Arthur’s argument is well founded, and applies to the investment industry as much as any other economic realm.
As it stretches to reduce all things to a model, classical economic theory uses quantifiable nouns (amounts, levels and rates) as a base language. The resulting models ¬– inspired by the robustness of physics – ideally deliver clarity and “scientific” logic, but often at a cost. A single-minded approach to narrative effectively sieves what it cannot quantify, and in so doing, easily skips over the natural disorder of people and processes that live behind the numbers.
Unlike the universal laws that govern physics, economies are messy and complex. Humans simply do not behave in the predictable fashion of atoms and neutrons. And herein lies the limitation of a solitarily, algebraic perspective of the world, a perspective that abstracts people and their unique behaviours and motivations, and reduces them to symbolic quantities for comparison and theorisation.
The investment industry has long faced pressure to forego the mess of narrative and embrace the purity of algebra and the language of nouns. Efficient Market Hypothesis, Modern Portfolio Theory² and the Capital Asset Pricing Formula³ are just some of the popular Newtonian laws⁴ of the finance classroom, while sharp-edged nuggets – Active Share, Tracking Error, Information ratio, Sharpe ratio – constitute the industry’s trusty algebra.
To complicate matters further, unlike in economics – where there is often agreement on the definition of key nouns – in our industry Risk, arguably the most important noun, has taken on a multitude of definitions. In its most dangerous form it is abstracted, quantified and expressed in relation to another algebraic symbol. Unfortunately it is rarely defined as absolute loss against absolute wealth.
There’s a case to be made that our industry prefers the simplicity of ratios for the simple reason that they travel well. Stories, on the other hand, take time and effort to translate across a throng of intermediaries. Comparatively, there is far less friction in the language of ratios, ratings and rankings: What’s the portfolio P/E? What’s the active share? What’s the tracking error? What’s the ESG score? How big is the investment team? Unfortunately, the quantified answers to these questions quietly sieve out people, their history and culture, and their motivations.
It doesn’t travel as readily, but at Stewart Investors our philosophy has long favoured a Darwinian approach to understanding the quality of people, franchise and financials, and to debating the future.
In On the Origin of Species, Darwin took some 480 pages and roughly 120,000 words to articulate his theory of evolution. His work treated biology as a science where verbs and adjectives bring our gloriously complex world to life. Similarly, our philosophy and culture embrace the context, actions, motives and stories behind the numbers, because we believe human nuance informs long-term returns. Put another way: numbers, ratios and rankings are backward looking, but money is made, and most importantly protected, by looking forward. Successfully allocating capital into a largely unknowable future requires embracing and truly valuing the unquantifiable nouns our industry has trouble pinning down.
Quality is an emergent property. It is never static. Any attempt to reduce it to a simple ratio or statistic is, in our view, not only inappropriate, but also dangerous for one’s capital. Ratios sterilize the magic, organic, complex nature of businesses. When this approach is taken, as it so often is, our favourite topics (enduring qualities like culture, purpose and passion) are supplanted by numerators and denominators that are largely meaningless to anyone trying to understand a company’s ability to protect and grow capital over a decade or longer.
Indeed, our view is that the unquantifiable factors are what enable high-quality companies to enjoy success far beyond the time periods that traditional economic and financial theory seek to quantify.
For example, Marico, an Indian Consumer company, has been held by the trust for close to two decades. With innovative and often unique long-term cultures, this business has nurtured world-class franchises and generated 30%⁵ (GBP) returns a year⁶ while also making the world a better place, we believe, by improving the health and well-being of people around the globe.
We’ve found some of the most attractive investment opportunities arise when a company changes management. In these situations, historic ratios become even more meaningless. We build our conviction by talking to people and lining their vision of the future up against comparable franchises and cultures across the globe. A small team of geographic and sector generalists is an important resource in this type of pattern recognition.
From a capital protection perspective, our clients have not been invested in many companies commonly perceived as high quality (high ROEs, no debt, smooth earnings growth) because we weren’t comfortable with supposedly unquantifiable “squishy stuff” like culture, time horizon and alignment. Many of the large Chinese internet companies fall into this category. With large addressable markets, attractive margins and sky-high returns on capital, they tick all the quantitative boxes. However, the algebra can be meaningless in an environment where the rules of the game can change overnight for companies that are misaligned with the Chinese Communist Party’s ambitions for China.
