GUILÉ EMERGING MARKETS ENGAGEMENT FUND Buy & Care ... · Coca-Cola Hellenic, Heineken, Tata Motors and Richemont, whose ESG reports are of high quality. 3. In general, we also note

GUILÉ EMERGING MARKETS ENGAGEMENT FUND Buy & Care™ Responsible Investment Fund

Activity Report 2013–2014

In 1996 David de Pury, Guillaume Pictet, Henri Turrettini and Christian Berner joined forces to create their company. de Pury Pictet Turrettini & Cie S.A. (PPT) provides wealth management services. The firm has developed advanced skills in asset management for both private and institutional clients and currently manages around CHF 3 billion.

de Pury Pictet Turrettini & Cie has always demonstrated a great capacity for innovation, notably as a pioneer of responsible investment. It is the owner of the Buy and Care™ strategy, manager of the Guilé European Engagement Fund compartment and promotor of the Guilé Funds, and ensures the Funds’ consistency, transparency and distribution. PPT is a signatory to the United Nations-supported Principles for Responsible Investment (PRI).

Guilé is a contraction of the first names of Maguy and Léon Burrus. The Burrus family company was the first in Switzerland to introduce a pension fund and family allowances. When the business was sold, the sixth generation decided to set up the Guilé Foundation, whose mission is to promote corporate responsibility in terms of respect for human dignity and the environment.

The Guilé Foundation, to which the Guilé Funds return a significant portion of their management fees, has signed a Memorandum of Understanding with the United Nations Global Compact (UNGC). The Foundation embraces the universal values enshrined in the ten principles of the Global Compact and acts as a catalyst by helping companies to put those principles into practice. The company assessments, known as the GuiléReportingAssessment™, and the ensuing dialogue are services provided by the Guilé Foundation to the Guilé Funds.

ABSENCE OF CONFLICT OF INTEREST DECLARATION: The mission of the Guilé Foundation requires strict attention to matters of independence and impartiality in order to preserve the integrity of its engagement process. It is extremely important that the extra-financial analysis of companies in the Guilé Funds, a critical part of these products, is not compromised by any conflict of interest on the part of the analysts. Therefore, the Guilé Foundation formally states that BHP, the company that provided the specialists on the Guilé Engagement Team, received no fees in 2013–2014 from the companies that compose the Guilé Funds.

Welcome For the fourth consecutive year, de Pury Pictet Turrettini & Cie S.A. (PPT) is publishing a transparent, exhaustive report on the Guilé Emerging Markets Engagement Fund (GEMEF) compartment. This report covers all our asset management, voting and engagement activities during the 2013 calendar year. The shareholder engagement carried over into the first three months of the following year to accommodate our dialogue with the many companies that still publish their extra-financial report at a later date. The present document therefore contains all the discussions held with the companies up to the end of March 2014.

The first five chapters consist of open information and are available on the website: www.ppt.ch/guilefunds. The sixth chapter contains individual pages on each of the GEMEF companies, with details of the assessment and dialogue conducted by the Guilé Fund’s experts. The complete report is reserved for our current and prospective investors and is distributed solely in hard copy form. The content of the discussions with the companies must be accessible only to a restricted readership. This confidentiality, together

with the wealth of skill and advice provided by the Guilé Foundation’s experts, contributes to the efficient, transparent and non-indulgent dialogue that underpins the Guilé Engagement Funds’ success.

The GEMEF, managed by Comgest and promoted by PPT, is a compartment of the Luxembourg-based umbrella fund Cadmos Fund Management (Guilé Funds). Launched in March 2009, the GEMEF applies the same investment strategy as the original, flagship product of 2006, the Guilé European Engagement Fund (GEEF). Comgest had been selected for its long experience in the emerging markets and its management style, very close to PPT’s style and therefore particularly suited to shareholder engagement. Here, as in the GEEF, the portfolio manager assumes all investment and voting decisions concerning the underlying companies, while the Guilé Foundation coordinates the shareholder engagement with those companies. The privileged partnership established with the United Nations Global Compact guarantees the credibility of the Guilé Foundation and its corporate assessment methodology.

We hope that you will enjoy reading this 2013–2014 Activity Report. We also take this opportunity to thank our investors for their trust in us year after year, and for their comments, which have enabled us to improve the readability and content of this document.

Table of contents

1. Engagement progress ...................................................................................................................................... 4

1.1 Summary of GEMEF results 2013–2014 .................................................................................................... 4

1.2 Outlook for the Guilé Funds ...................................................................................................................... 8

2. The Guilé Funds’ Buy & Care™ strategy ......................................................................................................... 10

2.1 Company analysis .................................................................................................................................... 12

2.2 Portfolio management ............................................................................................................................ 12

2.3 Voting and engagement .......................................................................................................................... 13

3. Management report for 2013 ........................................................................................................................ 16

3.1 Performance report ................................................................................................................................. 16

3.2 Portfolio positioning and company update ............................................................................................. 16

3.3 Recent portfolio movements .................................................................................................................. 17

3.4 Portfolio outlook ..................................................................................................................................... 17

3.5 Composition of the portfolio as at 31 December 2013 ........................................................................... 19

4. Exercise of voting rights in 2013 .................................................................................................................... 20

4.1 Key factors and trends in 2013 ................................................................................................................ 20

4.2 Main oppositions in 2013 ........................................................................................................................ 21

4.3 Analysis of the votes by topic .................................................................................................................. 23

5. Shareholder engagement in 2013 –2014 ....................................................................................................... 26

5.1 Rate of engagement ................................................................................................................................ 26

5.2 Effectiveness of the engagement ............................................................................................................ 27

5.3 Long-term results .................................................................................................................................... 28

6. Confidential report ......................................................................................................................................... 31

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1. Engagement progress

1.1 Summary of GEMEF results 2013–2014 All thirty-nine companies in the portfolio as at 31 December 2013 were assessed according to the ten principles of the Global Compact.1 Credit for this success must go to the dedication of the Guilé Foundation’s Guilé Engagement Team™ (GET) and the stability of the portfolio managed by Comgest.

