Jack Lowenstein, Morphic Asset Management
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Ethics and investing were once mutually exclusive. Now, there's a growing movement to intertwine the two, spearheaded by fund managers focused on differentiation in a crowded market.
Naturally, there might be shades of grey, even in your typical 'green' portfolio.
Jack Lowenstein, the joint Chief Investment Officer and Managing Director of Morphic Asset Management, runs the Morphic Ethical Equities Fund.
Morphic Asset Management combs through global share markets for ‘positive and negative screeners' in effort to prevent unethical entities from making their way into the fund.
Companies that do not align with definitively ethical values are negatively screened. Conversely, companies generating positive ethical outcomes and positive returns are sought out to invest in. These positive screeners are, admittedly, much harder to pin down as ethical investments aren't yet always the most profitable kinds. Positive screeners are in the business of things like water and air quality, conservation, and renewable energy.
As such, there is a mandate for positive screeners to make up a minimum of 5 per cent of the Morphic Ethical Equities Fund. It might seem low, but Lowenstein says there still isn't shades of grey in his carefully curated portfolio.
Lowenstein talks to InvestSMART about select stocks that fit the ethical bill, Morphic's short selling strategy, and why he likes Tokyo so much.
Listen to our podcast, or read the full interview below.
Laura Daquino: I'm sitting down with Jack Lowenstein, the joint Chief Investment Officer and Managing Director at Morphic Asset Management. Hi Jack.
Jack Lowenstein: Laura, thanks for coming to see us.
Laura Daquino: Today we're talking the Morphic ethical investing philosophy. There is solid proof, isn't there Jack, that investing ethically is first and foremost a smart investment decision?
Jack Lowenstein: We believe so. We think that our negative screen will keep us out of trouble with a lot of dying industries, like fossil fuels and tobacco. And we think our positive screen will help us balance that with opportunities in things like water conservation and sensible treatment of waste, which will definitely be a good thing for the world and good for our investors.
Laura Daquino: Besides the US, which obviously a lot of fund managers are pretty heavily invested in, that have an international strategy, you have a decent amount of your portfolio invested in both Asia Pacific and Western Europe. I'd like to just drill down on the Western European region, and see if there's any specific stocks there or sectors there that you're looking at?
Jack Lowenstein: Well, our biggest position in the fund, and indeed in Western Europe, is a company called Alstom, which most of your listeners will know about because they make trains and trams, including lots for Australia. I think they made some of the trains in Melbourne, they're making our new tram in Sydney. They're a global, they call themselves global mobility, so they make trains, trams, and signalling systems all around the world. They're one of the largest players in that sector, and it is a very, very exciting sector, because both in developing countries and emerging economies, you're getting this realisation that you have to spend a lot of money on urban transport infrastructure, but also on improving trains that go between cities. It's a really big growth area – not an explosive area, but a very steady, long-term growth area. Alstom has got a record order book, and what makes it even more exciting is they're about to merge with their biggest competitor in Europe, which is a subsidiary of Siemens, to make a global train and tram business compete with the cheaper, but not necessarily as good, competitors they're getting out of China.
Laura Daquino: Do you look at any businesses like that in the States, as well? Because I know there is a bit of tension between Western Europe and the States in that area of the market.
Jack Lowenstein: Look, we haven't looked at transport companies in the US, because the biggest one is General Electric, which we can't invest in, because it invests in nuclear power and a whole bunch of other stuff we're not allowed to invest in. So the answer's no. We have looked at China High Speed, which is the biggest competitor in our region.
Laura Daquino: You also hedge your portfolio, don't you?
Jack Lowenstein: Yes. Our view is our investors want us to get them returns that are similar or better than the stock market as a whole, but they want us to do it with lower volatility. Our general approach is to try and keep up when the market's going up, and do rather better when the market is falling, so our investors can sleep at night.