Our focus on quality and people leads us to embrace stories and narrative. Our investment reports often have sections that run for pages without mentioning many numbers. Anyone observing our investment debates would hopefully also notice how much time we spend deep in the weeds, focusing on the key determinants of quality: culture, values and behaviours.
This is also true for how we think about and incorporate ESG and sustainability into our analysis: we find it impossible to separate our consideration of these things from discussions about quality. We believe our industry’s desire to create new “quantifiable nouns” threatens to replace the living, dynamic nature of companies, and their people, with colour-coded algebra. In fact, our view is that the long list of AAA-rated ESG companies that fail to meet our quality and sustainability requirements reflects the imperative data providers have to force others to see companies through their kaleidoscope of ill-defined, templated, quality.
As with the companies we seek out, independence of thought and the ability to zig when others zag carries the cost of being different. But our view is that long-term success often comes from a willingness to be different.
We also believe, based on past experience and performance as much as anything else, that Stewart Investors’ unconventional comfort in prose over numbers – along with our preference for debating the future over quantifying the past – will continue to result in unconventional portfolios capable of delivering attractive long-term returns to our clients.
*Past performance is not indicative of future performance.
View our list of investment terms to help you understand the terminology within this document.
Some companies presented in this article have been selected as companies that make a contribution to healthcare and are held in the Stewart Investors Sustainable Funds Group strategies as at December 30, 2020. Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies. Companies mentioned herein may or may not form part of the holdings of Stewart Investors. This stock information does not constitute any offer or inducement to enter into any investment activity nor is it a recommendation to purchase or sell any security.
Certain statements, estimates, and projections in this document may be forward-looking statements. These forward-looking statements are based upon Stewart Investors’ current assumptions and beliefs, in light of currently available information, but involve known and unknown risks and uncertainties. Actual actions or results may differ materially from those discussed. Readers are cautioned not to place undue reliance on these forward-looking statements. There is no certainty that current conditions will last, and Stewart Investors undertakes no obligation to correct, revise or update information herein, whether as a result of new information, future events or otherwise.
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Pacific Assets Trust plc (“The Trust”) is an investment trust, incorporated in Scotland with registered number SC091052, whose shares have been admitted to the Official List of the London Stock Exchange plc. The Trust has appointed Frostrow Capital LLP as its Alternative Investment Fund Manager under the Alternative Investment Fund Managers Directive. Frostrow and the Trust have delegated certain portfolio management responsibilities to First Sentier Investors (UK) IM Limited. Further information is available from Client Services, Stewart Investors, 23 St Andrew Square Edinburgh, EH2 1BB or by telephoning 0800 587 4141 between 9am and 5pm Monday to Friday or by visiting www.pacific-assets.co.uk. Telephone calls with Stewart Investors may be recorded.
The distribution or purchase of shares in the Trust, or entering into an investment agreement with Stewart Investors may be restricted in certain jurisdictions.
First Sentier Investors entities referred to in this document are part of First Sentier Investors, a member of MUFG, a global financial group. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.
© 2021 MSCI ESG Research LLC Reproduced by permission. Although Stewart Investors information providers, including without limitation, MSCI ESG Research LLC and its affiliates (the “ESG Parties”), obtain information from sources they consider reliable, none of the ESG Parties warrants or guarantees the originality, accuracy and/ or completeness of any data herein. None of the ESG Parties makes any express or implied warranties of any kind, and the ESG Parties hereby expressly disclaim all warranties of merchantability and fitness for a particular purpose, with respect to any data herein. None of the ESG Parties shall have any liability for any errors or omissions in connection with any data herein. Further without limiting any of the foregoing, in no event shall any of the ESG Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
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Before finding out more about Pacific Assets Trust plc ("the Company”), it is important that you first read and understand the information set out below. The Company is an investment company within the meaning of section 833 of the Companies Act 2006 and incorporated in Scotland with registered number SC091052. The Company's shares have been admitted to the Official List of the UK Listing Authority and admitted to trading on the main market of the London Stock Exchange plc. The Company is an alternative investment fund for the purposes of the Alternative Investment Fund Managers Directive ("AIFMD") and has appointed Frostrow Capital LLP (“Frostrow”) as alternative investment fund manager ("AIFM"). Frostrow has delegated certain portfolio management responsibilities to First Sentier Investors (UK) IM Limited (registered company number SC079063) (“FSI UKIM”) which is authorised and regulated by the Financial Conduct Authority under registration number 119367 and whose registered office is at 23 St. Andrew Square, Edinburgh, Midlothian, EH2 1BB. FSI UKIM has further delegated certain portfolio management activities to First Sentier Investors (Australia) IM Limited ("FSI AIM"). FSI UKIM and FSI AIM are both part of First Sentier Investors, part of Mitsubishi UFJ Financial Group ("MUFG"), a global financial group.
