Continuous dialogue is key to APG’s Focus Equities strategy

Published on: 13 July 2023

APG on behalf of its clients uses its influence to improve companies’ sustainability and long-term performance. In this series, we explore how stewardship is applied in the different asset classes and strategies making up APG’s diversified portfolio. In this second installment, Michael Neft and Terhi Halme zoom in on the Focus Equities strategy. “We are an engaged shareholder. That has been part of the Focus philosophy since day one.”

• APG’s Focus Equities is a long-term focused portfolio with roughly 16 billion euros in assets under management.
• Up to 50 listed small and medium-sized enterprises (SMEs) in developed Europe, North America and Asia Pacific make up the portfolio.
• These companies are active in a variety of sectors, offering products and services ranging from sustainable design, engineering and consulting solutions (Arcadis) and safety gear (MSA Safety) to servo motors and robots (Yaskawa Electric).

The best company they can be

Meeting with fifteen members of a company’s leadership team; hiring an external consultant to do a climate change analysis on every name in the portfolio; attending trade fairs to stay on top of what’s going on with portfolio companies, their competitors and in their industry – these are all “a necessary part of what we do,” says Michael Neft, Head of Focus Equities at APG. “Our goal is to invest in high-quality companies for the long term and take them from good to great. As a team we always ask ourselves: if the stock market now closes for ten years, which names would we still be happy owning at the end of that ten-year period?”

In view of this long-term investment horizon and the relatively large stakes (typically between 3 to 15% of market cap), knowing each of the holdings inside out is key to the Focus strategy. The team of eight investment professionals conduct a thorough analysis on factors affecting these companies’ long-term risks and returns – including sustainability risks – all in order to help make them the best company that they can be and help deliver the best outcomes to APG’s clients.

Continuously engaged

Exactly because of this in-depth approach, long-term investment horizon and the relatively large stakes it holds, the Focus team is particularly well positioned to have a meaningful dialogue with the companies in its concentrated portfolio. Every year, the team has dozens of one-on-one meetings with executive management teams and supervisory boards of its portfolio companies. “We are an engaged shareholder. That has been part of the Focus philosophy since day one. We prefer to be continuously engaged instead of occasionally outraged,” says Michael.

Terhi Halme, Head of Responsible Investments Americas at APG, adds: “Within Focus Equities, engagement starts at a very early stage – at times even before investment – and continues throughout the entire investment period. The team takes a proactive approach to engagement.”

Michael explains: “We say it's our job to kill investment cases. We really put these companies through the wringer. It takes nine months to a year from the start of an investment case to the company actually being included in the portfolio. We evaluate the quality of every one of our portfolio companies using the team’s in-depth knowledge and research, including a deep dive into ESG aspects. This enables us to identify the ESG topics to follow up on with the company right from the start, and leverage this expertise to produce better outcomes for our clients and society.”  

We will push if we think a company could be moving in a better direction

Of course, an ownership mentality includes actively exercising voting rights. The team discusses every item on the voting agenda before voting. But a lot more happens outside the voting season, sometimes way ahead of the shareholders’ Annual General Meeting (AGM). Michael: “Our level of influence is a combination of how much of a company we own, how important we are to them, and the relationship that we have established with them. Owning a small number of names but a big chunk of each individual name helps us in terms of creating better and more responsible business practices. If one of our portfolio companies is planning to introduce a new remuneration policy, quite often they will have brought us on board early on to get our feedback. We are not shy. We will push if we think a company could be moving in a better direction.”

Real-world outcomes

An example of a ‘better direction’ could be implementing science-based carbon reduction targets through the Science Based Targets initiative (SBTi), an approach that the Focus team has been vocal about with its portfolio companies in the past few years. Science Based Targets (SBTs) provide a clearly-defined pathway for companies to reduce greenhouse gas emissions, in line with what the latest climate science deems necessary to meet the goal of the Paris Agreement to limit global warming to 1.5°C.

Michael: “Midcap companies have historically not had dedicated resources on ESG – we have quite a few companies that produced their first sustainability report upon prodding from us. Not that we deserve all the credit, but it’s certainly something we have pushed for in a number of cases. Nowadays even some of our smaller listed companies have dedicated people responsible for ESG. And they are becoming more receptive to our opinions.”

Michael also sees increased acceptance among small and medium-sized companies for SBTs. “This year alone we have a couple more companies committing to science-based carbon reduction targets. Currently, around one third of our portfolio has set SBTs. To me, that’s all part of stewardship. Over one-third (5.9 billion euros) of our portfolio is a Sustainable Development Investment, which means it contributes, under our methodology, to achieving the United Nations’ Sustainable Development Goals (SDGs) – most notably SDG 3 (Health & Wellbeing), but also for example SDG 2 (Zero Hunger) and SDG 12 (Responsible Consumption). This contributes to our clients' stated goals to help achieve the SDGs through their investments.”