The GET experts systematically sent their assessments to the GEMEF companies. To establish a constructive, continuous dialogue, they also offered to present the results of their research in

person to the companies’ senior management and to explore with the latter the most realistic areas for improvement. Based on the assessments carried out, an active dialogue was conducted with twenty-six companies.

Two-thirds of the companies in the fund engage in dialogue with the GET. This performance, remarkable for the emerging markets, probably results from the consistency of the Guilé Funds’ approach as described in this report.

On the other hand, we were unable to pursue the dialogue in 2013–2014 with thirteen companies, of which only five are signatories to the Global Compact. In addition, four new companies were added to the portfolio in the course of the year. It is interesting to note that most of the firms that proved resistant to an open discussion are of Asian origin. That culture often requires that personal contact and relations of trust be established prior to any process of interaction and dialogue. This was confirmed following our event in Taipei in March 2013, which brought together some eighty participants. The transparent, convivial exchanges on that occasion subsequently opened the doors to three Taiwanese companies.

1 See chapter 2.3 for a detailed description of the assessment methodology.

The meetings and conference calls through which we conduct the dialogue generally proceed in a highly constructive spirit, with astonishing transparency on the part of the attendees. In most cases, the companies are represented by the people in charge of social responsibility or sustainable development, usually accompanied by their colleagues in investor relations, public relations or human resources.

We have found that, with few exceptions, dialogue is always preferable to exclusion. Sometimes, the Guilé Funds are the only responsible investor maintaining the conversation and suggesting areas with potential for progress on the ESG issues.2 The rare market participants conducting this type of

2 Environmental, social and governance (ESG).

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5

10

15

20

25

30

Dialogue No Dialogue

Dialogue with the companies 2013-2014

Signatory of the Global Compact Yes No

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discussion often sever the contact with major companies that are only partially involved in controversial activities. And the companies themselves may refuse to meet shareholders that adopt an overly inflexible stance with little regard for the economic realities.

By taking care not to ostracise diversified and profitable groups that will probably continue to grow, the Guilé Funds play a complementary and no doubt key role in the responsible investment universe.

Companies are speaking out about their desire for a healthy dialogue with their stakeholders. But they are also increasingly critical of over-simplified exclusion criteria and the multi-criteria ratings and other ESG classifications that are often compiled once a year based on laborious questionnaires. The Guilé Funds’ “soft power” engagement is clearly conducive to an influential, but always constructive, dialogue.

Furthermore, the Guilé Foundation’s brand of engagement is complementary to the media coverage. Public relations managers are always on the alert for controversial issues that might tarnish their company’s reputation, and this enables the GET to bring up minor incidents and the appropriate preventive measures. For example, with H&M, a company in the GEEF compartment since the latter’s inception, the sub-contractor risks have been examined on many occasions. Today H&M seems to be managing these issues far more effectively than are its competitors. Moreover, it was not involved in the Rana Plaza disaster in Bangladesh in April 2013.

The GEMEF companies’ social responsibility policies and practices are much less advanced than those of the companies in the GEEF portfolio. But notable exceptions include the Brazilian and South-African companies and Coca-Cola Hellenic, Heineken, Tata Motors and Richemont, whose ESG reports are of high quality.3 In general, we also note better quality and transparency as regards the social responsibility risks and opportunities on the part of the eighteen companies in the compartment (46 per cent) that are signatories to the Global Compact. For example, Natura Cosmeticos, a manufacturer of cosmetics and personal-hygiene products active in

3 Some of the companies in the compartment do not have their head office in an emerging-market country but are nevertheless

Brazil and Latin America, can stand comparison with a number of its European competitors. The Guilé Foundation’s assessment shows an excellent level of quality and comprehensiveness in the company’s reporting. Its report is well structured and presents a convincing sustainability strategy, with quantitative targets and consistent use of the Global Reporting Initiative (GRI) indicators. Natura Cosmeticos is aware that it serves as a model for many South American companies in terms of corporate social responsibility (CSR).

For these reasons, it is important to acknowledge the GET’s ceaseless efforts to promote social responsibility and the ten Global Compact principles among the company representatives with whom we interact. Much of the credit for convincing Richemont to sign the Global Compact must go to the Guilé Foundation’s systematic analytical engagement process.

The Brazilian company Cielo, a leading processor of credit-card payments, also illustrates the quality of the shareholder dialogue championed by the Guilé Funds. Shortly after Cielo’s entry into the GEMEF portfolio in 2011, a first highly instructive dialogue took place with the heads of sustainable development and investor relations. The GET made concrete proposals, aimed at increasing the transparency of specific extra-financial aspects of the reporting. As a result, Cielo published a significantly upgraded sustainability report in 2013. And far from resting on its laurels, the company has since announced that in its next report, it will follow the G4 version of the internationally recognised GRI guidelines for sustainability reporting. This new GRI standard emphasises the compilation and publication of important and financially material ESG information. Our last example is OdontoPrev, Brazil’s leading dental insurer. In July 2013, the Guilé engagement team conducted a comparative study to help OdontoPrev discover the multinationals’ best practices in terms of social and environmental responsibility. The company’s aims are to define its goals, the appropriate strategy and the implementation measures and to produce high-quality ESG reporting. When the results of the study were presented, the head of investor relations said that it was: “…a dream for us [OdontoPrev] to be able to learn from the best peers such as Novo Nordisk and Natura which are constituents of the Guilé Funds. “

well exposed to these high-growth markets through their activities.

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According to him, this study was of great help in understanding the issues, identifying the gaps in their reporting and taking remedial action where necessary. He added that the GET’s document had played an essential role in drawing the attention of the board of directors and senior management to the company’s own ESG issues. Even so, given the technical, financial and manpower constraints and the company’s other established priorities, he still sees the task of putting the recommendations into practice within a reasonable deadline as a formidable challenge.