The materials contained herein have been prepared for use solely by individuals who are resident in the United Kingdom for tax and investment purposes or are professional investors in Ireland.
The materials contained herein are not for release, publication, or distribution, directly or indirectly, in whole or in part, to US, Australian, Canadian, Japanese or South African persons or into or within the United States (including its territories and possessions, any state of the United States and the District of Columbia), Australia, Canada, Japan, the Republic of South Africa or any other jurisdiction where to do so would constitute a violation of the relevant laws or regulations of such jurisdiction.
The information contained herein and on the pages that follow does not constitute an offer of securities for sale or a solicitation of an offer to purchase securities in the United States or in any jurisdiction in which such an offer or solicitation would be unlawful. The securities referred to herein and on the pages that follow have not been and will not be registered under the US Securities Act of 1933, as amended (the "Securities Act"), or with any securities regulatory authority of any state or other jurisdiction of the United States, and may not be offered, sold, resold, pledged, delivered, distributed or otherwise transferred, directly or indirectly, into or within the United States, or to, or for the account or benefit of, US persons as defined in Regulation S under the Securities Act ("US Persons"). No public offering of the securities referred to herein and on the pages that follow is being made in the United States. The Company has not been and will not be registered under the US Investment Company Act of 1940 (the "Investment Company Act") and, as such, holders of the securities referred to herein and on the pages that follow will not be entitled to the benefits of the Investment Company Act. No offer, sale, resale, pledge, delivery, distribution or transfer of the securities referred to herein and on the pages that follow may be made except under circumstances that will not result in the Company being required to register as an investment company under the Investment Company Act. The securities referred to herein and on the pages that follow have not been and will not be registered under the applicable securities laws of Australia, Canada, Japan, the Republic of South Africa or any other restricted jurisdiction. There will be no public offering of the securities referred to herein and on the pages that follow in Australia, Canada, Japan, the Republic of South Africa or any other restricted jurisdiction. The securities referred to herein and on the pages that follow may not be offered, sold, resold, pledged, delivered, distributed or otherwise transferred, directly or indirectly, into or within Australia, Canada, Japan or the Republic of South Africa or to any national, resident or citizen of Australia, Canada, Japan or the Republic of South Africa. Potential users of this information are requested to inform themselves about and to observe any such restrictions.
The information on the pages that follow may contain forward looking statements. Any statement other than a statement of historical fact is a forward looking statement. Actual results may differ materially from those expressed or implied by any forward looking statement. The Company does not undertake any obligation to update or revise any forward looking statements, whether as a result of new information, future events, or otherwise. You should not place undue reliance on any forward looking statement, which speaks only as of the date of its issuance.
First Sentier Investors believes that the information provided is accurate as at the date of its publication, but no representation or warranty of accuracy is given by First Sentier Investors, Frostrow or the Company and therefore no liability in respect of any error or omission by a third party is accepted by First Sentier Investors, Frostrow, the Company or their affiliates or any of their directors, employees, consultants or agents.
The information contained in this website is subject to change without prior notice and is not to be reproduced, copied or otherwise made available to persons other than those for whom it is intended, especially anyone outside the UK for tax or investment purposes (except professional investors in Ireland), without the prior written consent of First Sentier Investors.
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Please remember that the value of investments and the income from them may go down as well as up and that you may not get back the amount you originally invested. Past performance is not a reliable indicator of future results.
Changes in exchange rates will affect the value of investments overseas. Gearing, where borrowing is used to fund further investment, can increase the returns in rising markets and decrease the returns in market downturns.
Investments in emerging markets may involve a higher risk than investments in more developed markets. Investors should consider whether or not an investment in funds or companies which invest in such markets is either suitable for or should constitute a substantial part of an investor’s portfolio.
