CFA Institute of Chicago’s Investment Exchange Forum Podcast
In a recent episode of the Investment Exchange Forum podcast, Richard Excell, CFA joins SBH’s Director of Environmental, Social, and Governance (ESG) Research Suresh Rajagopal, CFA and Senior Portfolio Manager John Roberts, Esq. as they discuss diversity and inclusion and the SBH Workplace Equality strategy.
– [Rich] Welcome to CFA, charterholders and guests. My name is Rich Excell, a CFA charterholder and member of the CFA Society Chicago. This is the Investment Exchange Forum. In this forum, we explore and discuss investing ideas, whether they are mainstream or niche, whether you read about them every day or not. As charterholders, we know how important the topic of ESG is. I’ve been exploring ESG from a number of different investment perspectives. Today, we will discuss more about diversity, equality, and inclusion. We are privileged to have joining us the co-portfolio managers of the Segall Bryant & Hamill Workplace Equality Fund. Suresh Rajagopal is a co-PM of the fund, and Director of ESG Strategies. He is also a CFA charterholder. John Roberts is also a co-PM of the fund, and a Senior Portfolio Manager at Segall Bryant. Welcome to you both. Before we start out, I always like to hear a little bit about each person’s background, because I always find it interesting, and I think others do as well, ’cause we all take a different path to get to where we are today. So maybe we can start with Suresh. Could you tell us a little bit about your background and how you kind of got to where you are today?
– [Suresh] Sure, I started my working life as a commercial lender back in Detroit, worked for a bank called National Bank of Detroit. Did commercial lending, leveraged finance, loan syndications, and quickly realized that my interests lie elsewhere. So made the jump to asset management with Munder Capital, and was there for seven years, and joined Segall Bryant & Hamill in 2007, I believe, and came over as a healthcare analyst and picked up consumer staples and discretionary along the way, and then eventually was promoted to a PM all cap, and then with workplace equality.
– [Rich] John, how about you? How did you get to where you are right now?
– [John] It’s an interesting path. I grew up as a Navy brat actually all over Southeast Asia. Ended up in Northern California. I went to college in D.C., got a finance degree from the George Washington University, and started working for an investment bank named PaineWebber, now a part a UBS in San Francisco, which really, you know, late ’80s. Took a small detour to law school, and then got hired by a predecessor firm in Denver, Denver Investments, which was acquired by Segall Bryant & Hamill, and that was in 1996. And I’ve been there ever since.
– [Rich] Okay, I spent many a 4th of July and January 1st at the Naval base in Singapore. So I, and I know the Southeast Asian naval community a little bit. First question, I’m going to kind of throw to you, John. So ESG is clearly going mainstream kind of both in the prevalence of the subject matter, but also clearly this year, in the flows to asset managers, et cetera. So I’m wondering what , how long have you guys been running the Workplace Equality Fund?
– [John] So for me it was actually shortly after I started with the firm in 1998. We had a client that was a portfolio manager managing accounts for individuals and foundations, and I had a private foundation that hired us and they ask us to only invest in companies that treated everyone equally, and it was really focused around the LGBTQ community. Money came from a gentleman who had essentially invented the gay travel industry, and on his death, they started a private foundation, his business partners. So really it was, you know, going back to 1998 before really the word ESG was in the vernacular.
– [Rich] Absolutely, that’s, you’re definitely ESG hipsters on that front, without a doubt. So Suresh, obviously there was a client and a rationale to start this back in ’98, but is there research that you might point to, either internal or external, that kind of shows that the focus on equality is not just, is not only good from a social issue perspective, but maybe also a good financial decision?
– [Suresh] Yeah, we generally tend to focus on companies that are of higher quality, and spend a lot of time with the governance, and if you look at the data that’s out there, I mean, there’s several white papers, et cetera, that point to the fact that companies that treat their employees equally across their policies tend to out-perform over time. We always, from a analytical standpoint, focus on return on invested capital, free cashflow, and margins, but ultimately the governance, and how the management teams that operate these companies and treat their employees is a big factor in how they succeed both in the marketplace and from a returns perspective.