These operational challenges are often mentioned by the GEMEF companies. In future, therefore, the GET will dwell even more heavily on the financial importance (materiality) of its suggestions. In this way, the people in charge of social responsibility will be equipped to seek more substantial backing from their line management and board of directors. In the light of recent experience, the Guilé Foundation’s experts will work even harder to promote their methods of benchmarking the companies against their peers and competitors. This tool has proved very useful in concentrating boards’ and senior managements’ minds on their company’s ESG issues.

Many companies with whom we have established a dialogue testify to their increasing interaction with the Guilé Funds.

Here are a few examples: “… The Swiss-based Guilé Foundation initiated the first investment fund whose selection criteria combine mainstream financial analysis with the vision and objectives of the United Nations Global Compact. In 2009, the Guilé Emerging Markets Engagement Fund was launched to promote responsibility in developing and transitional economies by means of constructive shareholder engagement. This new fund has invested in Odontoprev because of its active participation in the UN Global Compact. The fund’s Engagement Team analyzed the CSR reporting and presented the findings. Because Odontoprev made its interest in further developing its reporting very clear, the Guilé Foundation offered to conduct an additional benchmark study, provided best practices and formulated recommendations concerning structure, information channels and content of a future CSR report. All in all, the intensive dialogue with the Guilé Foundation was very fruitful and helped us to improve our reporting substantially.” José Roberto Pacheco, Director of Investor Relations, OdontoPrev “ … I wanted to let you know (…) that my 2014 wish list for the new CSR report to be published in June has been enriched with the comments you made when we met . Thank you.” Sophie Cagnard, Head of Investor Relations, Richemont “… We would also like to thank you for the opportunity and the insights you gave us for the next Sustainability report. The assessment was very helpful and gave us another perspective of what key issues we should focus for for the next document. ” Ana Carolina Morello, Consultant – Advisory – Sustainability EY, for the CCR Group

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Extract from Coca-Cola Hellenic’s CSR report published in 2012

Extract from Heineken’s CSR report published in early 2013

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1.2 Outlook for the Guilé Funds The satisfaction voiced by companies, investors and stakeholders in the Guilé Funds has inspired the development of a new compartment dedicated entirely to Swiss equities. Launched in April 2014, the Guilé Swiss Engagement Fund (GSEF) will adopt the Guilé Funds’ recognised Buy & Care™ strategy.4 The GSEF, the first fund of Swiss equities based on shareholder engagement, is perfectly adapted to the structure of Swiss businesses. This is a buoyant market with fine companies, but one that has always been considered a challenge to active management and, even more so, responsible investment. It is true that the dominant presence in the indices of a few very large companies complicates the portfolio managers’ task. And the problem is even worse for the socially responsible investment (SRI) funds. Should they take the additional financial risk of screening out giants such as Nestlé, Novartis, Roche or UBS, or possibly lose their credibility as an SRI fund by not doing so? Having failed to manage this dilemma convincingly, the classic SRI Swiss equity funds have still not succeeded in gaining a foothold.

The emphasis placed on shareholder dialogue in the Buy & Care strategy was designed to avoid this selection bias. Our portfolio manager, Alexandre Stucki, founder of the firm Alexandre Stucki Investment Management (ASIM), invests only in those Swiss companies that he has known personally for many years. Most Swiss businesses have an excellent culture of dialogue. The collaboration between PPT and ASIM came naturally, with Alexandre Stucki’s investment style’s being ideally suited to the Buy & Care strategy. With the aid of the GET, his visits to the companies will enable him to investigate the financial relevance of the ESG strategies in place –or of the lack of such a strategy. The integration of these issues, wrongly considered “extra-financial” and now gaining in importance, will strengthen his analyses, convictions and investment decisions. Indeed, the GSEF seems to unite all the ingredients needed to prove that active but non-exhausting management based on shareholder dialogue can generate lastingly higher returns than those of its benchmark.

The effectiveness of the engagement process in place since 2006 is attributable in large part to the robustness of the methodology developed by the Guilé Foundation. Aided by the suggestions from PPT and the companies, this methodology

4 See chapter 2.

progresses constantly, always with the aim of further integrating the ESG parameters into the financial and economic reality. This goal is undoubtedly the most important current and future challenge for the Guilé Funds and for all the companies. Shareholder engagement, realised through an approach of reciprocal added value, ensures that the Guilé Funds are ideally positioned to achieve the financial integration of the ESG parameters. With that in mind, and to remain at the forefront of shareholder engagement, the Guilé Foundation, with the support of PPT, recently developed what can certainly be considered the first integrated engagement process. As of this year, the managers of the Guilé compartments (beginning with the GEEF and the GSEF) and the companies’ financial leaders will be more closely involved in the engagement process. In the assessments sent to the companies, the portfolio managers will now highlight the financial or ESG risks that they have identified. In the ensuing discussions, they will be able to voice their desire to see the company think more about, and communicate more clearly, the materiality of these issues. This approach is also supportive to those in charge of social responsibility, who are sometimes poorly integrated into their company’s global strategy. The combined presence of a GET member, an ESG specialist, and a compartment manager with a keen sense of the companies’ business models and financial situation, will strengthen our message and help ensure that it reaches the highest levels of the corporate hierarchy. In this way, as a responsible shareholder, we are improving businesses’ ability to weigh up the tangible financial risks of inaction, negligence or even unlawful behaviour. Any adjustments that we might require to reduce our risks therefore appear more modest when mentioned. The companies are prepared to consent, particularly since the request is made by a loyal investor.

This important development in the engagement process is also driven by the will to help the companies. For example, the Guiding Principles on Business and Human Rights will pose a challenge to large multinationals. Those principles, based on the “Protect, Respect, Remedy” framework developed by UN Special Representative John Ruggie, were

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endorsed unanimously by the Human Rights Council. They call on states and businesses to take new steps to avoid direct or indirect human rights abuses in their cross-border activities. Several states, including Switzerland, wish to institutionalise those principles while limiting opposition from the business community. NGOs such as Human Rights Without Frontiers are campaigning for the right of victims of human rights abuses and violation of Swiss companies’ environmental standards to lodge a complaint in Switzerland and obtain redress. In France, members of the governing party have filed a bill that would establish parent companies’ duty of care and legal liability in relation to their subsidiaries and subcontractors abroad.