We do that through a variety of tools. We do manage the currency, where we feel appropriate. We also look at increasing or decreasing the amount of cash we hold, and sometimes I think what makes us stand apart is probably our agility, in the very short-term. So. for example, two years ago when Britain unexpectedly voted to leave the European Union in the so-called Brexit Referendum, we started that day convinced, like the rest of the world, that there would not be a vote in favour of Brexit, so we were fully invested. But because we always try to think how we might be wrong, that's a centre point of our investment approach to say, “You think you're right” – but you're a bunch of type A personalities, so you always think you're right. But have some thought about how you might be wrong, and have an idea of how you might identify when you are wrong. In this case, we identified very clearly how we would be wrong.
We knew exactly how each of the early announcing polling sections would report if there was going to be a Brexit, and we could see very quickly there was going to be a Brexit. At that point, in the next hour or so, we raised our portfolio from zero cash to 50 per cent cash. That's an example of how we hedge. We don't try to anticipate big moves. We try to move very quickly when they actually happen.
Laura Daquino: How much cash are you holding now?
Jack Lowenstein: At the moment we're fully invested. Our view is that we are in a slowly rising market. There was that little bit of a shock we saw in late January, early February, but to some extent it's already leaving the system, so we're reasonably confident that investors who come to us, looking for global equity exposure, we're going to give it to them.
Laura Daquino: Would you say you have any major concerns about global markets, or not particularly?
Jack Lowenstein: Look, our major concern about global markets is that there's surprise on free trade. Obviously at the moment, President Trump has done what many people in America prior to him have felt should be done, which is to push back on China's wanting to have all the benefits to be part of the world trade system, but not pay any of the price, including things like respecting intellectual property rights. So, this is going to be an issue. We suspect it'll be largely noise, and there will not be a lot of consequences from it, but we're watching it very closely.
Laura Daquino: Are there shades of grey with ethical investing? For example, a big bank that might lend out money to oil companies, and might have oil companies on its loan books, or things like that where it makes it a little bit hard to distinguish?
Jack Lowenstein: That's definitely the case. I mean, particularly if you're investing in larger companies, you end up with quite complex businesses that have bits of them that you might not like. I think everybody knows the example of Wesfarmers, now Woolies, which operates one of the biggest gambling networks for its pub networks, in Australia. You do get this, when you invest in large, complicated companies, you get these difficult bits.
We tend to invest in smaller mid-cap companies which are somewhat easier to rule out for those purposes. I don't think we have any shades of grey in our portfolio, but we do recognise that as an issue.
Laura Daquino: Beyond the obvious connotations with the environment, what does ethical investing mean to you, or what's the next big thing in this area? I notice that you've talked about gender diversity on boards as well.
Jack Lowenstein: I think beyond the environment, we don't invest in so-called 'sin stocks'. That is gambling and tobacco. Tobacco's a very big part of the world stock markets, believe it or not – hard to believe, but it is – and we also don't invest in companies doing armaments, which is not environmental, but definitely part of that negative screening element.
The coming thing is all about what's called ESG, which is environmental, which we do cover pretty well, and social, and governance. The governance thing is very interesting. As a global investor, you come across lots of different governance norms, but we do believe that having a diversified board, and that doesn't just mean having females on the board, but it also means having a range of life experiences, and a range of nationalities, we think that's a very important element to have to companies being well-managed, and avoiding a clubby mentality where you can end you with nobody wanting to say no to a very powerful chief executive, for example.
Laura Daquino: Yeah, good point with that one. You're also set apart from some of the other funds of your kind with your short selling strategy. Can you talk us through this a little bit and maybe provide a recent example and rationale about a company you did short?
Jack Lowenstein: Yes. First of all, although we're not allowed to have long positions in bad companies, we are allowed to short bad companies, and in fact, that's part of our framework for thinking. To give you an example, recently we were shorting Wells Fargo, which is a US large cap bank, because we felt there were a number of problems with that bank. One of them was that it was just so big, it was very hard for it to grow. The second problem is that it makes the banks that are currently in front of the Australian banking Royal Commission look like minor offenders in terms of the number of really quite terrible things it has done to its customers.
The worst case that everybody knows about was that it was actually opening bank accounts for customers without telling them, and charging them for it. This was because the staff were told they would get rewarded for bonuses for making multiple sales to the same customer. There are all these governance issues, so we shorted it because we thought it was too big to grow, and had big governance problems.
