Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Janus Henderson's Mike Kerley to talk about ESG considerations in emerging markets.
Hi, Mike.
Mike Kerley: Hi.
Wall: So, we are here today to talk about ESG and governance which is not something that is synonymous for a lot of investors with emerging markets, with Asia. It has come to the fore. More people are talking about the importance of ESG. How does that marry with the traditionally less transparent operations of Asian emerging markets?
Kerley: I think it's fair to say that the governance has been, as you say, key to investors' considerations when they invest in these areas. I think things are improving, definitely. But it's very important to know some of the characteristics that happen in certain markets because they all differ. Calling them emerging markets is one thing. It kind of avoids some of the intricacies of individual markets. We've done quite a lot of work on China in governance and trying to get people to understand how China works, because it is different.
Wall: And in what ways is it different? I mean, one of the things that perhaps stands out is the state-owned enterprises, for example, which you don't find in the western world anymore?
Kerley: That's true. So, trying to understand the role of senior management and whether it's governed by the state or governed by private enterprises, what are their intentions and is it in the best interest of minority shareholders?
Wall: And how do you take those considerations on board when you are running your own portfolios?
Kerley: Well, I think, you have to do due diligence. We are fund managers, we are investors. We look at numbers. But numbers aren't everything. And what happens behind the numbers and the intentions behind the numbers is just as important. So, we do quite a lot of work looking at the intentions of management and the intentions of companies and whether they are doing what they say they are going to do. And we think that's really important.
Wall: And is it about being an activist shareholder and changing things where you can? Or is it about screening out those companies which perhaps are not making the mark, the level which you'd like to see in your portfolios?
Kerley: Activism, I think, is something that will come. But in certain places, it's going to fall on deaf ears. State sector and activism doesn't really work. Things will change over time and as shareholders we can get in there. But you got to remember that most of these companies are pretty young. When we invest in the west, we are talking about companies with 50 years or 100 years' worth of history which is – governance has kind of matured over time. In a lot of these places, we are talking about companies that are five-to-10-years-old. So, they need to be educated and we need to make sure that we are doing due diligence when we invest.
Wall: Are there any particular countries or indeed sectors or even a few companies where you are thinking actually these are best-in-class and they are making great roads into ensuring governance is a consideration?
Kerley: Oh, there are. There's a list of the top 100 and you can say which ones are the best and which ones are the worst. But I think what's important when you go about identifying the individual companies is to look at the characteristics as to why they are the best companies. So, you take some well-known companies and said, well, that's great, the director is a non-executive director, independent audits. These kinds of things are all the things you want to see. And then you go further down the list and maybe you will see companies which in theory have the same things. But then when you look at into it, they changed auditors three times in the last five years and you start to think, so well, maybe that's not quite right. So, lists and identifying companies like that isn't necessarily an easy job. You have to look behind it.
Wall: And what's the one takeaway then retail investors should have? Because I think there have been some high-profile, with a lot of media coverage, governance failings in this part of the world over the last five, 10 years in which the high-profile fund managers have come a cropper. So, should we be focusing on that? Or it sounds like we should be trying to be a bit more positive?
Kerley: Well, I think, the bottom line with this is that our view is that China in particular is going to become so important for investors globally as it gets included in indices over the next few years. So, people can't ignore it or stand from afar and wave fingers and say that we are never going to invest there. I think what you need to do is be conscious of the way that China works, the relationships between the state and private companies and you as shareholders. So, it's important to look at this data to establish whether these companies are right. And what we're saying here is that, all right, governance isn't what we expect in the west, but there is governance and it's different and we need to understand those differences.
Wall: Mike, thank you very much.
Kerley: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
