens in cryptocurrency. So, for example, in Bitcoin, it uses a lot of energy and computer power. So I actually saw a stat and don't quote me on the well, you will quote me because it's on record. But I didn't see a stat that said cryptocurrency makes up more emissions than Switzerland. Wow. So actually that there is a bit of an environmental impact with mining around Ren cryptocurrency. But it is an interesting asset class and it does have some outcomes, particularly as people don't want physical cash in in a Covid safe environment to digital currency. So it kind have some benefits but unsustainable from an environmental point of view. [00:07:17][38.6]

Alec: [00:07:18] Fair enough. We're getting closer. All right. Next one, sustainable or unsustainable Tesla. [00:07:24][6.3]

Emilie: [00:07:25] Yes. OK, so producer of electric vehicles, which is great passenger vehicles do account for seven percent of global CO2 emissions. So electrifying our transport network is super important and particularly replacing fossil fuel burning engines. But the problem with Tesla is there have been some safety concerns, too, with their factories and they do have a very vocal CEO. So there is a bit of a reputational risk there, but it's on the right track. [00:07:49][23.8]

Bryce: [00:07:49] Interesting. So vocal CEO weighs into your analysis of whether or not it's a sustainable company. [00:07:55][6.1]

Emilie: [00:07:56] Well, in terms of reputational risk, so if you have people or kind of operations that could be considered a little bit risky or controversial, that definitely can put volatility in the stock and we want to avoid those types of things. [00:08:09][13.2]

Alec: [00:08:10] Interesting. I imagine it matters what they're vocal about as well. Like if they're vocally saying switch to renewables, that's probably fine. If it's Allen saying Ottery care about covid Lockdown's people come back to the factory, that's probably not going to be vocal. [00:08:23][12.8]

Emilie: [00:08:23] Exactly. So we want to make sure that that they are kind of vocal on the issues that really matter and are not encouraging socially unaware type of environment. [00:08:31][8.0]

Bryce: [00:08:32] So nice. So I think we ended up with maybe half a marijuana, [00:08:35][3.6]

Emilie: [00:08:38] Greg, potentially by. [00:08:39][1.1]

Bryce: [00:08:40] So before we jump into the future, impact Small Caps Fund and the work that you're doing there. We always love to get a bit of an idea of your background, particularly when it comes to the first investment that you may have made and the story behind that and perhaps a lesson or two that you got from that. So thinking back to your time, I mean, what was the first investment? [00:08:58][18.1]

Emilie: [00:08:59] Yes, I was actually back when I was working in a bar and I had barely any money, but I had about a thousand dollars. And so I thought, what can I do with that? And actually put it into an ETF, an Asian market ETF, which was quite good timing. I think it went I end up selling it up 20 percent, which I thought was a pretty pretty good win. Definitely gave me a bit of a taste for volatility on the markets. I also started investing when I was in my early days with it's now called Bryce, but it used to be called Icona. It's a micro investing platform. I actually worked there for a little bit and that also gave me a little bit of exposure to investing. So it rounds up your virtual spare change. That was a cool kind of introduction, I guess, to physically investing [00:09:35][35.5]

Bryce: [00:09:35] what you think acorns to raise brand change [00:09:37][2.0]

Emilie: [00:09:40] and good, fresh, fresh, new, fresh new look. [00:09:43][3.0]

Alec: [00:09:45] So from that first investment in the ETF, putting money in rise to where you are now, have you developed a personal investing philosophy? [00:09:52][6.8]

Emilie: [00:09:52] Well, sustainable investing, of course. [00:09:54][1.4]

Emilie: [00:09:55] Very obra. Yeah. Yeah, exactly. [00:09:56][1.4]

Emilie: [00:09:57] I actually do think if you're investing as an individual, you know, people spend their degrees and their careers working on the stock market and looking at how to invest professionally. So I think if you're not a professional investor and you don't have enough funds to diversify your your portfolio, you should really be looking at managed funds and ETFs, which is a great way to kind of get exposure to different geographies and different sectors and haven't managed by professionals. So my investment philosophy and what I tell my friends is if you don't have the time, you don't have the funds. Look, look at one of those options, because they're going to give you better outcomes longer term, hopefully. [00:10:31][33.6]

Bryce: [00:10:31] So speaking of ETFs, we can we'll move into the perennial and invest side of things. So invest creates tradable active ETF investment solutions for the products that perennial, I guess, come up with and manage. Some of them include income generated funds, cash boost, core income and income maximiser. So a lot of [00:10:53][21.1]

Emilie: [00:10:55] income [00:10:55][0.0]

Bryce: [00:10:55] based product. They're the one that we want to focus on is the future small caps fun because, you know, we're interested in that sustainable space, but also small caps to our audience is something that we don't necessarily get a lot of information on. So you'd be good to start digging in there where, you know, fascinating about the research process. So we'd love to understand a bit about, firstly, your just day to day in the fund. So firstly, what does your fund try to achieve? And then we'll kind of go into a bit more. [00:11:23][27.9]