In this context, it is gratifying to see that shareholder engagement is gaining recognition in the political sphere. In a recent article, the OECD stated: “What matters for society as a whole is the role that ownership engagement is expected to play for effective capital allocation and monitoring of corporate performance”.

Following publication of its Green Paper, the European Commission is currently instituting major reforms related to various governance themes. It proposes nothing less than to make shareholder engagement obligatory for institutional investors. These rules could come into

play as early as 2015, although they have yet to be approved by the EU Council and the Members of the European Parliament. The new directive on publication of “non-financial” information also illustrates the legislator’s influence on companies’ behaviour and, consequently, on the GET’s priorities. EU companies that employ more than five hundred people are now required to publish the environmental and social data pertinent to their activities. For companies that are already subject to similar obligations the adjustments will be easier.5 Even before the IIRC released its international framework for integrated reporting, the GET was helping the pioneering companies, such as Novo Nordisk, to disseminate their integrated report as a source of inspiration to others.6 Similarly, in the United States, the SASB has unveiled its first industry-specific standards, which will see thirteen thousand companies regularly publishing key indicators on the materiality of the ESG issues.7

These trends show that “extra-financial” information is becoming standardised and that the Guilé funds are simply anticipating tomorrow’s reality, in which the classic financial models will gradually monetise and integrate ESG factors. Given the increased likelihood of the ESG issues’ having an impact on financial performance, shareholder engagement no doubt represents an effective way of managing, or even reducing, them.

5 British, Swedish, French, Spanish and Danish companies. 6IIRC: International Integrated Reporting Council.

7SASB: Sustainability Accounting Standards Board.

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2. The Guilé Funds’ Buy & Care™ strategy

For seven years now we have been demonstrating that active management can be reinvented to reconcile profitability with responsibility. Active portfolio management, based on thorough fundamental analysis, is the keystone of the Buy & Care investment strategy. By integrating the ESG parameters and engaging in dialogue, we strengthen our understanding and fundamental analysis of the companies. This union of tradition

and innovation enables us to explore a new frontier, not only of responsible investment but of active management. The Buy & Care investment strategy developed by PPT has now matured to a point where it may be useful to restate its main characteristics. Our philosophy is built on three founding principles. They have proved particularly reliable in the long term and through changing financial and economic cycles:

1. We do not invest in a stock but in a company. Every effort will be made to deepen our understanding of the companies’ business model and their senior managements’ ability to ensure its longevity. Information technology is a complement to, but not a substitute for, human contact and frequent visits.

2. The main aim is to create added value for our investors in the medium and long term. We are proud to have invented a new, non-exhausting form of active management, where portfolio turnover is significantly below the average for active managers. It requires working with a longer time horizon and observing a strict discipline in the fundamental analysis. Furthermore, as a responsible investor, we limit our clients’ transaction fees.

3. We build concentrated portfolios. Our deep analysis strengthens our convictions and enables us to deviate from the benchmark (tracking error). The indices must not influence the investment-decision process, but serve solely as a risk-management tool.

The Guilé Fund portfolio managers are highly experienced, and are co-owners and partners in their company. In place since the launch of each compartment, they apply the Buy & Care strategy in accordance with their investment style, deep fundamental analysis and shareholder engagement as conducted by the GET, while maintaining a low turnover rate.

Our managers are not subject to dogmatic rules and possibly arbitrary ESG ratings. Free of external constraints, they are fully responsible for their financial performance. Their market experience proves that it is easier to create long-term shareholder value if, at the same time, value is

created for that company’s stakeholders. Aware that financial parameters will predominate, they strive to integrate the ESG factors and to link these to the classic financial valuation models. This work calls for concentrated teams whose members combine financial, ESG and portfolio management skills. The Guilé Funds are thus positioned counter to many best-in-class funds that separate financial analysis from ESG analysis, both of which are separated again from portfolio management. By continuing to deliver the dual performance shown in the chart below, the Guilé Funds’ strategy will encourage other market participants to adopt this pragmatic approach to responsible investment.

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Shareholder engagement, the bedrock of the Buy & Care strategy, is applied to all the Guilé Funds, since continuous, non-indulgent dialogue with the companies creates value for all the stakeholders. The companies that participate in our dialogue receive a detailed ESG assessment together with carefully considered advice from our GET experts. As they progress, they strengthen their sustainability together with that of the economy as a whole.

The engagement process proves highly instructive for our portfolio managers. It sharpens their assessments of the risks or longevity of the companies’ business model and strengthens their investment convictions. Over time, the markets perceive and price in the companies’ enhanced quality and the value of our investments improves accordingly. A number of recent studies and surveys indicate that engagement and integration are the strategies

that institutional investors interested in SRI find most convincing and request most frequently.8 A recent Eurosif publication confirms that institutional investors hold the majority of SRI assets under management.9 In the UK, for example, institutional investors represent 97 per cent of the market. Interestingly, the two dominant strategies are financial integration, and engagement and voting. Many institutional investors, including some who are cautious when it comes to traditional SRI, say that they would actually like to invest more in recognised strategies combining profitability and responsibility. Based on listening to investors’ needs, the virtuous circle of the Buy & Care process applied to the Guilé Funds pushes back the frontiers of responsible investment. Following is an illustration of the three-step Buy & Care process as it relates to the Guilé Emerging Markets Engagement Fund (GEMEF).

8 Survey by Voxia communication and Conser presented at the Geneva Forum for Sustainable Investment 2014.

9 Eurosif: European SRI Study 2012.

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2.1 Company analysis Comgest, manager of the GEMEF since the latter’s inception in 2009, has ensured that its investment process continues to evolve. As a signatory to the PRI since March 2010, it looks for companies that enjoy visible and sustainable long-term growth and whose managements work to an industrial strategy. It begins by identifying businesses with earnings growth of more than 10 per cent, above-average profit margins and return on equity, a sound

balance sheet and low debt. As can be seen from the investment process shown below, Comgest analyses the quality of the companies by drawing on the Michael Porter Five Forces model (barriers to entry, strong competitive advantages etc.). Lastly, a five-year forecasting model based on systematic use of discounted profits and dividends leads to the selection of attractive valuations.

