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Equities

Active equity management

Dr. Rainer Matthes, Chief Investment Officer Portfolio Management Metzler Asset Management

Active managers are only engaged if their personal skills enable them to deliver “alpha”, i.e. returns that exceed those achieved by the benchmark. These skills include but are not limited to recognizing structural changes and sustainable business models and using them successfully in the portfolio. Investment approaches rooted in fundamentals like this will therefore always be long-term.

Active stock picking that is true to style with clear processes and structures is one of Metzler Asset Management’s core competencies. Investors value us as an active manager because we deliver "real" alpha that is not based on known risk premiums but rooted in the strengths and competencies of our portfolio managers. Our portfolios are not "hidden index funds", but the result of thorough fundamental analysis of companies, industries and trends.

Our aim is to understand business models in detail, assess their future viability, and classify the current valuation of an equity in a fundamentally correct manner. We also include non-financial indicators ("ESG integration") in our fundamental company analysis if we believe they may have an impact on the share price.

The prerequisite for successful active management is a clearly defined investment philosophy that is stringently implemented by a team with the lowest possible turnover. An efficient and performance-oriented organizational structure gives each portfolio manager room to develop his or her alpha ideas and allows risks to be controlled at the same time.

A consistent investment approach throughout all phases of the equity market cycle is very important to us. Our long-term investment philosophy is "lived" by all portfolio managers on a daily basis and investment decisions can be tracked at all times. We do not change our investment style according to taste or market phase; we remain true to our long-term approach even in difficult times.

Sustainability components are an integral part of fundamental analysis for equities at all stages of the investment process. We work together with established specialists on this important topic.

The higher the percentage of passive investors, the greater the alpha chances of active strategies are. We aim to achieve added value compared with the benchmark indices, and we do this by investing in companies that meet the criteria of our strict selection process. We identify highly "active shares" while strictly controlling the portfolio risks.

The market is characterized by high-frequency trading, index-oriented investments and short-term investment strategies such as trend-following models. High volatility has unsettled many investors, causing the real character of the share as a successful long-term investment to recede into the background. We see ourselves as long-term, fundamentally oriented investors and take advantage of the opportunities  that large fluctuations offer. Volatility is a fundamental investor's friend, as it offers interesting investments at attractive prices. We regard each and every equity investment as a long-term participation in the risk capital of a company. Accordingly, we focus on understanding and assessing the long-term risk/reward structures of the companies in our portfolios. We do not speculate; we invest.

We create added value by carefully selecting individual securities based on fundamentally sound assessments of the business models. We analyze the value drivers and risks of each business model and assess the quality of its management and their strategic decisions. We look at structural sector trends and potentially revolutionary changes.

Each portfolio manager is responsible for all decisions pertraining to certain individual portfolios; at the same time, he or she is a member of at least one group of experts. The interaction of the expert groups with all colleagues on the equity platform is crucial to the success of our analyses. A manager can thus combine the expertise of the expert groups on sector cluster topics with his detailed knowledge of individual companies in his investment universe. The result is a fundamental analysis focused on key performance drivers, and findings can be quickly and flexibly implemented in the relevant portfolios.

Our equity portfolios are of high quality because we have very good access to investment-relevant information which we incorporate into investment decisions in a highly efficient manner. Each portfolio manager maintains direct contact with the top management of many companies in the relevant universe; we also make intensive use of external industry experts. Stringent fundamental stock picking is the key element in our investment philosophy for all equity portfolios managed via the equity platform.

In addition to purely financial criteria, we take into account how companies manage environmental, social and governance issues in the course of our investment process. A broader database help us to optimize our  selection of companies-and thus the risk/return profile of our portfolios.

ESG stands for "environment, social and governance". When incorporating these sustainability aspects, we use exclusion criteria, ESG integration and engagement as well as ESG controlling and reporting.

Goal: an improved risk/return profile

ESG integration aims to improve the risk/return profile of funds by incorporating key sustainability aspects into traditional investment analysis. For example, we assess from an economic point of view how ESG scores from MSCI ESG Research and/or sector-specific key performance indicators (KPIs) and/or ESG aspects of companies' business models affect  business success. By means of ESG controlling, we improve the integration of ESG into our investment processes on an ongoing basis.

Use of exclusion criteria and engagement through dialogue and voting rights

Exclusion criteria are used for all equity funds, based on 120 norms and conventions. The data stems primarily from MSCI ESG Research. In the event of "very severe controversies", i.e. the most serious breaches of one of these norms, we generally exclude the company in question from the investment universe. At the client's request, we also include other criteria in the investment process, for example based on data from ISS-oekom.

Last but not least, we work together with the specially mandated financial services advisor BMO Global Asset Management (BMO)to ensure that we address business-relevant ESG challenges in discussions with the companies represented in our portfolios (so-called engagement). BMO also exercises proxy voting rights. BMO prepares reports on this and on the milestones achieved in the engagement, some of which we include in the ESG reporting for our clients.

Sustainable investment at Metzler: An element of portfolio optimization

For years, Metzler Asset Management has consistently integrated ESG components into all discretionary mandates, thus supplementing classic analysis based on financial criteria.

ESG integration

Portfolio managers as entrepreneurs within the company

We also see the key to success in the efficiency of our structure–in the formation of a small team that is highly focused, performance-oriented and true to a homogeneous  investment philosophy. Our  equity platform is characterized by clear responsibilities, short and efficient communication channels,  and a high level of transparency. It is considered "integrated" because each manager benefits from the know-how of all other managers, but the ultimate responsibility for the portfolio is borne by the respective manager alone. All this works to the benefit our clients, as they are the ones who profit from the resulting promising opportunities for long-term portfolio outperformance with risks monitored at all times.

Structural issues are more important than a short-term

With our special approach, we aim to understand the most important long-term structural trends in the various industries. They are more important for our investment strategy than focusing short-term  on the quarterly figures reported by companies.

Each portfolio manager belongs to one of six expert groups: Capital Goods, Consumer Goods, Energy/Basic Resources, Financials, Technology/Media/Telecoms and Health Care. The teams are responsible for analyzing sector clusters and the individual stocks in their respective sectors. This provides a solid basis for closely monitoring and analysing even complex–structural issues.

An ESG research team consisting of two portfolio managers and one ESG integration manager works across clusters. The ESG integration manager bears central responsibility for ESG issues. He makes sure that our high quality requirements, also in the area of sustainability are consistently implemented and enhanced further.