Emilie: [00:11:24] Yes. So what our fund does is it really tries to go out and find interesting small and medium sized companies that are looking to contribute towards what we call a sustainable future. So our investment philosophy is that you actually do better and generate better returns when you think about the AHJ credentials of a company. And so we we think of ourselves as, yes, we are a pure play, sustainable fund, but actually we're really strong performing, smaller companies fund. And we've been able to demonstrate this by outperforming the benchmark, which is a term called Generating Alpha. And we've had about nine per cent alpha in the last year, which is good as of June 30. So, you know, it is it is investment style to invest sustainably, but it really generates better returns. And so I kind of say you can do good while doing well. [00:12:05][41.8]

Bryce: [00:12:06] And what benchmark are you benchmarked to [00:12:08][2.2]

Emilie: [00:12:10] give us the small ordinaries. So that's kind of a group of smaller companies on the stock exchange, and that's a benchmark. [00:12:17][6.8]

Alec: [00:12:17] Nice. And are you Australia and New Zealand focussed or are you going. [00:12:21][3.1]

Emilie: [00:12:21] Yeah, yep. So we're just Australian listed equities only. We also have some New Zealand stocks in the portfolio, but we're just Australian smaller companies. So X 50 and really focussing on that small and mid-cap analyzation space. And basically what we're trying to do is we're trying to use capital to solve global sustainability challenges. So there things like improving outcomes for climate change, for water scarcity, educational outcomes, social inequality and improve health care. So so they're kind of the themes that we're focussed on in the [00:12:50][29.3]

Alec: [00:12:50] so really small problems [00:12:51][0.7]

Emilie: [00:12:53] by [00:12:53][0.0]

Emilie: [00:12:53] solving big problems with small [00:12:54][0.9]

Alec: [00:12:54] companies like, you know, that's a good [00:12:56][1.5]

Emilie: [00:12:56] that's a good thing. I'm going to use that. [00:12:57][1.0]

Bryce: [00:12:58] So just for our listeners, the ticket for the fund is I am P. Q on the ASX. So if you're interested in getting involved in this fund, go and find that in your broker. [00:13:08][9.6]

Alec: [00:13:09] And if you're not interested now, you might be in about 20 minutes. [00:13:11][2.5]

Emilie: [00:13:12] I'll do my best. [00:13:12][0.5]

Alec: [00:13:14] So at the start of the show, I introduced the game as ethical or unethical and the preferred terminology is sustainable or unsustainable. I'm interested to sort of get into some definitions about how you think about ESG investing and if you can maybe expand on the preferred terminology and why you prefer sustainable over ethical. [00:13:31][17.2]

Emilie: [00:13:31] Yeah, sure. So RSJ is a term for the environmental, social and governance performance of a company. So when we're looking at the environment, we're thinking about greenhouse gas emissions, water management, pollution in social. It's all about the employees and the customer treatment and governance. We're thinking about the board, diversity, independents, things like that. So actually, when you're actually investing, you're considering these issues in the investment decisioning process. But there's there's different grades of of investing where kind of unquit that sustainable end, which we call dark green. But if you're only just kind of lightly considering ESG factors, you're considered to be more light, light green Investa and then things like negative screening, which is all about excluding kind of the bad things or the the seen industries or the light of the light. And then you also have on that far end impact investing, which is all about making positive change for society and the environment. And when we're thinking about sustainability, we're more looking about general practises of the business, ESG credentials and the like. But actually ethical investing is more about doesn't meet your ethical values and values differ from person to person. [00:14:40][69.1]

Bryce: [00:14:41] How many companies do you actually have in the fund? [00:14:43][2.1]

Emilie: [00:14:44] Yeah. Yeah. So so we target anywhere between 30 to 70 companies, but we've got about 45 in the portfolio at the moment. People say, well, it doesn't narrow your investment universe. Actually, there's heaps of examples of really interesting smaller companies that are doing great things to help benefit society and actually are doing this on a global scale. And we're increasingly finding that more and more. So it's a very cool space to be in and lots of lots of change happening. [00:15:08][23.9]

Alec: [00:15:09] I like the dark green to light green spectrum. I haven't heard of that before. Is there a little like rivalry between the tik-tok [00:15:14][5.2]

Emilie: [00:15:14] about like how you. [00:15:15][1.1]

Emilie: [00:15:17] Well, actually, funny you say that because there is a little bit more focus on are they greenwashing like we spoke about before? You know, we consider ourselves pretty, pretty pure, pure play sustainability. So we don't just negative screen. We go out and find those positive contributors. But there are some sustainability funds that might just take the everyday portfolio and screen out maybe thermal coal or tobacco. So there could be some stocks in there that you might be like, oh, why is that in my portfolio? And I do encourage anyone who's investing in sustainable assets through their sweep up, for instance, to go in and check the underlying holdings, because sometimes you might be surprised like this doesn't seem sustainable to me. So and that's just because the nature of how they're doing, their negative screens, [00:15:54][36.7]

