Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
Launched in January 2019, the Wellington Global Stewards Fund seeks to deliver long-term total returns in excess of the MSCI All Country World Index by investing in the equities of companies globally that generate a high return on capital relative to their peers and whose management teams and boards display exemplary stewardship to sustain those returns over time. The Fund targets net-zero emissions by 2050 in alignment with the Paris Agreement.
We define stewardship as how companies balance the interests of all stakeholders — including customers, employees, communities, supply chains and the environment — in their pursuit of profit. We run concentrated portfolios and hold a high bar for inclusion. Every stock must meet two criteria: high returns on capital and best-in-class stewardship. We conduct rigorous research to identity and invest in companies with both characteristics, favouring large global industry leaders with robust competitive positions.
In our view, companies that generate and sustain attractive returns on capital can focus on positive environmental and social outcomes, leading to higher stock prices and superior long-term returns. Higher returns enable these companies to further invest in good corporate stewardship. The process generates a continuous flywheel effect, improving the level and sustainability of both financial returns and stewardship over time, creating a lasting competitive advantage.
Mark Mandel and I manage the Wellington Global Stewards Fund and, between us, we have a combined investment experience of nearly 60 years. We leverage the research and differentiated insights of Wellington's broad range of resources, interacting extensively with our ESG research analysts, sustainability team, global industry analysts, equity research analysts and portfolio managers across the firm's global offices. Importantly, Wellington Management's size allows us to easily access companies' management and board members, enabling us to engage with and develop strong relationships with the companies in the portfolio.
How are you positioning your portfolio for 2022 and what will be key issues for investors?
We expect supply-chain challenges and talent retention to remain key issues over the strategy's 10-plus-year investment horizon so we invest in companies that are strong in these areas as well as in their approach to climate change.
Engagement is incredibly important to us as long-term shareholders. We engaged with 143 portfolio companies in 2021 and 135 in 2020.
Our engagement with global tyre manufacturer Michelin on responsible sourcing and mitigating supply-chain risk highlighted Michelin's exemplary credentials as a best-in-class steward. We learned that Michelin trains over 100,000 farmers annually on deforestation and biodiversity risks and engages actively to manage the impact of rubber cultivation on biodiversity and local ecosystems.
In another example, we engaged with the CEO of agricultural equipment supplier Deere following strike action and a subsequent new labour agreement. We wanted to understand how Deere would reinforce its culture and rebuild trust between workers and management. While the new agreement puts upward pressure on labour costs, we don't expect this to have a material impact on Deere's culture or returns over the long term, and during our engagement, Deere re-emphasised its pricing power as the leading supplier of large agricultural equipment.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
Microsoft is well recognised for the strength of its balance sheet and its ability to adapt and deliver. But it's perhaps less well recognised for its ambitious environmental goals — it has set a target to not only be carbon neutral but carbon negative by 2030 and has embedded carbon pricing into its procurement decisions in preparation for the energy transition. For us, this makes Microsoft a great steward.
Likewise, pharmaceutical companies are often a good fit for our investment process. Their returns on capital are generally high and stewardship comes naturally given the long-cycle nature of their business and the need to be patient-focused. Global health care company GSK stands out here. The company has been incredibly responsive, transparent and open to our engagement and we became increasingly confident about the outlook for GSK's return on capital given its stronger balance sheet, more focused mix of businesses, improved capital allocation and promising drug pipeline. After five years under a new CEO, GSK has made notable advances in R&D productivity, has exemplified robust employee engagement and attracted and retained talent despite a remarkably challenging backdrop. We are very encouraged and have a positive outlook for GSK.
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