Comgest investment process as applied to the GEMEF compartment

Similarly to PPT, in 2011 Comgest launched a programme aimed at integrating the ESG criteria into its company analyses. To do so it adopted a risk-based approach. Evaluating the risks associated with the ESG factors serves to strengthen the fundamental-analysis model. Two dedicated analysts assign a level of ESG risk to each company. The level is adjusted continuously as new ESG information is obtained. At present, the results of the ESG analysis are incorporated qualitatively, by the financial analyst, into the overall assessment of each company’s risks.

2.2 Portfolio management Comgest follows a pure stock-picking approach, without reference to the composition of the benchmark index. It may favour or avoid certain industries or regions, but the sectoral or geographic

10 Mercer LLC, “Investment horizons - Do managers do what they say?” (2010).

allocations are reviewed only after the stocks are identified. Constructing the portfolio involves the selection of twenty-five to forty-five companies with strong potential for outperformance in the medium and long term. This concentration is desirable in the case of an engagement fund, since it means that the cost of the shareholder dialogue can be contained. And that concentration is combined with an extremely low turnover rate, which increases the quality of the dialogue. For the past five years, the GEMEF turnover has been less than 50 per cent, which implies that on average, a company remains in the portfolio for more than two years. This ratio is significantly better than the average for emerging-market equity funds. As a comparison, a 2010 study by Mercer, based on one thousand active portfolios, puts the average turnover rate at 72 per cent, and 55 per cent for the responsible investment funds.10

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Since launched in March 2009, the compartment (Class B) has delivered an outstanding performance of 115.46 per cent. Over the same period the benchmark, the MSCI Emerging Markets (Net Return), has returned 130.91 per cent. It is hardly surprising that in the post-2008 rush to make up for lost ground companies with weak qualities outperformed those selected for the compartment. But recently, that gap has narrowed considerably.

In terms of NAV, classes A and B of the Guilé Emerging Markets Fund rose 5.7 per cent and 6.6 per cent respectively in 2013, while the MSCI Emerging Markets index fell 2.6 per cent. Class A is intended for private investors and Class B for institutional investors placing USD 1 million or more. A large portion of the management fees is paid back to the Guilé Foundation to finance the activities of the GET, which initiates and conducts the shareholder engagement.

Guilé Emerging Markets Engagement Fund – Class B

A performance like this could not have been achieved without the additional support of an excellent selling discipline. Changes in the fundamentals, risks or valuation of the underlyings, together with the quality of the dialogue, will influence the portfolio manager’s view and may lead to decisions to sell.

2.3 Voting and engagement In the past, company visits and participation in the annual general meeting (AGM) were standard practice for investors. Today, electronic trading and information systems, while clearly useful and efficient, have unfortunately made some primary sources of information obsolete. In our opinion, voting and shareholder engagement should once again be closely linked to the portfolio manager’s investment decision and therefore be part and parcel of his responsibilities. The real long-term financial impact of the decisions made at an AGM is clearly documented. Few professionals would deny that a board of directors’ skills, independence and availability are critical to a company’s future. Indeed, the effects of a capital increase will be felt immediately. Therefore, for Comgest and for PPT, exercising the right to vote is first and foremost a financial responsibility.

To make this task easier, Comgest has elected the independent proxy Institutional Shareholder Services (ISS) to exercise its vote. ISS is responsible for studying the resolutions and providing voting recommendations in accordance with responsible investment principles. These recommendations, prepared by the specialised ISS analysts, provide valuable support to Comgest’s own thinking. However, the ultimate voting decision rests with Comgest’s analysts and portfolio managers.

New enhanced voting guidelines issued by PPT will apply as from the 2014 AGM season. In that document, we divide the items under discussion at an AGM into four topics: the structure of the board of directors; the transparency and coherency of the remuneration policy; capital structure and distribution; and respect for the rights of long-term shareholders. Our analysis of voting in the 2013 AGM season, presented in chapter 4, is broken down according to that new classification.

Lastly, as the Guilé Engagement Funds’ name suggests, our investment strategy is characterised by the continuous dialogue that we, as shareholder, seek.

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The Guilé Funds’ shareholder engagement is based on the ten principles of the United Nations Global Compact. The latter is a unique self-regulatory initiative signed by more than eight thousand companies, who strive to align their day-to-day

operations with ten universally accepted principles in the areas of human rights, international labour standards, the environment and the fight against corruption.

The sole obligation imposed on the signatory companies is to publish a Communication on Progress (COP). This report ensures that stakeholders are better informed about the issues that the companies face. A team of qualified analysts and senior advisors, the Guilé engagement team (GET), then analyses the comprehensiveness and quality of all the information provided on the subject of the ten Global Compact principles. Once the COP analysis has been validated and completed by the portfolio manager, a summarised version,

the Assessment Results, is sent to the company’s board of directors and senior management. The companies take a keen interest in this neutral, critical assessment by the GET. The content stimulates dialogue and, in doing so, enables our experts to suggest concrete improvements. Of course, the partnership formed since 1996 between the Guilé Foundation and the Global Compact in New York has done a great deal to accelerate awareness and acceptance of the Foundation’s shareholder dialogue.

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In the assessment, an important distinction is made between the comprehensiveness and the quality of the companies’ extra-financial reporting. In this way, the company’s attention can be focused on the questions of materiality and content when one of the key Global Compact principles has not been sufficiently addressed. On the other hand, when the information is material but not easily accessible, the Guilé Foundation’s experts will direct the dialogue to the quality and transparency of the reporting. Companies that publish

convincing, comprehensive, quality information will probably be able to reduce their risk premium and thus increase their stock’s upside potential. The Guilé Funds investors should therefore benefit direct from the successes obtained in the course of the shareholder engagement.