Alec: [00:15:55] are there any funds? So you want to call out? Sure. [00:15:57][2.0]

Emilie: [00:15:58] I'm not going to name any names. I'm not going to name any names. [00:16:01][3.6]

Emilie: [00:16:02] But but I'm PKU [00:16:03][1.3]

Emilie: [00:16:04] pure play [00:16:04][0.3]

Bryce: [00:16:06] with the screening process. How often are you actually reviewing the companies that make it in? If they're small cap company, a lot of room for things to change as they grow. Of course. Yeah. When do you do the Ren? [00:16:16][9.6]

Alec: [00:16:16] Bryce has been trying to pivot us into tabacco. [00:16:18][1.8]

Emilie: [00:16:22] So before we invest in a company, we actually speak to management about sustainability in general and we send them an email asking them if they have any exposure to our exclusions list. So we actually find out pretty quickly whether they do or not. But a big part of our role is engaging with companies and improving outcomes. So we're speaking to them every month sometimes and just making sure that they're still on track. They're doing the right things. Any deviations in performance from a sustainability point of view? You know, if they lose a female director, we encourage them to appoint another one or if they don't have any to begin with. So, you know, and if there was a change in circumstances, we do typically reduce our holdings and in some severe cases divest. And that particularly comes out during AGM season when we see all their sustainability reports and the remuneration of the executives and whether it aligns. [00:17:05][43.3]

Bryce: [00:17:06] It's interesting you say reduce your whole you mean reduce your exposure in the company to me, you're either all in or not in [00:17:12][6.2]

Emilie: [00:17:12] at all if you [00:17:14][1.3]

Alec: [00:17:14] don't like it, saying you're either ethical on it. Yeah, well, it's not like you less. Yeah, yeah, yeah. [00:17:19][4.5]

Bryce: [00:17:19] You can't be half pregnant of. [00:17:20][1.0]

Emilie: [00:17:22] Yeah. So it is an interesting debate. I mean some RSJ investment funds like to hold on to assets because I believe that that's the best way to make change is to have capital invested as shareholders they can initiate change. Our view is that we really like companies that have a positive focus and in the small cap space, you typically find they might be focussed on supplying water to regions which are really limited in supply for water resources. But their governance systems are really bad. So they might have a lack of independent directors on the board, which can kind of cloud how they drive the company going forward, or they might not have diverse in terms of gender or backgrounds. And there are things that we can help change and engage with the management. So we can say and I happened recently, you know, we said we want to say now another female on the board, he some recommendations, please don't appoint them, will vote for you in this AGM. But if things haven't changed by next AGM, we're going to vote against and we might divest or we might reduce our holdings. [00:18:13][51.8]

Alec: [00:18:15] Did they appoint a female [00:18:15][0.6]

Emilie: [00:18:15] director there in the process, which is [00:18:17][1.5]

Emilie: [00:18:17] really good, really good. [00:18:18][1.3]

Alec: [00:18:19] I think conceptually negative screening makes sense for people. Yeah, in tobacco, you're in gambling, you're in alcohol, whatever it is you're positive. Screening, I think, for people is a little bit more conceptually nuanced, shall we say, especially when, you know, we've got so many different industries. And, you know, we spoke about lithium miners before serving a really important purpose in the transition to renewables, but have some questions about them as you know, their environmental practises and stuff like that. So when you're thinking about positive screening, how do you balance those factors across different industries and across different sectors of the market? [00:18:51][31.8]

Emilie: [00:18:52] So we have a process that is called out in a score. So that's environment, social governance, but also engagement. And it's a score out of ten for each of those factors. And engagement is wide the most, and that allows us to kind of compare. So it's an absolute score so we can compare different companies and different sectors. And that's kind of one way that we can measure it. As you said, it is a little bit nuanced and it does depend company by company, particularly on the focus on what they're doing. But the biggest benefit is the ability as active managers to be able to engage with management and really discuss with them about how they're thinking about sustainability. And that's kind of where we make the decision whether it's going to cross the line or not. [00:19:27][35.3]

Alec: [00:19:28] I've got to ask, what company has the highest ESG plus a score on the ASX? [00:19:33][5.4]

Emilie: [00:19:34] That's a really good question. There would be a couple I don't know if there's a straight ten, [00:19:38][4.0]

Emilie: [00:19:39] OK, [00:19:39][0.0]

Emilie: [00:19:40] but there's a couple of nines and maybe we can jump into a few examples a little bit later. But there are companies that have a positive focus but then have really good reporting and reporting, really solid management team, diverse. They have great outcomes for their for their customers. So, yeah, I actually should have a look at what's our top performer. [00:19:57][17.2]

Emilie: [00:19:58] That's a good [00:19:58][0.2]

Alec: [00:19:58] question. So, no, Tannen's means every company needs to lift their game, basically. [00:20:02][3.5]

Emilie: [00:20:02] Exactly. That's what our job is as well. [00:20:05][2.5]

