10/25/2021 | News release | Distributed by Public on 10/25/2021 11:17
Today Tony Tursich and Jim Madden can laugh about a bold position they took years ago. This would have been way back in 1999. Doing business as Portfolio 21-for the new millennium-they were convinced that the energy industry was in secular decline.
"It was getting squeezed by legislation, getting squeezed by cheaper renewables, it was getting harder to get oil out of the ground," Madden recalls. "This is not an optimal place to place my money. If you're a quality growth manager, why would you throw money at an industry that's in decline?"
The decision was made at a time when energy companies dominated the S&P 500. "Exxon, Chevron-those were the companies with the largest market caps. Now they aren't even in the top 20," says Tursich. "To say we were going to avoid a sector that back then was north of 10% of the S&P 500 was pretty bold, but we believed it was the right move for the portfolio."
Unfortunately, the energy sector went on to outperform for the first nine years of the fund.
"You certainly question yourself," says Madden. "We were certain about our conclusion. But will it happen in our lifetime, or will we be fired before it happens?"
It's a story that illustrates so much about the team's approach:
"We want to see evidence that a company is creating value for shareholders over long periods of time, doing it consistently, but we also want to have confidence that the company will be able to continue to do that into the foreseeable future. Is this company thinking long term? Is this company prepared for the future? Is this company going to be able to navigate environmental constraints and other issues, and succeed by continuing to create value for shareholders?"
While their heads may have been turned by "new economy"-type companies early on, they long ago concluded that business model trumps investment theme.
The following Q&A elaborates on the pair's backstory, the concurrent evolution of ESG as an investment discipline, and how they've come to join forces with Calamos. (And for more, see our Sustainable Equity landing page.)
Q. Let's start at the very beginning. You blazed the trail in screening for ESG-how did that come about?
Tursich: Our firm, (first called Progressive Securities, later Progressive Investment Management), started as a wealth management shop in Portland, Oregon. Jim and I were the portfolio management and research division, but we were treated like the back office. As in, "Hey, we've got these clients. Here's the money. Put it through the sausage grinder and create a portfolio for us."
Madden: In this business, you are going up against so many smart people and so many competitors. In order to provide yourself with the chance to serve clients and generate alpha, you need to come up with something that is different. We knew we weren't going to be able to out-spreadsheet Goldman Sachs. We knew we weren't going to be able to have as many analysts as a lot of larger firms.
We decided No to both parts: We're not going to give up performance, and we are not going to inject our values into the investment process.
So, the edge that we found was the fact that people weren't looking at and weighting ESG data. A) It wasn't available, and B) People just didn't think about it. That's how we thought we'd add value for clients. We'd look at risks that these companies have that no one else is looking at. We would understand their risk/return proposition better.
In the beginning, it was an all-ESG shop with just managed SMAs, following a pretty standard set of ESG criteria for concentrated domestic portfolios. There were no more than seven people at that point in the firm. We launched a fund in 1999 that we named Portfolio 21. As it became a bigger part of the business, for branding purposes, it was better to just rename the business Portfolio 21.
Q. There was a standard set of ESG criteria to follow 30 years ago?
Madden: That may be the biggest thing that's changed over the years. Back in the day, there was maybe one third-party provider for ESG data and that was fairly anecdotal data. It wasn't very deep.
Back in '91, there was no data. If you wanted it, you'd better go get it, go talk to companies and figure it out yourself. Today there's so much data, you don't even know what to do with it. The skills that it takes to do the job now have changed from finding the data to filtering it in a way that makes sense.
Tursich: Even today, all the information that we're looking for is not available and packaged by any specific data provider.
A big decision that we had to mull over was, are we too early? And is there a market for this? Does it exist? The short answer is, well, yes, we were too early. But thankfully, we pushed past that barrier and had some early success.
We found a group of investors, financial consultants and advisors that were early ESG adopters, and we developed a strong relationship with this group. They were the first to seed our product. They were excited about the investment thesis around environmental risk and opportunity. Their support outweighed our inexperience and lack of track record. But we got lucky. We had good performance early on. And that helped us to keep the momentum going.
