As the crisis lingers on with the risk of Greek default and the to-ing and fro-ing of the various political leaders, investors are worried about the risks of default by sovereign borrowers, the extremely low level of short-term rates, the risk of zero growth in Europe and the US, market volatility, etc. Basically, there is zero visibility and they have no idea what strategy to adopt.
However, despite this troubled environment, the most globalised companies are proving surprisingly resilient in view of the fact that most analysts predicted sharp falls in profits against a backdrop of virtual world recession. Although it is difficult to generalise, it is clear that since the 2007 crisis companies have learnt to manage their results in a shifting environment and that some industries, such as the luxury industry, are impertinently showing good health compared to other sectors that have been led astray by expectations of a general slowdown.
We have a paradoxical situation in which many companies are posting unprecedentedly high levels of dividend yield, whilst, for some of them, every dip in their share price leads to a sharp fall in their net asset value, exposing them to a hostile or gradual takeover.
In this highly volatile environment, do companies with the best corporate governance practices perform better than their peers? This theory, hotly debated by socially responsible analysts, acquires full relevance in the midst of the crisis, as it poses a direct question as to the most efficient criteria for identifying the companies that will be able to weather the crisis without sinking.
Our investment strategy proved highly resilient to this summer’s stock market crisis and financial market volatility, enabling us to outperform the CAC 40 (dividends reinvested) by 2.1% in 2011 year to date. This performance has been made possible by a cautious approach to risk, with a tracking error of 2.4% despite increased market volatility since June 2011.
This original investment strategy that is applied to our Proxy Active Investors fund has been built on our experience as engaged minority shareholders since 2004. The originality of the method consists mainly in its combination of quantitative management (aiming to identify the impact of corporate governance on the evolution of the company’s share price) and qualitative management (aiming to take account of companies’ “reactivity” to our suggestions to improve their corporate governance).
By overweighting companies that have listened to us, and by underweighting companies that haven’t, we have built up a portfolio that embodies a conviction: the best governed companies, and those that listen to their shareholders, are in the best position to be able to adapt to stakeholder developments in their efforts to survive the crisis and ensure the successful development of their business model.
Our results so far this year show that this approach is proving resilient to the present crisis, and we hope that you will join the investors who have chosen to trust us in the implementation of conviction-driven management that listens to shareholders.
Olivier de Guerre
PhiTrust Active Investors
Investor and Shareholder