Alec: [00:20:05] So on that theme of positive screening and, you know, different factors being more relevant in different sectors and stuff like that, obviously your Australia, New Zealand focus. But when you think about, you know, other markets, how do you sort of way, you know, different ethical standards and stuff in different countries around the world? [00:20:22][16.3]

Emilie: [00:20:22] Yeah. So obviously there's different regulatory environments across different geographies. So developed markets might have more rigorous expectations then more more developing countries. You know, you kind of want to avoid some of those more high risk geographies have can have reputational risk or potentially corruption or fraudulent activity. So so we are careful of that in terms of actually actually investing. Europe is definitely the lady here so that, you know, they've got an EU taxonomy which is coming into force, which is all about writing the sustainability credentials of funds claiming to be sustainable. So that's really. Doing there, obviously doing lots of work on carbon emissions and the like, the U.S. is quickly following so that they are behind. But you're saying that asset class grow rapidly. There's a statistic that for Australia, New Zealand investments, about 63 percent have some kind of sustainability criteria that the fund is using, which is really interesting and not one that many people expect. But like we said, probably most of that is very light green. [00:21:18][55.5]

Alec: [00:21:18] Yeah, yeah. Being an ethical investor in Europe seems too easy these days. The government steps in. There's a lot of focus on it. There's a lot of capital on it. I want to say ethical investing funds in, you know, the third world. [00:21:29][10.8]

Emilie: [00:21:30] Yeah, well, you know, one day I really hope that there's no such thing as sustainable fund. Just everyone is focussed on on generating positive outcomes. So that's the goal, to put myself out of a job [00:21:39][9.2]

Emilie: [00:21:40] like the day when that is the day, the dream. [00:21:43][2.3]

Alec: [00:21:44] There'll be a lot of fund inflows to your fund before that happens. [00:21:47][2.7]

Emilie: [00:21:47] So, you know, for a long [00:21:49][1.4]

Bryce: [00:21:50] time, like you mentioned, the exclusions list is part of the process and send to the company to understand if they're exposed to any of those exclusions. Where does your research process sort of go and what's the flow? How does it work? It'd be pretty interesting to. [00:22:04][13.6]

Emilie: [00:22:04] Yeah. Yeah. [00:22:04][0.2]

Emilie: [00:22:04] So first, we actually need to find stock ideas so we get those from a whole different range of sources, whether that we've come across them from other people in the market. Our team members might find new and interesting ideas, or they might be companies that come to us that are raising capital or listing on the stock exchange. So finding the idea is that is the first starting point. And then we'll do a quick due diligence process looking at their financials so their profitability, their cash flow statement and also their balance sheet, of course, their cash position. And we want to make sure there's no dodgy accounting going on there. We want to make sure that they're profitable, at least on the path to profitability. And then we're also looking at the backgrounds of the board and the management team, making sure they're capable. They've got a good track record. They meet the diverse skills that are required to run that company, and we actually might even test their product or service. So in the case where it's an app, we'll download that app and we'll use it and we'll look at the reviews on Google. We will discuss with competitors or consumers of the product and just kind of get an understanding of how they say them. And then we will also meet with management. And that's where we get a real sense of the strategic direction of the business, how they plan to run it, what is their management style. And if there's no red flags from that, we'll actually build a model. So build a financial model will estimate what we think that their earnings will look like in the next three years. And if valuation looks OK, so we want to make sure it's not too expensive and the liquidity is adequate. So that kind of means that there's enough funds going in and out of the stock that we can buy in easily and exit easily as well. Then we'll we'll look to invest. So that's kind of how the process works. [00:23:35][90.3]

Bryce: [00:23:35] One of the, I guess, things that we discuss with small cap managers is the fact that they're always zooming across the country to go and meet with clients. And, you know, it's very hard to get information from for small caps. Yeah, I imagine Covid has killed the ability for funds to go and meet. So is this just happening all over Zoome now? How are you actually meeting. [00:23:54][18.8]

Emilie: [00:23:55] Yeah, heaps, heaps of Zoome. So in a really useful tool and actually a massive timesaver having to run around so it's a lot more efficient. So some people have said there's been commentary out there in the market that maybe don't get as good a sense of the sentiment from from CEOs, which is kind of a key advantage of meeting and talking with these companies. But we found it pretty effective, very easy to access CEOs through Zoome all across the world, which is exactly what we want to be doing. So it's been an interesting change. The problem is, obviously site visits are a little bit more challenging, so we can't go and visit the factories or the place of employment, which you do tend to get quite good insight from doing that. But other than that, it's business as usual and there's still opportunities coming. Do you have [00:24:35][40.8]

Bryce: [00:24:36] a market cap [00:24:36][0.5]

Emilie: [00:24:36] limit? [00:24:36][0.0]

Emilie: [00:24:37] Yeah. So in our specifically, we don't invest in any stocks below 50 million market cap and we have a limit of five stocks under 200 million market cap as well. And actually our weighted average market capitalisation is around one point seven billion. All right. [00:24:51][14.0]

