David Lambert, Senior Portfolio Manager, Head of European Equities
RBC Global Asset Management (UK) Limited

What is your approach to investing during volatile periods?

Well, I guess the opportunities for companies are where they've always been, in allocating capital to high return, sustainable areas of industry. So we kind of always live in volatile times with respect to geopolitics, economic cycles and other macro forces. And the key is to focus on what we do best and where we have the greatest insights. And that's more at the micro level as opposed to the macro level.

I mean, I guess what we tend to find is that in periods of dislocation, these tend to benefit strong quality businesses over weak, highly indebted, low return businesses as they can weather any disruption to a much greater degree, so actually, exit crises and periods of volatility with an advantage over their peers.

What is the core philosophy of the team?

Our core philosophy is to invest in well-established franchises that earn returns well in excess of their cost of capital.

Now, these businesses typically will be capital light, and therefore it's actually not that expensive to grow these businesses. So this dynamic of earning higher returns and reinvesting them back into the business underlying high levels of return creates the powerful dynamic of compounding shareholder value over a considerable period of time. So this exponential curve of compounding is what our core philosophy is looking to exploit.

So high sustainable, predictable, consistent returns is what we look for in a business as a core philosophy.

What do you look for when investing in companies?

We want to marry the company experience with our core philosophy. So this some of this loops into completely the core philosophy and what we have to ascertain what dynamics within each business allies with our philosophy. So in most cases, it's a number of things. It could be good management culture, good competitive position, i.e. a moat around the firm, unique intellectual property, a focus on good allocation of capital. In effect of all aspects that allow the margins of returns of a business to be high and stable or even improving over time.

So governance is the key that glues all this together.

What is your approach to Environmental, Social and Governance (ESG)?

The team's approach to ESG is it has to be an integral part of the analysis of any business because fundamentally it's an intangible asset that is built into to any company. So we take very seriously all ESG considerations. So we have checklists, we have material management issues that we monitor, and we address them on a stock-by-stock basis.

So we don't use a one glove fits all ESG policy. We look at the business, we look at the industry. And I think that's really important that we treat everything on a case-by-case basis. But then on top of that, we clearly use engagement with businesses to ascertain whether what they're saying and doing aligns with what we think they're doing. And that's really key. But it's an integral part of everything we do and sits up there with the analytical work that we do on operations. So ESG is right up there from that perspective.

Where do you see the most interesting themes for ESG at the moment?

Well, ESG and sustainability has been around for a long time, but it's been the big talking point for the last decade, I guess with a stalling in globalization and a post-pandemic recovery.

It's got great potential to shape the markets going forwards. Governance and societal behavior. So we see opportunities across the spectrum, which with any issue which excites us, how companies can reduce their environmental impact remains a key theme, especially among those companies that are improving the efficient use of natural resources and waste reduction. From a more social angle, how companies can improve general quality of life for the society of increasing ease, of increasing importance, especially in areas such as food security and socioeconomic empowerment.

And finally, I guess, you know, more applicable right now in volatile times, the resilience of economies is vital, and we see interesting areas for the advancement, including technological innovation and resilient infrastructure. But let us not forget that the focus of ESG is ever evolving and ever changing. And we have to be cognizant of that. So we don't want to get pigeonholed in certain themes, but we need to be pliable to develop and monitor new and pressing ESG themes over time.

Are your ESG engagement efforts with companies predominantly for insight or influence?

So engagement is just one part of a multi-pronged approach that we take to incorporating ESG into our process. We look to build relationships with companies rather than start from an adversarial position, given that we invest in great businesses to start with. So we have space in the management team to begin with, and we think this can be a key tool for the team to leverage our engagement. So we can derive good insights into how management teams are running their businesses beyond the statements given out in quarterly earnings through engagement, as well as the ability to discuss any issues that may arise from time to time.

You know, we're not in a position or want to, to be quite frank, to take a moral high ground. But clearly, we want to ascertain that a company's values are aligned with ours. But actually, what you find is, is that more and more is that many companies are on the front foot when it comes to engagement and focusing on ESG. So, meetings are much more streamlined than they used to be.

I guess the biggest interaction we have with companies actually is with remuneration committees. So the remuneration committees, we tend to find the biggest dislocation when our expectations and expectations of management teams. So we've had many. So the successes where we've tried to get management teams to realign or reappraise their thinking about their LTV so long term incentive plans.

But, you know, we address all sorts of manner of ESG aspects with all companies.