– [Rich] Awesome, so John kind of pivoting back a little bit, so I know why you started this fund back in the day, but oftentimes when we hear ESG from our CFA perspective, a lot of people are focusing on climate or environment. So clearly after the financial crisis, governance issues were really important and only recently have more and more have been talking about social considerations. So have you seen more, you know, kind of gaining more traction on social issues, and having an easier discussion with company management?
– [John] Yeah, it really has been a long arc, you know, having done this on the social and governance side, screening companies, and talking to management for over 20 years. And you know, we have seen the last few years a real interest in workplace equality. We talk about income inequality, you know, wealth inequality, and clearly even within corporate America, you have big gaps. And so, people are starting to notice it, and it’s more of a conversation topic, and I think it’s clearly in the popular culture right now is, you know, what do we do to combat some of these inequalities, and look first at the workplace? And really in terms of equality across, you know, especially in the LGBTQ community, you look at, you know, that you’ve had a couple of watershed events with, you know, same-sex marriage being legalized, the Defense of Marriage Act being ruled unconstitutional, and a couple of big Supreme Court cases that led to that. But really more recently, the focus on racial equality, gender equality, I mean, I’d like to say that corporate America leads social change and we are seeing company management step up to the plate on these issues in increasing numbers. You know, government kind of tends to follow, but really corporate America tends to lead on social issues. So yes, more recently you have seen corporate America really starting to step up.
– [Rich] I think that’s a great point, that corporate and consumer employees urging the corporates has a much more powerful impact oftentimes than to look for government regulation. Suresh, kind of building on that a little bit, when you look at the management teams, and you’re kind of focusing on some of these social KPIs, not just financial KPIs, are you guys willing to take an activist approach with management teams to kind of make some suggestions of changes they could make in their structure? Are you working with them on that, or are you just really kind of observing what they do?
– [Suresh] Yeah, it’s a good question. I’m going to throw a line out here, which I’ll readily admit that I heard from somebody else, but it does a very good job of explaining the way we think about not just workplace equality, but ESG in general. The statement is we’re active in ESG, not activist ESG. What I mean by that is we spend a lot of time, because this particular strategy does require us to be quite frankly labor-intensive, because we do spend a tremendous amount of time with the company management teams and the HR departments and having them answer questions that relate particularly to workplace equality. And they need to be able to provide us documented facts, and where they are public with it, how active they are, before they even pass the initial screen to be included in the strategy. And after that, it’s, you know, us being analytical and fundamental, and asking more questions about how they do what they do. So again, I’d say there we’re active in understanding how, why, and what. Are we activists in that sense? Not directly, but to be candid, when we talk to management teams about these topics, they take an interest. They do provide us feedback, and they are curious and asking what other management teams are doing and how they’re treating it. So by default, to some degree, we are active in that sense.
– [Rich] So how many company meetings would you have in a given year?
– [Suresh] Because of the work from home, we’re actually getting a lot more than we normally would, because the time spent virtually is much easier for the management teams. They’re not traveling. They can knock out 20 meetings a day. Quite frankly, we’ve had very little issues getting management teams, but we’ll probably talk to three or four a day just on my team relatively easily.
– [Rich] Wow, okay. John, you’ve been doing this for a long time. Have management teams in general become more receptive to the conversation? Is it something where it’s an easier discussion, something where they’re, like you said, corporate America leads, but are they, is it easier now?
– [John] I think given the social changes that we’ve seen and the emphasis on equality and workplace conditions, we’ve seen management teams becoming much more focused on it, much more willing to talk about it. We’ve had, to dovetail with what Suresh was talking about, you know, activism versus, I’ve always said, you know, you can catch more flies with honey than vinegar. And so, rather than, you know, having a very activist approach where you’re, you know, pushing up shareholder resolutions, work with management teams, and we’ve had management teams come to us and talk to us about what do we need to do to be in your universe? You know, what are other companies doing in this area? You know, especially smaller companies that, you know, as Suresh said, it’s an all cap strategy, and so smaller companies that maybe don’t have a chief diversity officer, you know, their HR is tasked with that, along with all the HR tasks, and they’re coming to us saying, “What are best practices here? “What are other companies on the list doing? “How are they tackling this?” And, and from us, it’s actually pretty easy because from a corporate value standpoint, Segall Bryant & Hamill, you know, our firm is very, very equality-minded, and you know, our CEO here sits on our diversity and inclusion committee. And so, it’s something that we take to heart, and we’re seeing company management understanding that this is not a luxury. This is kind of the cost of admission these days.