Emilie: [00:24:52] So yeah. [00:24:53][0.6]

Emilie: [00:24:55] So, yeah, look, we're not right down in the very speculative point of the market. We're pretty focussed on making sure they're not burning too much cash. So we don't kind of tend to focus on on speculative stocks. We want to see a path to profitability. [00:25:06][11.9]

Alec: [00:25:08] So small caps are in an interesting space for a lot of our community. And there's obviously some differences when you're looking at the smaller end of the market compared to, you know, the BHP and the Facebook's of the world. What are some of particular characteristics that you look for in a small cap stock? [00:25:24][16.2]

Emilie: [00:25:25] Yeah, yeah. So firstly, what I talked about just cash flow, profitable or clear path to profitability, making sure that there's no dodgy accounting practises going on. [00:25:33][8.3]

Bryce: [00:25:33] How do I make sure there's no dodgy accounting? [00:25:35][1.6]

Emilie: [00:25:35] You have to look really close at the numbers and just monitor that over time. Build out your own model, talk to management about anything that maybe might be aggressive accounting or not aggressive enough that that can be the other problem. So, yeah, so not burning cash, looking at the balance sheet, making sure they have stable cash flows and also just making sure the management team has a good track record that. Also really important because you don't want someone whose first time CEO and about to list on the stock exchange, you really want that that good track record and management ability, that's [00:26:04][28.6]

Alec: [00:26:04] something that often comes up when we're speaking to fund managers and analysts and stuff that that manager track record. Obviously, you guys have the ability to actually speak to the director or the CEO or whoever it is for retail investors. What are some tips you have to figure out if a manager has a good track record or not? [00:26:22][17.4]

Emilie: [00:26:22] Yeah, it is a challenging one. I think some companies are tending to put a little bit more material through videos or social media, which you could potentially do, but also writing about them. Have they been afar? Is that has there been any controversies in their past? Nothing to look at is how much stock they own. So are they invested in their own business? Have they been selling recently? That's a good indicator. But if you can see that background look on their LinkedIn, I'm like always talking people on my team. So I just have a look at that as well, because that will give you a good, good idea of what their background is like. [00:26:52][29.5]

Bryce: [00:26:52] You guys should work GoPro to your site [00:26:54][1.8]

Emilie: [00:26:56] and then sell that footage. It would be valuable, right? Covid or bring a microphone and release. It is what I'm going to do that the sustainable funds. [00:27:07][11.2]

Bryce: [00:27:09] And what's the what's the general time period between harvesting the idea and then actually putting money into the stock? [00:27:15][6.1]

Emilie: [00:27:16] It can vary. We have quite a few different investment products across pretty more broadly, and we have a private to public fund as well. And that basically looks at companies maybe three years out of IPO. And so we might get that idea and we'll be following it for all the way from when they invest up until they list on the stock exchange. You know, we have stocks that we've been looking at for years that that we one day might invest. So or it can be really instant. It might be an idea that just comes to market. And after our due diligence, we invest within, you know, a few weeks could be [00:27:44][28.5]

Alec: [00:27:45] we're keen to get a little bit specific here about one particular stock. And it was the largest position your fund held as of the 31st of March. You can confirm or deny whether it's the largest if you choose to. The company is genetic signatures. Yeah, ASX ticket just. Yeah. So I guess can you tell us a bit about the company, but maybe talk us through the process that, you know, you found the company and you researched it and stuff like that. [00:28:10][25.1]

Emilie: [00:28:11] Yeah. So Genetic Signatures is a biotechnology company and it actually has developed a rapid pathology testing kit. And what it can do is detect infectious disease within five hours and actually do so with a lot more precision. So you get a lot less false negatives, which is obviously really important when you're dealing with infectious disease. And what they were able does that [00:28:32][21.5]

Alec: [00:28:32] include [00:28:32][0.0]

Emilie: [00:28:33] was going to say, yeah, well, funny, funny you say. [00:28:36][3.3]

Emilie: [00:28:38] So what happens is that we really like the company because of the improvement in obviously patient outcomes from rapid pathology testing kits. But when Covid happened, though, actually able to modify their kids to include the test of Covid and their stock price is really well out of that. It's up [00:28:53][14.9]

Bryce: [00:28:54] 15 per cent right now to [00:28:55][1.7]

Emilie: [00:28:56] do according [00:28:57][1.3]

Bryce: [00:28:58] the third of July. [00:29:00][1.9]

Emilie: [00:29:01] Yeah, so so we actually bought the stock in a capital raise back in the end of 2009 for 98 cents. So yesterday it was two point thirty. And obviously it's up again today and we still think there's more valuation upside from here. You know, good management team, great product, improving patient outcomes takes a lot of our boxes. So we're quite happy with that investment, obviously. [00:29:19][17.7]

Alec: [00:29:20] Yeah. A couple of days after the market bottomed, it jumped up eighty percent in a week. [00:29:23][3.6]

