Environmental, social and governance (ESG) is at the heart of the investment process, says Jeremy Richardson, a senior portfolio manager at RBC Global Asset Management in London, UK. Richardson is part of a team of 12 on the Morningstar 5-star rated RBC Global Equity mandate, led by Habib Subjally,
"Fundamentally," says Richardson, "finding great companies that are conducting themselves responsibility is very important to us. ESG has become more and more important and we want to know that the management teams are making the right decisions for the business and its employees to drive long-term performance."
Risk management is also at the heart of the mandate. To that end, three people on the team -- called "portfolio engineers" -- focus on risk and portfolio construction, including a diversified mix of holdings across sectors and industries. "People always talk about capital and allocation," says Richardson, "but it's actually the risk you take that drives the returns. It's very important that you're taking risk in the areas where you expect to get rewarded."
Along with the ESG criteria, all stocks among the characteristic 51 holdings must meet three other elements on the check list to be included in the portfolio. The first is a winning business model that is going to prevail in the marketplace, compared to the rest of the industry. According to Richardson, they're looking for a company that's got a better mousetrap, so it's not like looking at cash flow, return on investments or assets.
The second focus is on companies with the opportunity to take market share, to turn that winning business model into market share growth.
The third ingredient is to look for end market growth. According to Richardson, if a company is able to take market share and the end market itself is growing, then as a long-term investor you really amplify the value-creating opportunity. "It's really hard to add long-term value," says Richardson, "if the industry you're in is shrinking."
For example, "we don't own a car company in our portfolio," says Richardson, "because it's really hard to have high convictions about what the industry is going to look like in 10 to 15 years' time." But there are opportunities in the industry, so one of the holdings in the mandate is Nidec Corp., a Japan-based company that makes electric motors. "Electric motors are well positioned to benefit from disruption," says Richardson, "because the technology may drive electric cars. Also areas like robotics, where electric motors are being used in robotics."
A favoured company among the top 10 holdings is U.S.-based 
TJX Companies (TJX). TJX owns a number of discount-priced Canadian department stores including Winners, Marshalls and HomeSense. "We see TJX as having almost unique capabilities in the industry," says Richardson. Instead of going to a factory and purchasing and shipping products, the company uses a network of 1,000 buyers for 20,000 distributors on off-price, in-season items and sells them to customers at a discount. The company has very short supply chains and they turn their inventory over very quickly, about 10 times a year. "That means that there's very little inventory risk with the business model," says Richardson.
U.S.-based Microsoft (MSFT), which was not included in the fund for years, is now among the top 10 holdings. "With the new chief executive officer, Satya Nadella, "there's now been a switch," says Richardson, "to a much more customer-oriented focus, and that is showing a lot of success and progress. They've also tilted the business away from the traditional desktop and more towards cloud computing, and that's what we see driving a lot of change within the industry."
The stock-picking process includes talking to company suppliers, employees, customers and perhaps regulators to identify companies that have a winning formula in the industry. Richardson says it's a very systematic approach that doesn't include using quantitative screens at the beginning of the process because the information often isn't there.
"So we steer well clear of looking at things like earnings momentum," says Richardson, "or price earnings ratios, because we think it's really hard to deliver returns for investors better than the market, starting with market data."
The fund's positioning has long been to hold approximately 60% in U.S.-based companies. According to Richardson, in terms of the opportunity set for the bottom-up approach, the U.S. has grown over the course of the last 18 months to two years as a proportion of global markets.
The approximately 20% weighting in financials is not unusual either. According to Richardson, the industry has regained some of its poise in the markets as investors anticipate rising interest rates, which would be favourable for many banks.
Looking ahead at risks, "there are things we worry about," says Richardson. "The top three on the list would be a policy mistake by the Feds, such as raising rates too far; the second would be difficult economic conditions in Europe; and third would be the influence of China and being able to predict that, particularly when the country has so much debt within it. So those are risks, but they're not new risks, we've been dealing with those for the last five years or so."
