Di Zhou's international ESG fund is beating 98% of its peers this year. The investor breaks down her process for selecting winning stocks and explains why Alibaba is the biggest holding in her…

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Di Zhou Thornburg Roof Di Zhou is the portfolio manager of the $122.9 million Thornburg Better World International fund.

  • Di Zhou is the portfolio manager of the $122.9 million Thornburg Better World International fund, which has returned 20.99% year-to-date and is ranked in the 2nd percentile of all 779 funds in the same category, according to Morningstar data. 
  • Zhou’s fund, which focuses on international large-cap stocks, combines fundamental research and stock selection with ESG analysis and a low-carbon mandate.
  • In an interview with Business Insider, she breaks down her process for selecting winning ESG stocks and explains why she exited Ubisoft Entertainment but kept Alibaba and Luxshare Precision Industry in her portfolio. 
  • Visit Business Insider’s homepage for more stories.

Before she became an investor herself, Di Zhou was already learning from the best minds of the investment industry. 

Starting her career in manager research and pension consulting at Wilshire Associates, Zhou covered growth equity and fixed income managers — a role that put her in regular and close contact with investing luminaries such as Bill Gross and Bill Miller

“When you are 20-something years old and didn’t know anything, if I didn’t work for Wilshire, people like Bill Miller and Bill Gross would not give a minute of their time to me,” she said. “Because I was, fortunately, working for the gatekeeper, they take my meetings on a regular basis and talk to me about their investment views and processes.”

Those experiences inspired Zhou to become a professional investor herself. At the peak of the 2008 financial crisis, she enrolled in the Booth School of Business at the University of Chicago. 

“I still remember one day I was in New York. I was standing across the street and seeing where it used to be the Lehman Brothers office, they were just changing the sign to Barclays,” she recalled. “I remember standing there thinking ‘I just took two years out of my career, took a loan of $120,000, and I’m going to graduate from business school with no jobs.’ So that was pretty daunting.”

Despite a formidable prospect of graduating into a recession, Zhou made the career switch into investing. After an unpaid internship with Indian asset manager SBI Mutual Fund, she landed at Thornburg Investment Management.

Today, Zhou is the lead portfolio manager of the $122.9 million Thornburg Better World International fund, which has returned 20.99% year-to-date and beaten 98% of its 778 peers in the same category, according to Morningstar data

How to select winning ESG stocks 

Although environmental, social, and governance investing has become more mainstream over the past few years, many investors still balk at the possibility of having to sacrifice returns in order to meet ESG standards. 

Zhou tries to differentiate her fund by combining fundamental research and stock selection with ESG analysis and a low-carbon mandate to both deliver superior risk-adjusted returns over the long term and integrate material ESG factors. 

To ensure full ESG integration, Zhou and her team gather both external and internal data themselves rather than hiring another team to separately evaluate the ESG scores of her portfolio stocks.

“We do have access to a number of third-party data agencies like Sustainalytics, MSCI, or Bloomberg, but at the same time, those data collectors are very much subject to their capacity to collect data,” she said. “Because we talk to our company every quarter, we can gather a lot of data information that might not be disclosed by the rating agencies.”

She points to portfolio holding Luxshare Precision Industry, a Chinese computer and electronic connectors company, as an example. 

“When we look at Sustainalytics or Bloomberg, Luxshare’s ESG score is not great because they don’t have a lot of disclosure,” Zhou said. “But when you dig deeper into their business, they actually have a fantastic sustainability report and very good policies and targets of where they want to go from a carbon, governance, and social perspective.”

She explained: “The problem is the report is in Chinese and the rating agencies couldn’t just pick it up and translate it. So there’s a lot of interesting data that might be overlooked by the rating agencies but could be easily picked up by fundamental managers like us.”

Another proprietary method that Zhou utilizes to assess companies is what she calls the “three pillars of trust,” which refers to a company’s board of directors, management team, and employees.

The method played a big part in her decision to exit the stock of French video game developer Ubisoft in August this year after reports of allegations of sexual harassment against company executives came out and a number of senior employees were fired in June and July.

“What we did post the news flow was not to immediately decide to sell the stock, but really come back to the three areas of trust to evaluate the situation,” Zhou said. “Because we want to know whether the board of directors or the management team knew that was happening and whether there was a cover-up or it was more isolated incidents.”

After talking to the first two pillars, Zhou came to the conclusion that Ubisoft’s Board of Directors and management team did not try to cover up the incidents. 

However, reading commentaries left by Ubisoft employees on Glassdoor and other sites presented a worrying picture.

“We came to the conclusion that this workplace sexual harassment issue might not be an isolated issue, it might be a company-wide issue,” she said. “One case in point is that the people who were asked to leave were not just in one office, they were in multiple different locations.”

“Talent recruitment and retention is a key factor in the video game industry because you have talented people to program your games and make the games attractive to new customers,” she added. “It might not impact your near-term profitability per se because your game is in development for three to five years, but it will definitely have a negative impact on your games in the pipeline.”

Alibaba — an ESG momentum stock

The Ubisoft stock has risen over 6% since August, but Zhou is sticking with her analysis and conviction. On the other hand, while the top holding in her portfolio — Alibaba (BABA) — might raise some eyebrows, Zhou makes the case for its ESG eligibility. 

“We have this approach that allows us to own both best-in-class ESG companies and also the ESG momentum companies,” she explained. “Our quantitative peers can only fish in the best-in-class ESG company investment universe because they don’t know the company from a fundamental perspective.”

She continued: “And then the rating agencies tend to be very backward-looking and not capturing the changes of the companies. But for fundamental managers, we can not only generate alpha from all the best-in-class ESG companies but also capture companies that are on the way to improve their ESG-ness.”

For Zhou, Alibaba, the largest e-commerce platform in China, is one such example.

“Even though Alibaba is a platform company, they have humongous power to influence the companies on their platform,” she said. “For example, there are huge logistic activities involved around their platform and they will strongly encourage vendors on their platform to use all biodegradable packaging materials.”

Another ESG initiative the company has taken on is to design games where their customers can earn reward points by performing environmentally friendly daily tasks and allow them to exchange those points for Ant Financial to plant trees on the Gobi desert.

“This little game has been existing for two to three years and there have been 30 million monthly active users playing this game,” Zhou said. “Ant Financial has planted over 500 million trees already.”

Despite the recent headwinds facing Alibaba such as China’s proposed antitrust regulations of big monopolistic platforms and Ant Financial’s delayed mega IPO, Zhou is optimistic. 

“It’s probably even better to have better clarity and regulations now,” she said. “Because if they have gone through the IPO, investors like us will always think about what kind of regulations could be forthcoming and therefore how can we prepare for it.”

She added: “I don’t think that’s a game-changer. At the same time, the market opportunity is still huge, it’s still there.”

A Global Asset Management Seoul Korea Magazine

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