Investments in the Company may be less liquid than the securities of a larger company, or an investment trust which invests in larger companies, or in more developed economic regions. Securities in smaller companies or an investment trust (such as the Company) which invests in emerging markets may possess greater potential for capital appreciation, but also involve risks, such as limited product lines, markets and financial or managerial resources and trading in such securities may be subject to more abrupt price movements than trading in the securities of larger companies.
1.1. The terms and conditions set out below apply to your use of the Company’s website. Please read them.
1.2. The "Company" means Pacific Assets Trust plc and any of its subsidiaries and related companies (including, for these purposes, Frostrow Capital LLP (“Frostrow”), First Sentier Investors (UK) IM Limited, trading as Stewart Investors, to whom Pacific Assets Trust plc has delegated certain portfolio management responsibilities), and references to "the Company’s website" are to the website available at www.pacific-assets.co.uk and also include, but are not limited to, the text, documents, images, links, sounds, graphics, and video sequences displayed on the website (the "Materials").
1.3. By clicking and entering www.pacific-assets.co.uk you agree that you have read and accept these terms and conditions. If you do not agree, do not use www.pacific-assets.co.uk. The information in the Company’s website is only for the attention of residents of the United Kingdom and professional investors in Ireland. It is your responsibility to be aware of and to observe all applicable laws and regulations in the United Kingdom and Ireland.
1.4. No information contained in these pages should be taken as a recommendation to buy, sell, or hold the shares of any entity. Nothing on the Company’s website or in the Materials constitutes or is intended to constitute financial or other advice and you should not act upon any information contained on the Company’s website or in the Materials without first consulting a financial or other professional adviser.
1.5. The Company’s website is not intended to offer or to promote the offer or sale of the shares in the Company (the "Shares") in the United States or to US Persons. Each acquirer of the Shares will be deemed to represent, amongst other things, that (i) it is not in the United States, (ii) it is not a US Person or acquiring the Shares for the account or benefit of a US Person, and (iii) it is acquiring the Shares in an "offshore transaction" meeting the requirements of Regulation S under the Securities Act.
1.6. The Shares may not be acquired or held by, or transferred to, (i) an "employee benefit plan" as defined in Section 3(3) of the US Employee Retirement Income Security Act of 1974, as amended ("ERISA"), that is subject to Title I of ERISA; (ii) a "plan" as defined in Section 4975 of the US Internal Revenue Code of 1986, as amended (the "US Tax Code"), including an individual retirement account or other arrangement that is subject to Section 4975 of the US Tax Code; (iii) an entity which is deemed to hold the assets of any of the foregoing types of plans, accounts or arrangements that is subject to Title I of ERISA or Section 4975 of the US Tax Code; or (iv) a governmental, church, non-US or other employee benefit plan that is subject to any federal, state, local or non-US law that is substantially similar to the provisions of Title I of ERISA or Section 4975 of the US Tax Code, and whose purchase, holding, or disposition of the Shares would constitute or result in a non-exempt violation of any such substantially similar law.
1.7. The Company delivers (or will deliver) to its shareholders annual financial reports, interim management statements and such other shareholder notices as the Company deems appropriate. Unless a shareholder indicates otherwise by written notice to the Company, the shareholder hereby consents to receive the Company’s financial statements, shareholder newsletters, and other shareholder notices and materials via email to the shareholder’s email address in the Company’s records or via the Company’s website at www.pacific-assets.co.uk. Although the Company does not impose any additional charges for electronic delivery, the shareholder may, of course, incur costs associated with the shareholder’s electronic access, such as usage charges from the shareholder’s Internet access providers. The shareholder may revoke its election to receive such documents via electronic delivery at any time by written notice to the Company requesting that the Company send such documents via facsimile or in hard copy via the postal service to the address notified to the Company by the shareholder from time to time.
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3. Limitation of liability
3.1. Use of the Company’s website and the Materials are at your sole risk. The Company will not be liable to any person for any direct, indirect, special or consequential, losses, damages, or awards of any kind, howsoever caused, as a result of the use of or inability to use, or reliance on, the Company’s website or any of the Materials. To the maximum extent permitted by law, the Company excludes all warranties, conditions, terms, undertakings, and representations (excepting fraudulent misrepresentation) of any kind, express or implied, statutory or otherwise in connection with the Company’s website and the Materials. Nothing in these terms and conditions shall be taken to limit or exclude any liability which may not otherwise be limited or excluded under applicable law.