The comprehensiveness analysis is carried out for each of the ten Global Compact principles, based on the following eight criteria:

In contrast, the analysis of information quality covers all ten principles and is aimed more at determining whether the information published is

sufficiently credible and accessible and is likely to be taken into account by the financial markets.

The ten Global Compact principles provide a neutral, universal basis for analysis. The main strengths and weaknesses are examined, but without seeking to weight the different principles, as this sometimes abstract exercise can dilute the

analysis. The approach outlined here has contributed to our success with the companies; a result achieved despite our modest size compared with that of other investors engaged in influential dialogue.

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3. Management report for 2013

3.1 Performance report In 2013, the emerging markets remained in the doldrums, economic growth continued to fall and companies’ profitability ratios weakened. In the emerging markets, revenues and profits suffered from structural factors such as declining productivity and the maturity of the credit cycle, making any improvement difficult to foresee. Downward earnings revisions clearly weighed on the emerging stock markets but currencies were the main handicap during the year. Commodity producers and countries with external deficits were the hardest hit. Already in steep decline, the currencies of South Africa, Brazil, Indonesia and Chile could tumble even further. The portfolio is exposed to three of these, but the earnings growth

of our core positions (Copec, BRF, JBS, WEG, Naspers, MTN and SAB Miller) depends largely on invoicing denominated in hard currencies.

The geographic allocation was neutral and the fund’s main driver was our choice of stocks in IT and consumer staples, and in Russia, China and Korea. Internet companies enjoyed accelerating growth and improved visibility as regards the dreaded transition from fixed to mobile Internet access. They are definitely attractive, given the slowing economic growth, the public companies’ lack of respect for shareholders, and the high valuations in the consumer sector. Even though their multiples have risen sharply, the Internet companies’ promising growth prospects justify our maintaining most of our positions, after careful selection.

Internet technology: robust growth

The fund was also rewarded by its exposure to Magnit, Hutchison Wampoa, JBS, Tata Motors and Cielo, all of whom announced half-year results in line with or beating their forecasts. Brazilian Natura and Indian BHEL penalised the performance, as their growth did not meet the market’s expectations. We see this weakness as short-lived, and have therefore maintained or strengthened our positions.

In terms of NAV, classes A and B of the Guilé Emerging Markets Fund gained 5.7 per cent and 6.6 per cent respectively in 2013, while the MSCI Emerging Markets index shed 2.6 per cent.

3.2 Portfolio positioning and company update We maintain a high exposure to consumer staples, albeit lower than in the past. The valuations of many companies in that sector have clearly risen too far, at a time when emerging-market consumers are suffering from the slowing economic activity and the maturity of the credit cycle. Our knowledge of the companies, our long-standing relations with their management teams, the diversification obtained from exposure to global businesses (Heineken, SAB Miller, Coca-Cola HBC and JBS) and the underweightings in the portfolio should all protect us from any de-rating risk if the recovery in consumer spending were to be less robust than expected.

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The improved performances of our positions in life insurers (China Life, Ping An and Samsung Life) were fuelled by better returns on investment (end of the rate-cutting cycle, combined with rebounding equity markets) and customers’ increasing appetite for life insurance. Investors seem to be shunning the insurance sector, despite its promising growth prospects –in Asia and Latin America premiums have seen double-digit annual growth for the past decade. In China, the sector is dominated by a few national companies, such as

China Life and Ping An. China Life benefits from its vast distribution network, its expertise in actuarial science and its position as market leader in the rural areas. It derives more than half its profits from products that offer long-term protection and are difficult to re-negotiate. These advantages make up for the negative impact of the Chinese authorities’ interference in its management. The recent announcement of reforms aimed at providing better social protection should help to boost the company’s growth prospects.

Insurers: weak financial results obscure the positive underlying trends

For the fourth consecutive year, TSMC is our core position. In many ways, this stock seems to us a classic Comgest investment: it is at the forefront of semi-conductor technology, has no conflicts of interest, cultivates close long-term relations with its customers, generates strong cash flow, is well managed and benefits from the sustained growth and continuous evolution of the IT and telecommunications industries. The company has posted profit growth of more than 20 per cent a year for the past ten years and its 12-month forward price-to-earnings ratio is only 13 times, justifying its high weighting in the portfolio.

3.3 Recent portfolio movements We have added Mediatek to the portfolio. This Taiwanese company designs chips for telecommunications devices. While not yet a leading-edge technology company, Mediatek shows an outstanding ability to seize trends and produce high-quality, low-cost solutions. The stock should continue to benefit from the boom in entry-level smartphones in China and the other emerging-market countries.

This year, we sold our positions in Bharti Airtel, Bunge and Petrobras and reduced those in Heineken, Magnit, Tencent, Baidu and Yandex, in

view of the valuations reached. The new stocks included Richemont, Hutchison Wampoa, Localiza and Tata Motors.

3.4 Portfolio outlook Uncertainty clouds the emerging markets’ outlook for 2014. Valuations have fallen and the prevailing pessimism may be overdone, but macro- and microeconomic growth remains disappointing. The world economy’s apparent recovery urgently needs to accelerate in 2014.

The current situation cannot be compared with conditions in the late 1990s, when this asset class suffered from a series of crises. External debt has declined sharply, the central banks have built up their international reserves and in general, exchange rates are no longer indexed. Aggregate current account balances, which were highly volatile in the past, are now stable. Countries that have solid fiscal and current account balances or are introducing reforms – for example, China, Mexico and possibly India – should significantly outperform those that rely on external funding, such as Indonesia and Turkey.

As regards the most encouraging growth investments, note that the fund is increasingly exposed to emerging-market multinationals –

Source : Macquarie – april 2014

Growth in life insurance in China (rolling year) 2001 41.8% 2008 48.4%2002 59.2% 2009 10.7%2003 30.3% 2010 27.5%2004 9.9% 2011 -8.2%2005 14.9% 2012 4.2%2006 11.2% 2013 7.9%2007 22.5% 2014 YTD 35.5%

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companies whose head office is located in one of these countries, but that operate on a global scale – such as TSMC, JBS and Tata Motors, who benefit from the growth outside their country or region of origin.

