The Nikko AM Australian Equities team has a long history of investing based on fundamental research. All stocks have an intrinsic value that can be accurately assessed with expert and diligent research. In the short term, the market price frequently reflects factors other than this intrinsic value. Assessing the intrinsic value of an investment can reveal profit opportunities, as the market price will invariably move towards the intrinsic value. This thinking lies at the core of the Nikko AM Australian Equities investment approach.
Investing in a responsible manner — where material issues including environmental, social, and governance (ESG) issues are considered — is a part of our duty to clients. Engagement with the companies held in our portfolios is an important component of the investment process, with the aim of improving the outcome for investors, as well as increasing the value of companies by addressing ESG issues.
ESG factors often have a long-term impact that is overlooked by the market even though ESG risks can affect the long-term profitability of a company. Not only are direct ESG issues a concern, but society’s views and the consequent consumer, corporate, and government reactions also need to be considered.
As long-term, fundamental investors, the Nikko AM Australian Equity team considers ESG factors as having the same level of importance as more traditional factors, such as market structure, innovation, and industry growth. Any material ESG issues are incorporated into valuations, using the same methods for more traditional factors. This way, the impact is neither under- nor over-stated. It is important to note that we do not exclude particular asset types, industry sectors, or securities wholly on moral or ethical grounds, unless this is expressly built into the product’s investment strategy or client agreement.
Engagement with companies is a key part of the research process. Developing a superior understanding of companies to peers is a key method of producing higher returns. As shareholders, we have the capacity to influence better corporate behaviour. For companies held in our portfolios, this engagement is used to influence corporate practice to address ESG issues and to improve disclosure of ESG information.