Trinetra invests in companies whose growth is driven by domestic consumption in Emerging Markets. There are two key metrices to measure success for our portfolio and for the companies we invest in; financial performance and quantifiable metrices against UN SDGs.
The starting point for our investment policy for our responsible investment approach is that we invest according to the ethnographic studies we perform in Emerging Markets. The companies that we invest in are those that aim to solve the problems of EM consumers, whether this is access to education, access to healthcare, access to financing.
We assess this through conducting our Immersions research. We conduct our own ethnographic research, on the ground in cities, towns and villages across emerging markets. It is qualitative research that involves intensive discussions with people from different socio-economic backgrounds. We listen to their thoughts about their lives, and especially their hopes, aspirations and dreams for themselves and their families.
From this research we draw insights that relate to secular, sustainable growth trends in consumption patterns. This is the starting point for our investment policy in that any company in which we invest must be set to benefit from the trends over which we have gained insight.
These trends/themes fall in two general categories. Health & Wellness and Equality. Equality for the people that will rise from the bottom of the pyramid, for women, for the youth in getting access to equal opportunities and also the older adults, which we refer to Forever 40 as they can continue being productive into later age and deliver in these markets a longevity dividend.
Although we do not have negative screening criteria, as we focus on solutions to consumers problems we do not invest in sectors that are not consumer demand driven, such as energy, resources, materials, utilities which are big polluters. Similarly we do not invest in tobacco, not because of demand from an investor to negative screen for it, but because in a decade of ethnographic studies we are still to find a consumer who wants to smoke more or smoke better quality cigarettes as claimed by the tobacco companies, but instead their focus is on health an wellness.
As well as definitive exposure to the growth trends that we identify, companies in which we invest will generally have strong, sustainable competitive positioning and all ESG risks that we identify have to be risks that we can assign a probability and materiality through our risk frameworks. As such companies with considerable adverse externalities, including environmental destruction or negative social impact, are exposed to the risk of regulatory intervention which we cannot quantify. Likewise, when governance is poor, and management is not sufficiently aligned with shareholders, among all other stakeholders, then the risk of divergence from shareholder interest will be high. We will therefore block such companies from coming into our investable universe and we communicate to them the reasons why and what has to happen for us to consider them.
Our risk assessment considers all risks, operational, strategic, financial and ESG risks. The assessment of each risk impacts the cost of capital, a major factor in evaluating a stock’s expected risk-adjusted returns.
We construct a portfolio, shaped to a large extent by ESG risk incorporation, with a 15% IRR objective. We aim to deliver 2/3rds of that, a minimum of 10% p.a. on a 5-year rolling basis, minimising the risk to which clients are exposed, while maximising risk-adjusted returns.
Every company that we research gets mapped against at least one SDG and we have to have at least one quantifiable matrix that we will be monitoring for maintenance or improvement.
Company active engagement is core in our process. It focuses on two areas. First is the communication to management, insights from their consumers. We will even show them video evidence of how consumers view their products points point them to evolving trends. Second, is discussing their internal risk assessment processes and discussing our risk assessment to identify omissions in either theirs or our risk assessments.
Our policy defines companies as Emerging Markets companies not according to where they are listed, but according to their business operations. For example, 60% of Unilever’s 2019 revenue emanated from Emerging Markets, so we define it as an Emerging Markets company, despite its UK and Netherlands listings.
Our policy dictates that a minimum of 80% of the portfolio is invested in Emerging Market companies. Up to 20% of the portfolio can be invested in companies that do not have more than 50% of revenues from Emerging Markets, but where the majority of growth comes from Emerging Markets, again regardless of the country of listing.