– [Rich] Yeah, and Suresh, John brings up a good point that you guys as a firm can really be a conduit of information to your potential portfolio companies. Is, do you see that? Do you see when you talk in the managements that they’re looking to you for this sort of advice?
– [Suresh] Yeah, it’s, with ESG in general, it’s a pretty broad based thought process, and I would say it’s more gray than black and white. So when we talk about workplace and quality, because it’s thematically within the ESG universe, management teams do ask, “How do we think about it? “How do we get you that information? “What kind of thought processes “do other management teams put into this?” I would agree with John in that, you know, as you go down the market cap, they probably require more information, more help, and it’s just something that they’re not used to. And so, yeah, we do act as a conduit, and we try not to get, again, overly active in the process, but we do provide information when asked.
– [Rich] Yeah, so John, we spent a lot about, talking about management teams. What about investors? Has this been an easier discussion with potential investors on this subject?
– [John] Well, obviously, and again, because equality has been so much in the news, you’re seeing more and more appetite across all the different ESG type strategies, and all of them focus on different areas within the E and the S and the G, and to us that we’re seeing, especially younger investors, it’s a topic that comes up with families that we manage family wealth for. The younger investors are saying, “We want to feel good about the companies we’re investing in. “How are they treating their workers? “How are they treating the environment? “Are these companies that care about their employees?” So we are seeing younger generations really gravitate toward these types of topics, but they’re also enlightening older generations as well. And so, I think the universe of investors is really starting to focus more and more, and it’s a much easier conversation to have that there’s lots of data out there talking about how, you know, millennials and Gen X-ers are starting to really focus on we want to look at companies that do good as well as performing well, and you can have both.
– [Rich] Yeah, absolutely. I would echo that from the students that I teach. It’s a huge topic, and it comes up all the time, much, much more so I’m sure than in many recent years. Why don’t we focus a little bit on your own approach? So Suresh, can you tell us a little bit about your investment process, how you kind of start with that, how you ultimately bring the equality factor in, but what other metrics are you looking at, from a fundamental research and portfolio construction standpoint?
– [Suresh] Sure, and as I mentioned earlier, it’s a pretty labor-intensive process. You know, there is four or five questions that each company has to be able to answer and screen through, you know, tied specifically to benefits, inequality within the workplace, and support that the company provides to the employees, including, you know, diversity and inclusion training, et cetera. And that, once you get by that, then we get into what we normally do on a fundamental basis. We are a bottom-up fundamental stock-picking shop. You know, we’re not necessarily concerned about our overweight or underweight within a particular sector. We’re more interested more for which security will generate a return, and you know, as John mentioned, there is a factor here where companies that do good for their employees and their clients also do well from a returns perspective. The metrics that we tend to focus on are return on investment quality, free cashflow growth, the margin expansion, but all of that is driven really by our work and time that we spend with management teams and how they work all of those levers to get from point A to point B, and can they walk us through those, both the risk and reward factors associated with it.
– [Rich] And we talk about that ESG in some ways is really kind of a leading indicator of potential risk factors, so those that are scoring well on this factor tend to probably have a much lower risk factor on a lot of those metrics you talk about.
– [Suresh] Yeah, you know, we get asked quite a bit how we incorporate ESG overall into our investment process, and we’ve taken an integrated approach at Segall Bryant & Hamill. You know, we’re not exclusionary by any means. We have a lot of questions about how third-party vendors are scoring ESG, and what that really means. For us, we use ESG and a multitude of factors as a way to enhance our investment process, take what we’ve been doing for 20-plus years, and make it better, make sure that we understand the risks, rewards better. It’s proven to be fruitful for us, and our way of thinking.
– [Rich] A good investment process has to be disciplined, but also adaptable for sure, right?
– [Suresh] Absolutely.