Emilie: [00:29:24] Yeah, yeah. Good, good way for us. But but like you said, like, that's not a one off. We have lots of examples of where this kind of stuff happens for our companies. We hold and we believe that kind of the focus on sustainability allows us to find these good companies that are really doing amazing things and considering all types of risk across our business and and positive outcomes. And they're going to do better [00:29:43][19.5]

Bryce: [00:29:44] with small caps like this. Where does value sit in the spectrum of thinking about keeping in your portfolio and not like it's run a fair bit now? Yeah, obviously with these small cap companies, it's sort of like a growth mindset. Where does value sit? [00:29:59][15.6]

Emilie: [00:30:00] Yeah, so look, it's hard. We think that it's still got a lot more sales and it can do we can think they can reach a lot more geographies and also it's in FDA or in process of getting FDA approval for testing in the U.S. So that's obviously going to present a lot of upside if that comes through as well. So it is just balancing, you know, the risk around valuation upside. And it looks like we did trim a little bit after the strong performance. It's still in our portfolio, but it's not the biggest weight. So so we do take some some warnings. But just because we do see that there's a lot of potential from here for upside, we do still hold it. [00:30:34][34.4]

Alec: [00:30:35] So I'm interested to move to the ethical considerations for this company. So I'm going to guess that the exclusion list wasn't an issue, that the pathology company probably doesn't fall into any of this or, you know, carbon intensive industries. So then it becomes a question of looking at the company and, you know, doing a sort of positive screening, I guess. So can you talk us through? That process and some of the factors that you weighed and obviously it passed, but like that process. [00:31:00][25.1]

Emilie: [00:31:00] Yeah, so pharmaceutical companies obviously there sometimes they can be a risk because you're thinking about things like are they improving patient outcomes in this case? We believe, yes, because we're seeing better outcomes. I mean, less false negatives is obviously of extreme benefit. And having a result within five hours is is really beneficial. But you also when you're thinking about pharmaceutical companies, you want to make sure they're not price gouging. You want to make sure that there's access and affordability for customers, animal testing. So we we like to avoid companies that are testing on animals. And you also want to make sure they're doing their trials safely. So they're kind of the other things to think about. But in in genetics and Signature's case, it's it's all good, we believe, from a sustainability perspective. [00:31:41][41.1]

Bryce: [00:31:43] So I'm just. Did you have a follow up to that or. [00:31:45][2.0]

Alec: [00:31:45] No, I was just going to say, you peel back the onion on all of these things and things I didn't think about, like animal testing, how they're conducting trials, all that like. Yeah, that's why [00:31:54][9.3]

Emilie: [00:31:54] you want an answer. That is very true. [00:31:58][3.7]

Bryce: [00:31:59] I I'm just looking at some of the holdings in the fund at the moment, and I'm very pleased to see that the company that holds the second highest weighting is my stock pick of the year city, City Chic. [00:32:11][11.6]

Emilie: [00:32:13] She said, oh. So how did that make it in. [00:32:17][3.8]

Emilie: [00:32:17] Yeah. So City Chic is what we call and engage in probe so that a group of stocks that you might not consider in sustainability friendly industry, but actually they're doing amazing things from a sustainability perspective. So in City Shaikh's case, they are doing heaps of work on the living wage. So making sure everyone in the supply chain is getting paid a fair salary that allows them to actually live a reasonable quality of life. So you're thinking about minimum wage? Doesn't necessarily guarantee you a quality of life, but the living wage is is the concept that it's more sustainable to live off. So they're doing great things. They're they're doing factory checks that have grievance hotlines for for workers who can report any issues in their supply chain and they promote a really positive body image. So if you for the listeners who haven't heard of City Chic, it is a plus sized women's fashion retailer. And it's all about promoting positive body image and and confidence within yourself. So we really love the message. They have a great management team. They really tackling the online space. So most of their sales through the online channel, they're expanding into the U.S. This environment, they've done really well. They potentially small acquisition opportunities as kind of more of their competitors struggle in this environment if they're not online focussed. So we really relaxing shake, right. [00:33:32][75.1]

Alec: [00:33:32] Booming without knowing the company in as much detail as you do. Considerations around things like fast fashion come into play with this company or are they pretty good in that area? [00:33:42][9.8]

Emilie: [00:33:43] Fast fashion is definitely a consideration for us, and that's why it is an engaged improver and not what we call a sustainable future. Niebla But the positives outweigh the negatives in that case. So, you know, even though it is fast fashion, there's a lot of other sustainability benefits that that the stock brings. So we like that one. [00:33:58][14.9]

Alec: [00:33:58] I like the concept of an engage improver. If you can prove we'll be able to come back to this podcast and say you got a little bit of [00:34:04][6.0]

Emilie: [00:34:05] what [00:34:05][0.0]

Bryce: [00:34:05] has Perpetual done to make it into the fund. Yeah. [00:34:08][2.9]