3.2. Nothing in this website should be construed as investment, tax, legal, or other advice, nor is it to be relied upon in making an investment decision. Those accessing the website should consult their financial advisers regarding the suitability of any of the products referred to on this website. The value of investments and the income from them may go down as well as up and an investor may receive back significantly less than the original investment. Past performance is not a reliable indicator of future results.
3.3. Trading in securities in smaller companies or an investment trust (such as the Company) which invest in emerging markets may involve greater risks and be subject to more abrupt price movements than trading in securities of larger companies.
4.1. The Materials and the Company’s website are provided on an "as is" and "as available" basis and do not purport to be full or complete. The Company gives no warranties (express, implied, or statutory) as to satisfactory quality or fitness for purpose of the Materials, including, without limitation, as to the accuracy, validity, timeliness, merchantability, or completeness of any information or data contained therein (whether prepared by the Company or by any third party), or that any of the Materials or the Company’s website will be provided uninterrupted or free from errors or that any identified defect will be corrected. The Company has the right to suspend or withdraw the provision of all or any of the Company’s website or the Materials without prior notice at any time. You are entirely responsible for your use of the website and for the consequences of relying on any content. Further, no warranty of any kind is given that the Company’s website and the Materials are free from any virus or other malicious, destructive, or corrupting code, program, or macro. The Company does not warrant that the Company’s website or the server(s) that make(s) them available are free of any virus or other harmful elements.
4.2. To the maximum extent permitted by law, the Company disclaims all liability to you arising out of your use of the website. In particular, the Company shall not be liable for any direct or indirect loss or damage to you, any loss of profits, loss of business, revenue, data, goodwill, or anticipated or consequential loss or damage.
4.3. Reference in the Company’s website and/or the Materials to any hypertext link, product, process, or service does not imply the Company’s support for, or endorsement or recommendation of the provider thereof or the product, process, or service to which reference is made. The Company’s website may contain hypertext links to other websites, resources, or other third parties. The Company is not responsible for the availability of, and accepts no liability in relation to, these external websites or their contents. The Company is not a sponsor, partner, promoter, or publisher of any such website.
4.4. First Sentier Investors (UK) IM Limited and First Sentier Investors (Australia) IM Limited are part of First Sentier Investors (“FSI”) a part of Mitsubishi UFJ Group ("MUFG"), a global financial group. FSI includes a number of entities in different jurisdictions, operating under the First Sentier Investors brand. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.
5. Copyright and trademarks
5.1. The Materials are the copyright of the Company and its third-party licensors and may not be copied, distributed, uploaded, posted, republished, decompiled, disassembled, reverse-engineered or transmitted in any way without the prior written consent of the Company. You may, however, download one copy of the Materials for your personal use or use within the organisation in which you work on condition that you do not delete or change any copyright, trademark, or other proprietary notice contained in the Materials or alter the way in which they are presented. Modification or use other than as permitted above violates the Company’s intellectual property rights in the Materials.
5.2. The trademarks, service marks, and logo used and displayed on the Company’s website are registered and unregistered trademarks of the Company and others. The intellectual property rights in the “Pacific Assets Trust” name and logo are owned by the Company. Nothing in these terms and conditions or on the Company’s website should be construed as granting any licence or right to use any trademark displayed on the Company’s website. The Company enforces infringements of its intellectual property rights to the fullest extent permitted by the law.
6. Stock exchange prices and exchange rates — Any prices/values shown on this website in relation to different underlying securities are based on the prices notified to the investment manager of the Company as the last sale price of the relevant securities on the stock exchange on which they are traded (delayed up to 20 minutes) as at the time and date shown. The Company has not verified any of the stock exchange or other information contained on this website and it should be verified separately before relying on it. Prices and values shown on this website may vary throughout the course of, and between, stock exchange trading days, market trading times and business days in general.
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9. The Materials that you are seeking to access are not directed at and may not be viewed by or distributed to persons who are resident outside the United Kingdom (except for professional investors in Ireland), including but not limited to:
• who are in the United States or who are, or are acting for the account or benefit of, US Persons; or
• who are in a jurisdiction where it is not lawful to access the Materials.
The information contained on the following pages does not constitute an offer to sell, or the solicitation of an offer to acquire or subscribe for, any securities of Pacific Assets Trust plc in any jurisdiction in which, or to any person to whom, such offer or solicitation is unlawful.