Q. And, everything went according to plan?
Madden: No, not everything. We came up with our criteria in 1998, 1999, setting a high bar on the environmental side to identify global leaders. But when we applied those criteria to a big swath of the S&P 500, it became very clear that there was no way we could make a portfolio out of the two names that were going to pass the criteria.
At that point, we had to make a decision either to water down the criteria or to look elsewhere to expand the opportunity set. We decided that the criteria, the high bar, was important to what we were doing. So, we looked across the pond.
Tursich: There's a different culture, a different mindset, a different way of thinking in western Europe and northern Europe, in particular. So, we went there to visit companies, we went to Scandinavia.
We had asked U.S. companies, "Don't you believe this is a material risk? Don't you think this will impact your business, your customers, your profits, your shareholders, etc.?" And, their responses were, "Well, we're focused on the next quarter or the next year." They didn't explicitly say that they just wanted to meet their numbers, but that's what they meant.
When we asked the same questions in Europe, in a country like Sweden, they responded, "Yeah, duh, of course, we've considered that." The long-term mindset is ingrained in their culture, ingrained in their business. Many of the companies that we met with are companies that existed in the late 1800s. Their business has changed. They've evolved. Because of their long-term thinking and attention to future risk and opportunity, these companies have been able to transform, evolve, survive, and thrive over time and ultimately reward their shareholders. It was kind of a cultural phenomenon that became apparent to us early on.
Q. So, you're a small firm in Portland, screening based on a new process using what little information was available to you about U.S. companies, and you then make the decision to become a global fund?
Tursich: That's where the quality was.
Madden: If the European companies hadn't performed as they performed, then I doubt we would have gotten this far. We started with 30, 40 companies in the fund. So, yes, there was tons of sector and country risk. We didn't know it at the time because we were blissfully ignorant, but we were taking massive risks-except that they were the companies in our investment universe, and that was the point.
We've been overweight Europe for forever even though the U.S. has outperformed overseas markets for the last 10 to 12 years. The quality stocks that we've found in Europe have enabled us to overcome the underweight U.S.
Q. Europe has worked, energy worked eventually. What hasn't worked over the years?
Tursich: One might think, well, the world is moving to renewable energy. That makes the new economy, renewable energy companies a no-brainer. But these companies weren't akin to the long established, high quality companies that we found in Europe that had been operating successfully for 100 years. These new technology companies are just coming to market and struggling to generate sales, much less become profitable.
We discovered that this wasn't the way to add value for shareholders. You see a lot of thematic investment strategies these days. We learned early on that's not the way to play ESG thematically.
We speak the same language on risk. When we first started the Portfolio 21 fund, we thought we should be able to outperform with lower risk. If we could de-risk these companies by looking at their ESG as well as financial risks, and if we could aggregate a bunch of de-risked companies, then the end product should have less risk.
We've had more success with a company like Atlas Copco. They make air compressors and power tools and drill bits. You wouldn't think of them as green, but we think of them as green. We think of them as a company that's looking to continually make its products more efficient, continually make its products better for its customers so that they could use less lubricants as inputs in maintenance and less energy as input in their production.
Madden: Some of our worst performers over the years have been renewable energy, the wind turbine makers and solar panel makers. You can see the risk in fossil fuel companies because of what's happening to their markets. But you can also see the risk to renewable energy companies because of the business model. It's just not built for long-term success.
Q. With as early as you were, how have you dealt with those who were skeptical about screening for ESG?
Madden: There was a lot of values-based sentiment around ESG back in the day-invest with your values, make the world a better place, all this kind of collateral thought. And some people said, "Well, if I'm going to do this, I have to give up performance."
We decided No to both parts: We're not going to give up performance, and we are not going to inject our values into the investment process.
Q. And how were you able to deliver on that?
Tursich: Our focus and emphasis is on the best companies, the highest quality companies. The best current and future global leaders, as we call them, are companies that have really strong operating fundamentals, companies that were creating value for shareholders and have a competitive advantage. On top of that, we're looking for companies with strong ESG characteristics, again with the focus on environmental risk and opportunity. And ultimately, this enhances the quality factor, and our belief is that the highest quality companies will outperform over long periods of time.