As investment no longer seems to consist of blind faith in ETFs, our selection of stocks should prove rewarding; and in the context of a slowing global economy, that change in the market’s behaviour

could continue to work in our favour, given our expertise in identifying new growth segments.

Despite the mixed outlook for this asset class, we expect to see solid EPS growth in the portfolio in 2014. We believe that the current valuation discount reflects the lack of growth visibility in an uncertain emerging-market environment. As always, there is no knowing when this risk-return profile will translate into solid portfolio performance, but we are confident that it will.

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3.5 Composition of the portfolio as at 31 December 2013

Country GEMEF portfolio as at 31.12.2013 South Africa MTN Group Ltd. South Africa Naspers Ltd. South Africa SABMiller PLC South Africa Sanlam Ltd. Argentina Tenaris S.A. ADS Other Comgest Growth GEM Promising

Other Comgest Growth Latin America Brazil BRF-Brasil Foods S.A. Brazil CCR SA Brazil Cielo S/A Brazil JBS S/A Brazil Localiza Rent A Car S.A. Brazil Natura Cosmeticos S.A. Brazil Odontoprev S/A Brazil Weg S/A Chile Empresas Copec S.A. China Baidu Inc. ADS China China Life Insurance Co. Ltd. China China Mobile Ltd. China Ping An Insurance (Group) Co. China Tencent Holdings Ltd. China China Resources Power Holding Korea NAVER Corp. Korea Samsung Life Insurance Co. Ltd. UK Coca-Cola HBC ADR Netherlands Heineken N.V. Hong Kong Hutchison Whampoa Ltd. India Bharat Heavy Electricals Ltd. India Comgest Growth India India GAIL (India) Ltd. India Tata Motors Ltd. Mexico America Movil S.A.B. de C.V. Mexico Wal-Mart de Mexico S.A.B. de C.V. Mexico Fomento Economico Mexicano SAB

Poland Kernel Holding S.A. Russia Magnit JSC GDR Russia Mobile TeleSystems ADS Russia Yandex N.V. Cl A Switzerland Compagnie Financière Richemont SA Taiwan Mediatek Inc. Taiwan Taiwan Semiconductor

US YUM! Brands, Inc.

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4. Exercise of voting rights in 2013

4.1 Key factors and trends in 2013 At the end of December 2013, the portfolio of the Guilé Emerging Markets Engagement Fund compartment comprised forty-two stocks, of which five did not carry voting rights (three investment funds; Baidu, which does not hold annual general meetings; and the non-voting stock in Coca Cola Hellenic ADR). Technically, we could have voted on forty companies, as we divested ourselves of six after their AGMs (Bunge Limited, Petrobras, Bharti Airtel, E-Mart, Gold Fields and Randgold Resources) and brought three into the portfolio after their AGMs (Hutchison Whampoa, Fomento Economico Mexicano et Mediatek). But owing to technical problems with SABMillet and GAIL, China Resources Power (only the EGM missed) and Bharat Heavy Electricals (only the AGM missed) we exercised our voting rights on thirty-eight companies. The said

technical problems are unfortunately a frequent occurrence in cross-border voting and concern the necessary coordination between custodians and the electronic voting platform. To try to avoid such incidents in the future, Comgest has now set up an automatic warning system that signals changes in the custodian code, for the countries in which it is invested.

During the period under review we expressed an opinion on exactly five hundred items on AGM agendas. The majority of the resolutions submitted to the vote, i.e. 65 per cent, concerned the structure of the board of directors and the capital structure. Excluding the case of Naspers, which held a total of thirty-nine votes on remuneration, we found the breakdown of resolutions submitted to the vote to be nearly identical with that observed in Europe.

Naspers aside, remuneration was the subject of only forty-eight votes or around 10 per cent of the resolutions presented, despite its omnipresence in the media. Nevertheless, this number is remarkably high and is rising fast, considering that it concerned only thirty-eight companies. The companies sometimes submit several binding or advisory resolutions to the vote, to validate their remuneration policy as regards the board of

directors, senior management or employees, or to ratify the amounts paid.

As it turned out, the 2013 AGM season was mainly distinguished by the debate on excessive executive pay. Several countries, including Switzerland, have strengthened their legislation in this respect, making it obligatory for public companies to hold “ say on pay” resolutions. The law still varies widely from one country to the next. For once, Switzerland seems to be in the pioneering role, having accepted

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the Minder Initiative. The ordinance implementing the Minder Initiative does not compel investment funds to exercise their voting rights or to communicate, and even less so with respect to European companies. Nevertheless, the Guilé Funds intend to set the example and therefore go well beyond the legal requirements. The first effects of the Initiative will be felt in Switzerland during the 2014 AGM season. But the consequences will only really become apparent in 2015, when the main requirements enter into force.

The financial crisis, from which we are emerging with difficulty, is partly attributable to a particular type of “abstentionism” practised by shareholders. Although some investors underestimate the importance of exercising their voting right, many abstain in view of the administrative and financial obstacles in their way. The barriers to exercising voting rights are particularly high for those voting in third countries.

It is regrettable that despite the flow of new financial regulations, the subject of cross-border

voting has not been seriously addressed. Removal of the constraints that currently hamper voting procedures would enable the markets’ own self-regulation to function more efficiently. This would require changes in national legislation. We hope that the day will come when all AGMs can be convened with sufficient advance notice, shareholders can participate electronically, non-resident shareholders can vote without being present, all forms of share blocking cease to exist, and lastly, the fiscal and administrative barriers specific to certain countries are lifted.

4.2 Main oppositions in 2013 Of the five hundred votes cast, Comgest opposed the board of directors’ resolutions fifty-seven times or in 11.4 per cent of cases. At least one dissenting vote was cast at 40 per cent of our compartment’s AGMs. The following chart shows that board elections were the focus of attention, with more than 17 per cent of opposing votes.