Emilie: [00:34:09] So Perpetual is a financial stock. It is an investment manager and actually recently acquired a sustainability company called Trillium, and they're really focussed on obviously sustainable investing. So we quite like that. The management team is really engaged on on diversity and the like. Again, they said this is what we call a positive RSJ score. That means that it's, you know, not necessarily doing amazing things for sustainability, but it's not it's not doing bad things either. So it goes well in our a scoring mechanism. But it's not one that we would say is delivering amazing sustainability performance. It's just doing well. It's a good contributor and adds diversity to our fund. [00:34:47][38.1]

Bryce: [00:34:48] And then finally, from looking at the portfolio, obviously cash is the largest position at the moment. Is that generally how it works or is it because of what's going on at the moment? [00:34:57][9.6]

Emilie: [00:34:58] Yeah, so so cash, we typically there's a limit and we can't have more than 10 percent of cash. What cash does move around a little bit. And that's because we might receive inflows into the fund and therefore we don't want to rush to go and buy things. We actually want to wait for opportunities to present themselves. So it does provide us a little bit of optionality around that. So as things, you know, as the market is a bit more volatile, we can buy things when it goes down. Or we might have sold a holding which has has left more cash in the portfolio. But yet we do have a maximum of 10 percent cash. It's sitting under nine percent at the moment. But that is basically just to provide opportunities and optionality for the fund. [00:35:34][35.5]

Alec: [00:35:34] Nice. So I'm interested to move to the broader world of ethical investing. Obviously, it's a constantly changing space. I imagine carbon emissions is with a bullet, the number one thing at the moment. But what are some of the other big themes that we're seeing in 2020 and maybe some of the ones that are a little bit under the radar? So underrated. [00:35:52][17.6]

Emilie: [00:35:53] Yeah, cool. So 2020 has. I've actually been an amazing year for investing. It's been around for a while, but a lot of RSJ funds haven't really existed pre the last financial crisis. So the 07, 08. And so people were a little bit sceptical about, OK, is there a performance off to invest in a sustainable way? And what the covid situation pandemic did was show that these funds typically outperformed and that kind of renewed the interest in the asset class. And there's a number of different, I guess, issues that have come to surface. So environmental has always been the biggest focus for for sustainable funds and the society more broadly. But it did kind of lose a little bit of momentum into the climate crisis as companies kind of went into survival mode. And what actually became more front of mind was the social issues, which have typically been a little bit more ignored. So, you know, we've seen a lot of community and societal movements around Black Lives Matter and then also a bit of the unrest around the blasting of Jukin Gorge Vireo, which was the indigenous heritage site. And so we're seeing a lot of kind of more social licence to operate factors that are going on. If you also think about social, that's treatment of employees. Companies that already had a working from home policy or flexible working arrangements actually would have had quite an easy transition going into this crisis where everyone had to work from home. Those with more engaged workforce are going to have a more productive set of employees working from home. So actually, social has been really important. Also modern slavery. So there was a legal act that came comes into force this year that requires large companies to actually report on any modern slavery risks in their supply chain and how they're managing those risks. So that's been a big focus. There's around 40 million people globally in modern slavery conditions. So that includes things like forced labour, debt bondage, child labour, bad work conditions and low low wages. The other really topical thing is governance. So, you know, what's the diversity of their workforce? ASX three ASX 200 companies only have about 30 per cent of women on the board and only 18 percent of people are female. So that's something that we have to bridge the gap. And also in governance, you know, companies that have performed poorly and that are raising capital, should they really be then, you know, lifting the pay for the CEO, for example? And so so we're looking at those kind of governance type of issues. [00:38:11][138.3]

Alec: [00:38:12] So those were the numbers for the ASX 200, the 30 percent in that 18 percent. How does it compare to your universe in the small cap space? [00:38:19][7.0]

Emilie: [00:38:19] Unfortunately, it is a lot lower, but it is improving, particularly as investors are putting a little bit more pressure on on boards and on companies to improve those outcomes. Like I mentioned earlier, we think 30 percent is a minimum. You should be striving for equal representation because that's what society is, right? So where there's situations where a company is an equal representation, we were right to them. And we'll say, what are you doing about this issue? And depending on their response, we will vote against their remuneration report or we will divest our holdings and we can also help them. So we provide recommendations for good female directors in the industry as well. [00:38:52][32.4]

Alec: [00:38:52] So obviously you touched on Covid there and Covid has changed a lot of things for a lot of people. When you think about sustainable investing, has these Covid period changed how you analyse any of these issues or how you think about sustainable investing more generally? [00:39:05][13.2]

Emilie: [00:39:06] Since Covid, we've been really considering of how have they treated their employees over this period? So have they laid them off or are they trying to help, help keep them on in these times? What are they doing with customers? Are they providing hardship requests? Are they doing that everything they can to keep their customers safe during this time? What do they call waiting times? Like we've seen a few of the banks, you know, people might be on the phone for hours just trying to get in hold because they're having a hardship issue. [00:39:31][25.3]