Q. What are your thoughts on the way ESG has evolved over time?
Madden: Now you have more funds, more data, more interests, more legislation. Certainly, more definitions of ESG. I don't know if we expected it to take off the way it has, but I think we did feel like it would become one part of managing the investing because it does just make you a better investor. If you're not looking at these non-financial risks, then how can you really say that you're evaluating the entire company?
The ultimate change down the line is that there will be no such thing as ESG investing anymore. You'll just call it investing. ESG data will be standardized, and everyone will look at it, analyze it, just the same as they do with every other financial metric.
"How much ESG do we need in a portfolio?"
Tursich and Madden have heard the question over the years but propose a different way of thinking about it.
"We've always managed from a total portfolio solution perspective. With our wealth management business, we were picking the stocks. We were buying the bonds. We were getting exposure to asset classes on our own. Ultimately, that just naturally led to a core kind of investment style. Our portfolios are designed to be core portfolios. Ultimately, they could serve as your global equity exposure," says Tursich.
"My IRAs are 100% invested in the global strategy, and it's my 100% allocation to global equity," he adds.
"How much? As much as you want, but this ESG strategy is probably better than the other global funds that you're using," says Madden. "You don't have to put it in a box. Ultimately, I think a good landing place with the global is retirement plans. You've got younger people clamoring for ESG. There's no need for two choices in the 401(k) menu-one strategy is both global and ESG. That's a natural."
Tursich: We're not there yet. There's certainly not data that's broadly available, trustworthy, and consistently produced for the market overall. We're moving in that direction, but there's a long way to go.
Q. Certainly more companies are paying attention?
Madden: Yes, probably 10% of companies in the S&P 500 did corporate social responsibility reports back in the day, '98, '99.
We'd go to companies and say, "Hey, come on, show us what your environmental risks are here. Let us know. We need disclosure around what you're doing here, whether it's environmental risk or data privacy and security." And they'd say, "Yeah. We're not going to do that. That takes money. We don't have the time or the money. It just takes away time and money from the bottom line. Why would we do that?" It was woefully counterproductive.
That's changed. Now, I think around 90% of the S&P 500 does CSR reports. Now are they material? Are they useful? That's a case-by-case decision. But everybody pays attention to it now and in their own way.
People want to capture that premium whether it's through their products or through the recognition of being green or responsible or whatever they feel meets their needs.
Tursich: And, that creates a challenge-greenwashing. Every company now wants to be perceived as sustainable. And they'll go to great lengths and develop PR strategies to try to convey that message, even if their actual business isn't aligning with that way of thinking. That creates a challenge to just really be able to identify greenwashing and come to the conclusion that hey, this isn't meaningful, this is greenwashing.
Q. Tony and Jim, why are you and Calamos a good fit?
Tursich: We recognize that Calamos offered operational excellence. And of course, distribution was important, too. But another consideration was the freedom to continue on with our process and philosophy and invest in a way that we've been investing over the past decades. It's the best way to invest from our perspective. Calamos has given us authority to continue on and maintain that philosophy and process while providing support like we've never had in the past.
From our perspective, we believe it's a quality expansion of the business. ESG assets are getting scarcer. So, acquirers are pursuing whatever they can get, plastering an ESG name on it, and trying to raise some assets. That was not at all the approach that we sensed from Calamos.
Q. Calamos is known for its risk-managed approach, and ESG is another way of managing risk…
Madden: I think we speak the same language on risk. When we first started the Portfolio 21 fund, we thought we should be able to outperform with lower risk. If we could de-risk these companies by looking at their ESG as well as financial risks, and if we could aggregate a bunch of de-risked companies, then the end product should have less risk. Sure enough, after 20-odd years, we produced performance with lower volatility.
Tursich: Remember that our ESG process is not values-based, it's risk-based. We're looking for companies that can adapt to changing industry conditions, to changing regulations. We invest in companies that can evolve over time and avoid problems, avoid unnecessary liabilities and thus continue to create value for shareholders over the long term. That's about managing risk.
Investment professionals for more information about the new Calamos Sustainable Equity team and strategies, please contact your Calamos Investment Consultant at 888-571-2567 or [email protected].
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