– [Rich] So John, Suresh brings up a point that I wanted to kind of dig in a little bit on. It’s about the data, the ESG data providers, et cetera. This comes up in every conversation we have about the inconsistencies across the data providers. So how does this affect, and I know Suresh talked about this a little bit, how does this affect your discussions, either your discussions in the fund, or your discussions with investors? Is there really a good benchmark you can probably point to, or do you have to use a lot of proprietary info?
– [John] I think this is one of the areas where we historically have differentiated ourselves in that we’re looking at some factors, especially around workplace equality, that aren’t easily screened for in Bloomberg, or FactSet, or CapIQ. These, you know, these metrics don’t show up on a 10-Q or 10-K. So they are really harder to, much more labor-intensive, as Suresh said, to dig out, and you know, two decades of asking the questions have given us a pretty good data set and a pretty good grasp on what companies are doing it well, who do we talk to at specific companies, and so it is a very, very labor-intensive process. Your students will love to know that we typically use a lot of college interns to sift through data because college interns are great at sifting through data. And again, what we’re collecting oftentimes is directly from the companies, and part of our approach utilizes a survey where we’re out anonymously surveying employees of the companies that we’re investing in, ’cause management can talk all day about what they are doing. We want to hear also what the employees have to say about their day-to-day workplace experience, and I think that’s a really, really good confirming data set, again, fairly labor-intensive, but it does differentiate us. When you want to know how companies treat their employees, it’s important to talk to the employees.
– [Rich] Well, absolutely, and it’s not just a snapshot, or a data point in time, right? It says, as you talked about, it’s labor-intensive, but it’s over time in multiple discussions trying to see how the picture, or the movie’s playing out, not just taking a picture of it right here. And you bring up a point that I maybe could throw out to either one of you, but this is something that I’ve kind of asked others as well is that in some ways ESG and the fact that it is labor-intensive, the fact that really to do it well it seems that you have to have a proprietary process, this is in some ways right in the sweet spot of active management, and while we’ve seen big shifts towards passive in the last decade, the new renewed focus, or heightened focus on ESG is in some ways really kind of going to potentially helping active managers on a relative basis. Would you see it this way, Suresh?
– [Suresh] We do, I do. We’ve clearly planted our flag in active management at the firm, and it’s something that we’ve believed in since the beginning. You know, the volatility in the markets have shined a light back on active management relative to passive investing, at least these days. But again, with ESG in general, and then our fundamental approach and looking at stocks on an individual level, building from the bottom up, factoring in ESG as a thought process is additive to our process. It makes us better at what we do. It makes us more thoughtful with what we do, and we’re able to talk to the outside world about topics that are of interest to them and have a strong foundation in being able to answer the questions that we’re asked about, and provide guidance where needed.
– [Rich] And how do you handle where there, I’m sure you’ve come across situations where companies will score well on some factors, but not others, or maybe they do well on a governance issue, but maybe not on an environmental issue. How do you handle that type of situation?
– [Suresh] Sure, it’s, well, as I mentioned before, it’s a gray area. There’s no black and whites right now. For instance, I always use Tesla as an example because it scores well from an ESG perspective. But if you break it down to literally the nuts and bolts, there’s a lot of plastic on that car, and that has to come from carbon emissions. And secondly, there’s a lot of lithium in those batteries and lithium comes from the earth, and there’s a lot of damage done in order to retrieve that particular element. So you have to balance that out, and so we do spend a lot of time thinking about the risk, reward if each of these factors. And again, we’re not exclusionary in the way we invest. To say that, “Look, we’re not going to look “at any oil companies because they generate “carbon emissions, and we’re just going to move on,” would be foolish on our part, and probably detrimental to our end clients that we didn’t spend the time to say, “Well, how are you making it better? “What kind of alternative sources are you looking at?” You know, BP, or British Petroleum, has spent a lot of time talking about how they’re shifting away from oil into alternative sources of wind, solar, et cetera, and trying to remake the company. And so, you do have to have those conversations to understand that, and then overlay that into a financial model and think about what the benefits and the risks are there and see if it makes sense from a return perspective.
– [Rich] John, question for you. Do you guys look globally, or only in the US, and if you do look globally, how are the US firms that you guys talk to, how are they scoring on the different metrics relative to their global peers?
