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Active Earth Investment Management
Combining performance and sustainability
TBLI Conference Europe 2011
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Combining performance and sustainability
Who target high-quality risk-adjusted returns that meet Responsible Investment criteria
Using a powerful investment methodology and system platform (SEVMA*)
Which fully integrates sustainability risks and opportunities out of economic conviction
* Sustainable Enterprise Value Multiple Analysis
We are a team of experienced investment professionals:
Performance
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Simulation results for Global Absolute Fund – June 2000 to August 2011
* Long/short equity index, source: www.hedgefund.net
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Sustainability
INVESTOR BENEFITS
We have conducted a rigorous study on the impact of sustainability integration on portfolio Sharpe Ratios
Study parameters:
Global and European long/short portfolios tested
Both broad and narrow universes
Time period – Jan 2005 to May 2011
ESG data compiled from leading providers
Methodology:
Long/short portfolio of highest/lowest SEVM’s
All SEVMs (post-sustainability integration)
Portfolios rebalanced six-monthly
Asset allocation determined by SEVM long and short hurdles
Summary conclusion:
Improved Sharpe Ratios in the majority of the study portfolios
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Quality This measure incorporates a longer-term assessment of returns and fundamental risk Price This is a consistent and conservative valuation measure, independent of funding choices Quality relative to Price This highlights which stocks offer high-financial reward relative to fundamental risk
Sustainable Enterprise Value Multiple (SEVM)
QUALITYAE Across-the-cycle returns on capital
Fundamental risk =
PRICEAE Market value of capital
Book value of capital =
SEVM Sustainable Enterprise Value Multiple = = QUALITYAE
PRICEAE
SEVMA investment methodology
SEVMA takes a longer-term view of fundamental risks and returns
SEVMA delivers high-quality asymmetric returns across the market cycle
Active Earth valuation screen of global universe
Long investments SEVMs > 1 QualityAE > PriceAE
Source: Active Earth, as at 28th of April 2011
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SEVMA – performance driven
Short investments SEVMs < 1 PriceAE > QualityAE
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Financial quality
Very high Very low
Bu
sin
ess
qu
alit
y
Ver
y lo
w
V
ery
hig
h
Measuring quality – our Quality Matrix
Active Earth eligible longs
Financial quality
Very high Very low
Bu
sin
ess
qu
alit
y
Ver
y lo
w
V
ery
hig
h
Active Earth eligible shorts
Active Earth focus on high-quality longs and shorts
SEVMA systematically measures a company’s combined business and financial quality
Active Earth’s extensive back-tests have proven that the best investment Sharpe Ratios are achieved by investing (long and short) in higher-quality companies
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Sustainability is an economic issue
There will be winners and losers in this changing economic landscape. We believe that
understanding the sustainability risks and opportunities are key to successful investing
Sustainable quality ensures continued shareholder value creation
Sustainable companies ROCE & WACC
Unsustainable companies ROCE & WACC
ROCEAE
WACCAE
%
Diminishing QUALITYAE
Enhancing QUALITYAE
QUALITYAE = ROCEAE / WACCAE
Changing investment landscape
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Sustainability study – long/short conclusions
INVESTOR BENEFITS
How sustainability integration affects our investment process (based on study results):
1. Circa 15% of the universe were excluded due to unacceptable changes in QualityAE or controversial industries
2. Long investment decisions are driven by a high ratio of QualityAE to PriceAE
Sustainability adjustments have a material effect on QualityAE
25-30% of actual investments decisions changed post-sustainability integration
Final investment portfolio has a lower exposure to sustainability risks and higher exposure to
sustainability opportunities
3. Short investment decisions are driven by a high ratio of PriceAE to QualityAE
This is predominantly due to our focus on looking for high-quality alpha hedges rather than
trading shorts
Sustainability integration had little effect on investment decisions
Less than 5% of actual investments decisions changed post-sustainability integration
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Sustainability study – final conclusions
INVESTOR BENEFITS
Key conclusions:
1. Material impact on investment decisions result even though only modest pricing of
sustainability risks and opportunities
2. Improved Sharpe Ratios in the majority of the study portfolios
3. Trend of sustainability impacting investment decisions expected to continue as market
awareness of sustainability issues increases and sustainability imperatives hit home –
our home!
Active Earth team
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Daron Sheehan
Managing Director
Over 20 years experience in the financial industry and strong investment track record
Co-founded the successful London-based global investment company Metage Capital in 1998
Andrew Dykes
Head of Investments
Over 15 years experience in the financial industry and strong investment track record
Previously launched an innovative sustainable fund at Berenberg Bank
Hon. Peregrine Moncreiffe
Director of Investment Strategy
Over 30 years experience working internationally at a senior level in global investment firms
Chairman of North Atlantic Smaller Companies Investment Trust Plc
Lindsay Whitelaw
Director
Over 20 years experience in the financial industry and strong investment track record
Co-founded the successful UK fund management company Artemis Investment Management
Nabil Chaya
Director
Over 20 years experience working internationally at a senior level in the financial industry
Former senior executive at Bank Audi with key external facing investor relations role
D. Michael Adams, Global Marketing
Craig Doran, Head of Information Technology
Kyra Sheehan, Client Services
Team of three investment analysts
Active Earth’s investment management platform
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A powerful investment platform for the unique SEVMA methodology
The SEVMA Platform is an integrated screening, portfolio construction & risk management system
Employs consistent valuation measures for stocks, sectors & countries across market cycles
SEVMA PLATFORM
Top-down (aggregates) Bottom-up (stocks)
Pre-screening N/A 15,000
Financial database construction
Sustainability database construction
Live screening 800 3,300
Sustainability integration (Q4 2011)
Historical analysis (from June 2000)
Portfolio construction and optimisation
Attribution and risk management
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