Portfolio Manager Interview

Interview with Pax World International Fund manager Ivka Kalus-Bystricky

Ivka, before we begin talking about the new Pax World International Fund, perhaps you can tell us about your investing background in general and things about yourself personally.
Sure. I was born in Czechoslovakia, and in fact when I was working on my Master’s Degree at the Fletcher School at Tufts, I wrote my thesis on the problems with Communist Czechoslovakia’s environmental policy. Then, I ended up working in Prague in a management consulting capacity for Arthur D. Little. Up to that point I hadn’t done any business evaluation work, but that’s what I was assigned to do in Prague – to take what were state-owned enterprises and decide how they should be privatized. I was going through the businesses piece by piece, figuring out what they were worth at the time and how much they could be worth potentially. After three years there, I moved back to the US to join ADL’s Resources practice, where I worked for another three years on strategic and operational projects for global steel, mining and paper companies. I traveled all over the U.S. and did projects in Europe and Brazil. It was really great work that ultimately served me well when I became a fund manager.

Regarding my investment experience: immediately prior to joining Pax, I was a Senior Portfolio Manager at State Street Global Advisors in Boston, where I managed the International Growth Opportunities Fund, as well as the Global Growth Opportunities Fund. Before that, I managed several international and global portfolios at Baring Asset Management. Earlier in my investment career, I was an analyst at Putnam Investments and at Independence Investment, where I covered stocks across most international sectors over a five-year period. So I’ve been involved in international investment management for quite some time.

Just curiously, but also because it’s pertinent to the fact that you’re managing an international fund for Pax, how many languages do you speak?
Five – Czech, French, English, Spanish, and German.

Ivka, there must be literally dozens of international mutual funds from any number of well-known investment management companies. How is the Pax World International Fund different?
There are hundreds, actually. I believe that it is our Environmental, Social and Governance (ESG) research, which is at the heart of our investment process, is what differentiates the Pax World International Fund from our competitors. Being on the cutting edge of identifying sustainable international ESG themes will become an increasingly important competitive advantage for the Pax World International Fund as the market recognizes that companies with solid ESG strategies tend to deliver superior financial performance over the long term. It’s also important to recognize that strong investment performance comes not only from picking winners, but from avoiding losers. There are so many pitfalls that can curtail the prospects of companies when they engage in unethical or unsustainable practices. I expect our rigorous ESG research to help to filter out the companies that will ultimately disappoint the market with poor results due to poor management practices.

Am I right in assuming that the ESG research you have access to is critical in constructing the portfolio?
In the final analysis, managing a fund is really about tilting the odds in your favor. One obvious way of doing that is having a fundamental research team that’s sector-focused and trying to find the best ideas. But another way is saying, I want to buy companies that are going to be around for the next 10 years, and the reason they’re going to be around for that period of time is because they have solid environmental practices, they have solid corporate governance and they have sustainability initiatives working in their favor. I’m looking to avoid stocks that, for example, engage in unethical environmental practices.  And if I do that, then I believe I can beat the market by avoiding stocks that may blow up due to fines or lawsuits. In the aggregate, I believe that the stocks I’m going to be in are going to produce better financial results. 

That’s interesting. Would you talk a little more about the process you use to identify specific investments for the Fund?
I start with a top down approach, identifying sustainable macro growth drivers such as the vast and growing numbers of emerging market consumers or the strong and sustained need for infrastructure investment in both the developed and emerging world. I then look for regions, sectors/industries and individual securities that derive a disproportionate amount of their revenues and profits from such themes. I then look at whether the sustainable growth potential is partially or fully discounted by the market. If it isn’t, then I submit the stock for analysis by our ESG Research team.

This approach leads me to companies, industries and geographic regions that exhibit characteristics of sustainable growth, that can weather market cycles and that have the ability to demonstrate continuous improvement in their financial results. I like to take risk where I have the highest level of conviction, but also mitigate unintended risk that could result if I neglected certain regions, industries or currency exposures.

Again, let me say this: being on the cutting edge of identifying sustainable, international ESG themes will become an increasingly important competitive advantage for the Fund as the market recognizes that companies with solid ESG strategies tend to deliver superior financial performance over the long term. As I’ve said, it’s an odds game. If I get my themes right and then if I pick enough of the right stocks to meet those themes, that’s how my shareholders are going to win.

Are you focusing your attention on particular parts of the world?
My goal is to build a well-diversified portfolio where each position represents a high conviction sustainable growth theme, while the portfolio in aggregate captures opportunities that exist across multiple geographies and industries. Since growth in emerging markets currently appears to be driving global growth, I expect to spend a significant portion of my time looking for investment opportunities that benefit from the growth in these countries.

Let me give you an example. Everyone is focusing on the U.S. consumer and saying the flat screen TV market is dead because people domestically aren’t going to be able to extend their credit cards to buy these flat screen TVs. Well guess what? Markets outside the US already account for over 2/3 of global sales of flat screen TVs.  Sales here were growing more slowly, even before our current malaise, compared to a place like China, where sales are doubling every year and will surpass those in the US by the end of this decade. Not every Chinese can buy a flat screen TV, certainly. But there are three and a half times as many Chinese as there are Americans. And they don’t have to put the purchase on their credit card bill, either. They have cash. Think of the power markets like that represent!

I might add, think also what  this sort of unfettered growth represents in terms of environmental impact. It really exposes the need for sustainable manufacturing and waste management technologies.

One thing I’m very curious about. Are there stocks you were involved with in prior portfolios you managed that you might have avoided if you had had the benefit of Pax’s ESG screening process?
Yes, actually, a lot of them. Our ESG research would likely have picked up on factors that I was generally unaware of at the time, and the performance of those funds may have been affected as a result.

By what benchmark will your performance be compared? How does the International Fund differ composition-wise from the benchmark?
MSCI EAFE is the benchmark the International Fund is benchmarked against. Our portfolio is quite concentrated, with a range of 40-70 stocks – meaning that we have large active weights in the stocks we own relative to the benchmark. At any point in time I anticipate having between 10-20% of the portfolio in stocks that are not in the benchmark given the sustainable growth opportunities that exist in countries and smaller cap stocks that are not in EAFE. While it is a portfolio that is diversified across sectors and geographic regions, I am weighting certain geographies and sectors more heavily based on the faster and more sustainable growth in those regions.

Ivka, thank you for your time. This has been very interesting. And of course, best of luck as the Pax World International Fund develops and grows.