– [John] Yeah, historically, you know, we’ve looked at companies that do business in the US, and because we’re focused on this governance issue of workplace policies, that’s given us the ability to review EEO policies, which don’t necessarily exist in other countries. It also gives us good access to employees for our survey work without having to hire a raft of interpreters. And so, in terms of who’s leading, who’s not leading, who does well at this, it really depends on the sector and the companies. But overall, US companies have come a long way since I started this journey of looking at workplace equality back in 1998. I mean, literally, we did what bottom-up firms do, and we started just calling companies to figure out how we could meet a client’s desire to invest in companies that treated all their employees with dignity and respect and equality, and we could only find a couple of dozen companies that offered things like domestic partner benefits. European companies also tend to do a great job on workplace equality, some of it government mandated. As for a lot of the rest of the world, let’s say it’s a work in progress, but you know, even here in the US I like to say, you know, it’s a sector by sector kind of game that, and you know, people who’ve heard me speak before have heard me say, you know, “Houston, we’ve got a problem.” The energy sector tends not to be one that really spends a lot of time on these issues, and there are other sectors that tended to look at, hey, we’ve got to market to these other communities and these other demographics, and so we’d better have some representation there that have done a lot better.
– [Rich] There’s a point though that you bring up that, and I know I asked the question who’s leading, who’s not leading, but from a stock price perspective, does it matter who’s leading, who’s not leading, or who’s making positive changes at the margin, versus maybe kind of, you know, standing still, and not making those changes? Even in a, potentially in a sector that might not historically be considered positive on ESG metrics, if they’re making changes at the margin, can that still have positive benefits to the stock price?
– [John] Absolutely, we found a metric that looks at companies and how they treat their employees, and it’s a way to identify companies that invest in their human capital at a higher rate than their competitors, and we think that investing, you know, as a business owner myself, investing in your human capital is important. I mean, we see the benefit. Turnover is expensive. It’s expensive to train people, especially in this environment. And so, those companies that, you know, can invest in their human capital and invest in their employees, there’s all sorts of benefits to them, including the shareholder returns.
– [Rich] Suresh, John mentioned sectors and sector performance, and energy always kind of comes up as on the one end. Are there sectors that seem to be leading now on this issue? Is it as simple as tech does well, energy does badly, or is it more nuanced than that?
– [Suresh] I mean, it’s, if you look at the different sectors, as John mentioned, it is the demographic that they have to deal with as their end client. So when you think about it that way, consumer discretionary stocks are sort of at the forefront of this because they understand that they’re ultimately selling a good to a younger generation that’s much more open-minded and thoughtful on these topics. I’d also put information technology as another sector that’s very forward-thinking on these kinds of things, and I’d also probably put the financial services there, quite frankly, and that’s partly regulatory, obviously, but also their end client base is asking and demanding for these kinds of thought processes to be in place. You know, obviously energy is easy to pick on in this particular case, but I think even they are starting to understand that you can’t be on that island. You have to be thoughtful about what you’re doing, and how you think about your employee base.
– [Rich] Does it matter to ultimate performance if a company is kind of dragged there by regulators, or goes there willingly because of employees, and their own decisions?
– [Suresh] Yeah, I, for us, I think it’s a big, big deal in that it does indicate that the management teams that are forward-thinking, that are being thoughtful, are much more invested, and they understand their game plan, versus, hey, you have to do this. You get a whole room full of college kids that you get to say, “Hey, you have to do this homework,” and I’m sure it isn’t always received with such thunderous applause, but management teams that are thoughtful about it, think through it, and attack it appropriately, I do think that they’re better.
– [John] I would also add that companies where the CEO plants the flag and says, look, this is our corporate value, right, you either understand that this is important, diversity, inclusion, these types of equality metrics, these are important to us, and if you’re not on board, you know, hop off the bus. But when it’s the CEO saying that message, not somebody from HR, it makes a big difference.
– [Rich] Yup, absolutely, culture is a huge driver, without a doubt. Well, Suresh and John from the Workplace Equality Fund at Segall Bryant & Hamill, thank you very much for taking some time and talking to us about this today.
– My pleasure.
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