Stewardship

Environmental, social and governance (ESG) is a phenomenon that has hit the investment industry in the last decade, with fund managers and companies competing to demonstrate their worthiness.

At Compound we are somewhat wary of such phenomena. We would also note many good investors have been quietly applying the principles of ESG for several decades, so the core tenets of ESG are nothing new.

In terms of Environment (E), the Compound Global Fund will likely rate very well, not because we are trying to mollify the environmental movement, but because we generally avoid businesses with negative externalities on the environment. These externalities may become financial liabilities in the future. The beauty of owning just 20-25 businesses is that we can readily choose not to own “polluters”.

Our definition of Social (S) is a merit-based company. We have always preferred companies where employee and management progression is based on merit, not on your golf handicap or your university pedigree.

And as for governance (G), good governance is a must, though candidly easier said than done. To stay objective and watchful with CEOs we find it helps to never get too familiar with them. We have a small bias towards businesses where family or an individual has significant ownership as our belief is this encourages long term investment and alignment with our fund holders' interests.

We are very mindful that there is risk everywhere. There is perceptible risk to owning equities. For example, a stock market could be de-rated or a country could be banned, look at what happened to owners of Russian equities post the invasion of Ukraine. Frankly there is also risk in owning government bonds. Many Western governments are borrowing beyond their means, so they may resort to quantitative easing or devaluing their currencies, in turn reducing the purchasing power of bond holders. We will do what we can to navigate these uncertainties. The bulk of our personal wealth is invested in the funds, we genuinely watchful about the risk we are taking.