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Governance is Schroders’ top priority

Governance is Schroders’ top priority

While environmental, political, and social issues have topped the agenda in developed markets in Asia, governance in particular is the top priority for most asset management firms, such as Schroders.

‘If you cannot trust management of a company, you are inherently unable to trust the board of the company to take the right steps to create long-term shareholder value. Ensuring that management and shareholders’ interests are aligned is the starting point,’ the British asset manager said in its latest report.

For example, on the whole the Schroders Asia ex Japan Equities Team generally avoid state-owned companies in Asia; purely because the companies’ interests tend to be aligned with the state and not shareholders.

Issues that could potentially adversely impact companies on the environmental and social fronts, such as environmental scandals or product recalls, Schroders views as an opportunity for competitors to either grab market share or an invitation for increased regulatory scrutiny. The upshot of this is that longer-term profit will not be sustainable.

Jay Luong, fund manager for Asia ex-Japan equities said the firm’s investment process integrates governance into how it assesses whether it can invest in certain companies.

‘On a broader level, we look for companies that create durable long term value for shareholders. From a fundamentals perspective, this means identifying companies that have a positive ROIC minus WACC and preferably where valuations are attractive,’ he said.

This means that after Schroders has subtracted a company’s weighted average cost of capital (WACC) from its return on invested capital (ROIC), the resulting number should be positive.

‘These are generally companies that we like to own. As we focus on the returns of a business, any governance worries – whether it is directionless strategy, hoarding excess cash, or no execution follow-up – will become immediately apparent,’ Luong added.

‘Companies that invest and expand without due care for returns, we shy away from. Other key barometers we look at for good governance include factors such as excess profits and cash flow and whether management re-invests smartly or returns these to shareholders. Consistency and discipline in delivering a company’s medium term growth target is another positive for us,' he said. 

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