Cartica Management’s Powerful Combination: Investment Acumen, ESG Engagement, and Diverse Leadership

“Many emerging market companies have good ESG practices, but through active engagement we can improve disclosure around these practices to unlock value and ignite a cycle of positive change,” said Emily Alejos, Chief Investment Officer of Cartica Management. Through their framework of fundamental analysis, integrated macro, and country research, and active ESG engagement, Cartica aims to create value for companies and its shareholders.

Cartica Management

The firm was founded by seasoned investors, including former executives of the International Finance Corporation, the private sector investing arm of the World Bank Group. The founders brought a deep history dating back to the 1990s of investing in emerging market companies using investment theses based on both fundamentals and on improvements in corporate governance, environment, and social practices. Investing in emerging markets requires an understanding of the unique cultural, political, structural, and economic factors that influence investment performance in this diverse set of countries.

“We knew that investing in EM companies where value could be added through ESG and governance improvements could be both profitable and important for economic development. It lowers the cost of capital for companies and makes markets deeper and more transparent,” said Teresa Barger, Cartica’s Founder & CEO.

More than a decade later, the firm has remained true to its mission and is focused on identifying EM companies with good business models, good management teams, and strong or improving balance sheets. Three core tenets are the foundation of Cartica’s investment philosophy and value-creating strategy today:

  1. Bottom-up fundamental analysis
  2. Integrated macro and country research, and risk analysis
  3. Active company engagement, particularly on issues related to ESG and in improving ESG practices

With these beliefs in mind, Cartica Management has created an investment process which has enabled the team to build a concentrated, high conviction emerging markets strategy of 20-30 names. It is benchmark agnostic with an active share consistently above 98%.

The investment process includes several stages of research, analysis, and Investment Committee review of potential portfolio companies. Through each of these stages, the team considers the company’s ESG risks and opportunities and takes these into consideration while developing an ESG engagement strategy for such company.

Cartica starts with a bottom-up analysis of a company’s financials, business model, management team, and corporate culture. The team assesses target companies for (a) their openness to making value-enhancing improvements and (b) proven high integrity. The team then uses its knowledge of emerging markets macroeconomics and local policy dynamics to evaluate whether the risks in a specific investment have been properly priced into the financial models.

“Our “integrity check” is an important element in Cartica’s process,” said Kate Ahern, Cartica’s Head of ESG. Prior to making any investment, the investment team will consider the “integrity” of the company’s management, board, and controlling shareholders. This analysis is intended to assess whether the investment team believes the company is likely to be run for the benefit of all shareholders, including minority shareholders. Considering the predominance of controlling shareholders as well as the absence of the robust legal and regulatory practices of more developed markets, it can be particularly important to assess the integrity of the players. This includes an analysis of a company’s history of dealing with its minority shareholders, bondholders, lenders, and others – which Cartica believes is a key means of identifying downside risks. With the investment team’s extensive contacts and work in emerging markets, Cartica often has direct connection to individuals with firsthand knowledge of the controlling shareholders’ and management’s past behavior and reputation for integrity. Before approving an investment, both an Investment Thesis and an Engagement Thesis are articulated.

Once an investment goes into the concentrated portfolio of stocks, Cartica takes an active ownership approach. The team works with company management to benchmark and seek to improve their practices in E, S and G, to ensure good policies enshrine these practices in the culture, and to develop disclosures of these practices and policies. Cartica’s goal is to make its portfolio companies more valuable by addressing items of opportunity or risk in ESG and beyond, often in capital-markets facing issues such as sell-side coverage or share class disparities.

For example, the lack of diversity on a company’s board should raise a red flag about whether a company is forward thinking and committed to hiring top talent. This is one area that Cartica is intent on improving through active engagement with their portfolio companies, and the team often initiates these difficult conversations with management on this subject.

 “We want to know that the board is doing all it can do to ensure expert guidance and oversight and is not just focused on maintaining the status quo and seeing friends once a quarter,” said Kate Ahern.

It is a good sign to see board members demonstrate that they will go beyond their bubble to find expertise that is different and additive for the company. A 2019 study of U.S. publicly listed companies found that the presence of a female board member may help moderate the overconfidence of male CEOs. The effect is reduced risk, reduced costs of M&A transactions, and improved corporate decision-making.

Cartica has also studied the academic work on corporate culture’s contribution to financial performance. The team uses this knowledge to both assess target companies’ chances for success and to create a vibrant culture at Cartica based on humility, honesty, and collaboration, as well as the shared goal to make companies more valuable while creating returns for investors.

“Investment acumen, ESG engagement, and diverse leadership is a powerful combination which we believe will keep the firm performing at the highest level for decades to come, said Emily Alejos. Cartica Management is majority owned and led by women and continues to attract a high-performing team that is motivated to be a catalyst of positive change while creating long-term value for companies, shareholders, and communities.

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