PI Partnership – Newton Investment Management
structure between now and 2040, which equates to roughly two-thirds of all infra- structure investment globally.
The importance of corporate governance When seeking out suitable companies that can form part of the solution for some of the issues and trends described in this article, corporate governance is an extremely important consideration, as it should be in any investment decision. This is especially the case in emerging markets, however, where institutions are less mature, and where we see a higher level of listed-company control by the state and by promoter groups. The key rationale for a deep consideration of corporate governance is well appreciated: to minimise the risks of value being inap- propriately extracted from minority share- holders. At its crudest level, this can take the form of outright fraud, but it can also be more subtle, with more gradual or incremental value extraction. For example, it can occur through strategic priorities or mergers and acquisitions that are at odds with the long-term interests of minority shareholders. These risks can never be eliminated entirely, but an alignment of interests, and basic safeguards, can help emerging-markets investors to mitigate some of them.
No ‘box-ticking’ exercise When considering governance, we are ultimately trying to gauge the motivations and character of the people that ‘call the shots’ at any particular company, as well as the protections against them acting
inappropriately. Our experience in emerg- ing markets tells us that we cannot simply rely on a tick-box exercise around board structures and legal safeguards, although these considerations should not be over- looked. Deeper analysis and channel checking is required to establish whether promoters and management teams have a winning mentality and are appropriately incentivised to get positive results for all shareholders over the longer term. It is predominantly a qualitative, or investiga- tive, process that helps us to understand whether we can trust controlling groups to look after minority investors, and other important stakeholders, through good times and tough times. We tend to treat state-owned enterprises (SOEs) with caution, given the greater scope for conflicts of interest and lesser scope to appropriately incentivise man- agement teams. We also have anxieties around certain types of promoter-con- trolled companies. However, we would not rule out making investments into either type of company. Some SOEs can become hubs of innovation, given their ability to attract talented scientists and engineers. And it is in promoter-con- trolled companies where you can find the best management mindset, with a deep focus on company durability and longer- term objectives. What is important in all instances is the alignment of interest, trustworthiness and a winning mentality.
Navigating a period of rapid change Many industries are changing at an unprecedented pace, and it is difficult to
have any certainty about whether any given company is likely to be a consolida- tor, or disruption victim, when looking out five years or more into the future. This is well illustrated by the pace at which online platforms are now able to build up hundreds of millions of monthly active users within several years. But it covers all sorts of other potential game changers: solid-state electric-vehicle bat- teries, hydrogen fuel cells, nuclear-fusion energy, gene sequencing and US-China relations, to name a few. There are many inputs for this difficult question of whether a company is endowed with ‘moats’ to help it success- fully navigate the future, with things such as brand strength, technology and intel- lectual property (IP), scale and networks being commonly referenced. However, it is probably ‘people’ and ‘culture’ that give the best insight into a company’s ability to navigate a changing landscape. When thinking about the long term, it is impor- tant to back intellectually engaged man- agement teams with a growth mindset, who can allocate capital effectively; these are traits that can last more than one generation in some companies. These considerations also fall into the orbit of corporate governance.
It is our belief that those companies that can demonstrate a strong people culture, and which can proactively and genuinely strive to behave responsibly to reposition their activities to cater for large, under- served addressable markets based on their ‘needs’, will be the likely winners of the future.
Important information This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Com- pared to more established economies, the value of investments in emerging markets may be subject to greater volatility, owing to differences in generally accepted accounting principles or from economic, political instability or less developed market practices. Newton manages a variety of investment strategies. Whether and how ESG considerations are assessed or integrated into Newton’s strategies depends on the asset classes and/or the particular strategy involved, as well as the research and investment approach of each Newton firm. ESG may not be considered for each individual investment and, where ESG is considered, other attributes of an investment may outweigh ESG considerations when making investment decisions. Issued by Newton Investment Management Limited. ‘Newton’ and/or ‘Newton Investment Management’ is a corporate brand which refers to the following group of affiliated companies: Newton Investment Management Limited (NIM) and Newton Investment Management North America LLC (NIMNA). NIMNA was established in 2021 and is comprised of the equity and multi-asset teams from an affiliate, Mellon Investments Corporation. In the United Kingdom, NIM is authorised and regulated by the Financial Conduct Authority (‘FCA’), 12 Endeavour Square, London, E20 1JN, in the conduct of investment business. Registered in England no. 01371973. NIM and NIMNA are both registered as investment advisors with the Securities & Exchange Commission (‘SEC’) to offer investment advisory services in the United States. NIM’s investment business in the United States is described in Form ADV, Part 1 and 2, which can be obtained from the
SEC.gov website or obtained upon request. Both firms are indirect subsidiaries of The Bank of New York Mellon Corporation (‘BNY Mellon’).
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