Alec: [00:39:32] I needed to cancel a Qantas flight and their call time was about a week. So I guess they're unethical. [00:39:36][4.6]

Emilie: [00:39:38] Well, I think [00:39:38][0.3]

Emilie: [00:39:39] we have to take into consideration. Right. And what you find kind of more in the smaller spaces that have new attack systems and they have an ability to kind of address concerns maybe more quickly than some of the traditional players. But, yeah, something we've been watching [00:39:51][12.4]

Bryce: [00:39:52] the way before. We get to our final three questions that we ask our guests, is there anywhere that our audience can go to find out more information about what we've discussed today about invest and perennial or yourself? Yes, social media with LinkedIn. [00:40:07][14.9]

Emilie: [00:40:08] You can definitely check out the fund at investor dot com today. You and we'll also have links to any of the relevant information in the bottom of the show notes and also at investor dot com you Ford's Equity Mates. And obviously, please reach out if you want to have a chat, go and do your work. If you're looking to invest sustainably, make sure you understand all of the companies in the portfolio and there's no red flags. And we're always happy to chat about any of the sustainability credentials of our holdings. Nice. [00:40:33][25.0]

Alec: [00:40:34] So if you want a real dark green fund, unlike any of those light green pretenders out there, this is the one for you. [00:40:39][4.8]

Emilie: [00:40:40] We hope so. We try. [00:40:40][0.7]

Alec: [00:40:41] So, as Bryce said, we do like to end every interview with the same three questions, so we'll get stuck into those. The first one is do you have any must read books? And these can be investing or otherwise. [00:40:53][11.5]

Emilie: [00:40:54] Yeah. [00:40:54][0.0]

Emilie: [00:40:54] It would be fitting of me to suggest some AHJ related books, so I recently read Duck Ammu, which is by Bruce Pasko, and that kind of challenges the traditional recount of the European settlement on Australia and the perception of indigenous Australians as hunter gatherers. So that's that's really worth a read. I also recently finished Superpower Australia's Low Carbon Opportunity, which kind of goes through why Australia is really well positioned to be the renewable energy leader of the world. And on a slightly different note, another one of my favourite kind of not investing books, but I guess organisational books is exponential organisations. And that's all about how companies can foster a culture of innovation to succeed in a world that's rapidly changing technology so that all three books I recommend [00:41:39][44.9]

Alec: [00:41:40] this one, good recommendations. So the next question is, what is your go to source for investing or financial information? [00:41:46][5.8]

Emilie: [00:41:47] Yeah, so as a research analyst, actually we do a lot of our own own research. We don't tend to rely on others. So so we're writing the financial reports, annual report, sustainability reports, talking to management as as I've kind of mentioned. But IAFIS a really good source of information for just kind of day to day company update to market update. So I definitely recommend that. And hopefully if you have an iPhone, you can see stock movements through that there. So, yeah, we like to do our own research. [00:42:13][26.1]

Alec: [00:42:14] Fair enough. I don't have an iPhone because I think Apple is an unethical company. [00:42:16][2.8]

Emilie: [00:42:18] Elastic band. [00:42:18][0.5]

Alec: [00:42:20] Yes, it's going on. Green screen came off because it wasn't an iPhone. It wasn't as well. OK, so last question. If you think back to, you know, the start of your investing journey when you were working in the bar, investing in that first Asian ETF and signing up to icons. What advice would you give to your younger self? [00:42:36][16.4]

Emilie: [00:42:37] I think people from time to time and especially May, can kind of have a little bit of self-doubt. I mean, what I would have thought is just really back myself. You know, my view is as good as anyone else's view. It provides a diverse opinion. I did say a TED talk with Mike Cannon-Brookes, who is the CEO and co-founder of Atlassian, and he kind of spoke about this concept of imposter syndrome, how you kind of feel inadequate in what you do. And he says that, you know, most people do have had that feeling that maybe they don't feel qualified enough to to be doing what they're doing. Just push past that and back yourself and really have faith in what you're doing. Do the work and you'll be able to succeed. [00:43:09][32.5]

Bryce: [00:43:10] Nice one, love. A great way to finish the interview. And so absolutely appreciate you coming on and sharing your process as a research equities analyst. And, you know, as we said, this space is kind of hot in our audience at the moment. So it's always good to get a fresh opinion on what's out there and give our audience, I guess, a different way of thinking about things. So I appreciate you coming on the show. [00:43:32][21.9]

Emilie: [00:43:33] Thanks, guys. I am on Equity Mates now. [00:43:34][1.8]

Emilie: [00:43:35] Absolutely. Yeah. I've got to [00:43:38][3.4]

Bryce: [00:43:38] get an Equity Mates tattoo, though. That's the nice one. [00:43:42][3.8]

Emilie: [00:43:42] I appreciate. Thanks, guys. Thanks. Thanks for listening to Equity Mates investing podcast production of Equity Mates Media. [00:43:42][0.0]


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