Now, when we short, we typically try to avoid taking too much risk in the shorting. What we often do is what we call ‘pairing' – we'll buy a bank which we like, and short a bank we don't like in the same country. What that means is that, if you think about the risk we're taking, typically you're taking three risks with any investment – you're taking a risk that you might be wrong about the country, or the industry, or the management.
When we pair, we do long/short pairing, we're saying, "We could be wrong about the outlook for the industries," – in this case banking, or the country, in this case America – but we feel very sure we're investing on the long side in a good management team, and on the short side, we're shorting a bad management team. That's our general approach to those things.
Laura Daquino: Yeah, so that comes back down to a stock picking strategy rather than a region specific strategy, and that's what I was going to ask you about as well. I noticed that with your exposure to the US, it's just over 50 per cent of your portfolio. I know that that's a bit below the benchmark. I'm wondering if you've got any reservations about that region in particular?
Jack Lowenstein: I think that the truth about America is it's a very innovative country. The stock market there is full of exciting opportunities. We are a bit underweight because we feel that a lot of those opportunities are fairly fully priced – and we also see more, I think perhaps it's slightly the other way around, we just see more interesting opportunities elsewhere.
At the moment we are overweight Japan, we're a little overweight China, but in a very, very small area, and the last few weeks we started buying a few more stocks in India because the market's starting to come off a bit, and we see some opportunities there. It's not that we're deeply bearish about the US, we're just not wildly excited, so that's why we have the small underweight.
Laura Daquino: Yeah. With Japan, you've clearly identified more potential tailwinds than headwinds over there. Could you talk us through what you're seeing? Because obviously all fund managers are varying on Japan.
Jack Lowenstein: Yeah, we've got a very different portfolio in Japan than most people. Japan as a market, has not done spectacularly well in the last couple of years. Not as well as we expected, actually. But we've been mostly in areas that have done really well, and we've managed to pick some very good stocks there.
We like to joke that we invest in Tokyo, not Japan. And there is a bit of a difference. Japan, as a whole, the population is shrinking, the economy's not growing very fast. Tokyo, the population's still increasing, and the GDP of the area is increasing. And that's because like many countries, big cities are doing very well. But Tokyo is particularly attractive, it's becoming a much more pleasant place to live, young people want to live there, so the average age is lower than the rest of Japan.
The areas we focused on in Japan have mostly been real estate-related. Everything in Japan is framed about what happened in 1990, which seems like a very long time ago to me, when the stock market peaked, and the real estate market peaked. In every other country I know of, stock markets and real estate prices are much higher than they were in 1990, and in Japan, they're still well below. What we've seen in Tokyo, in particular, is a very, very steady rise in real estate prices, and a steady increase in volumes of real estate that get developed.
We've been involved in people like Open House, which is a real estate developer specialist in the middle of Tokyo, that's still only trading about 11-times PE, and it's gone up about four- or five times-fold in the last four or five years. It has been a very good investment. We invested in a rather unusual company called Investors Cloud, which is what's called a virtual property developer. It never owns the land it develops, so it's a very, very interesting company to own. And we've also got some investments in some different little areas. We own shares in a company called Pilot Corporation, which makes pens – you've probably owned a few yourself – they make the only erasable ballpoint pen, I'm sure you've seen those around. It's a world leader in pen technology. Nobody in Japan even, there's no brokers who cover it, but it's quite a big company, and we find it quite interesting.
Laura Daquino: Is that because they have to be so big for the brokers to cover them over there, and it's big compared to Australian standards?
Jack Lowenstein: That's a good point. This one is actually quite big, even by Japanese standards, not to be covered. The reason is the management are quite unapproachable, so we have to on the one hand say, "This is a bit of a challenge. How are we going to really understand what's going on here?" But they have very good financial disclosure, and the stock is very cheap, so it's about 13- or 14-times PE, which for a quality branded company, is exceptionally cheap.
Laura Daquino: Thanks Jack for sitting down with me and talking investing today.
Jack Lowenstein: Thank you for taking the time.
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