Themes No. of votes Against %1- Board of directors 184 32 17.4%2- Remuneration 87 8 9.2%3- Capital structure 142 13 9.2%4- Shareholders' rights 87 4 4.6%Total 500 57 11.4%

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The high proportion of opposition to appointments of board members is explained by the fact that this figure covers both the problems observed in Europe and the issues specific to the emerging markets. Besides the lack of independence seen in boards and key committees and the practice of combining the offices of chairman and chief executive, there is a sense of opacity. Comgest is often faced with companies that only partially disclose the identity and career path of the directors submitted to the vote. This makes it very hard to decide whether they are suitable candidates.

The increase in say-on-pay votes is also noticeable in the emerging-market countries. While these

votes have not forced a massive drop in salaries, they do help to increase the transparency and consistency of the remuneration structures. This positive development means that our portfolio manager is better equipped to judge whether senior managements’ interests are aligned with those of the investors.

A regional breakdown of opposing votes provides an insight into the characteristics of the different types of governance model. This analysis sharpens our ability to detect the excesses of individual companies. An understanding of local practices, which spring from that region’s own economic model and history, also contributes to the open dialogue championed by the Guilé Funds.

It is interesting to see that the five companies in the compartment that are based in OECD countries met with the greatest number of oppositions. What displeased Comgest most was the lack of independence in Richemont’s board of directors (fourteen opposing votes). In Latin America, the main objections concerned appointments to the board and remuneration. Our two Mexican companies account for more than half the oppositions to the election of directors, owing to a marked lack of transparency in the profiles of the people proposed. In contrast, remuneration problems concerned only three Brazilian companies who, contrary to the regulations, had not published the highest-paid director’s pay package. In Asia, we see that remuneration went unchallenged,

although there were thirteen votes for the twelve companies concerned. Even though this topic is less of an issue in Asia, a few controversial cases are beginning to heat up, particularly in India. Apart from a hefty capital increase without pre-emptive rights at Yandex, the four companies in the compartment that are based in Eastern Europe did not encounter any significant controversies in 2013.

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4.3 Analysis of the votes by topic The first topic addressed in our voting guidelines –the structure of the board of directors –is of fundamental importance to a company’s development. After the AGM, the board is the highest organ of management, defining the strategy to follow, appointing the senior management that will apply that strategy, and rewarding or

sanctioning it according as the objectives are reached. A board of directors must be a cohesive and competent team, available to attend the meetings and able to discuss and evaluate management’s performance freely and openly.

The table below lists the ten companies where at least one resolution linked to the board structure was challenged by the Guilé Funds.

Name Country Vote Against % AgainstGold Fields Ltd South Africa 8 4 50.00%TENARIS SA Argentina 1 1 100.00%CCR S.A. Brazil 2 1 50.00%Jbs S.A Brazil 3 1 33.33%Petrobras Brazil 5 1 20.00%China Resources Power China 7 4 57.14%Samsung Life Insurance Korea 3 1 33.33%America Movil Mexico 2 2 100.00%Wal-Mart de Mexico Mexico 4 3 75.00%Richemont Switzerland 20 14 70.00%

Board of directors

Comgest was particularly severe with Richemont, notably to bring about an increase in the independence of its board of directors. In principle, those not considered independent are executive members or those that were executive members in recent years, and directors representing a significant shareholder, or engaged in substantial business dealings with the company, or related to a member of senior management or having cross-directorship links with another director. Independence is also open to interpretation, obliging us to approach the challenges of this appraisal with all due humility. The rules of good governance are a great help, but they are often

insufficient for an objective assessment of a board’s independence.

We have mentioned executive pay. More than four out of every five companies already hold an advisory or binding vote on this topic, which has now surfaced in the emerging-market countries. In 2013, Comgest voted against the remuneration policies of six of the GEMEF companies. Naspers, a company active in pay television in South Africa, submitted thirty-nine resolutions to the vote, an exceptionally high number. In three cases, an opposing vote was justified by a long-term share-based profit-sharing plan that had no performance targets.

Name Country Vote Against % AgainstNaspers Ltd South Africa 39 3 7.69%CCR S.A. Brazil 1 1 100.00%Cielo SA Brazil 1 1 100.00%Natura Cosmeticos S.A Brazil 1 1 100.00%Randgold Resources UK 4 1 25.00%Heineken NV Netherlands 2 1 50.00%

Remuneration

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Of the thirty-two remaining companies, seven did not submit any say-on-pay resolutions to the vote in 2013. We are pleased to present the twenty-five companies in our compartment (nearly two-.

thirds) that submitted their remuneration to the vote and whose resolutions were accepted in their entirety by Comgest.

Name Country Vote AgainstGold Fields Ltd South Africa 2 0MTN Group Ltd South Africa 2 0Sanlam Ltd South Africa 3 0TENARIS SA Argentina 1 0BRF - Brazil Foods Brazil 2 0Jbs S.A Brazil 1 0Localiza Rent A Car S.A Brazil 2 0Odontoprev S.A. Brazil 1 0Petrobras Brazil 1 0Weg S.A Brazil 2 0Empresas Copec SA Chile 2 0China Life Insurance China 1 0China Resources Power China 1 0Ping An Insurance China 2 0Tencent Holdings Ltd. China 1 0E-MART Co. Ltd. Korea 1 0NAVER Corp. Korea 1 0Samsung Life Insurance Korea 1 0Bharti Airtel Ltd. India 3 0Tata Motors Ltd. India 2 0Wal-Mart de Mexico Mexico 1 0Kernel Holding S.A. Poland 2 0Richemont Switzerland 1 0Bunge Limited USA 1 0YUM! Brands, Inc. USA 2 0

Remuneration

While imperfect, these companies nevertheless managed to convince us that they were sufficiently transparent and that their remuneration policy was better aligned with the shareholders’ interests. In view of the progress seen, we expect to be able to vote on and approve more resolutions linked to pay in the coming years. This is undeniably the most controversial topic at AGMs. We estimate the rate of shareholder opposition as double or triple that for all other items on the agenda.

Our third topic relates to all the AGM resolutions concerned with capital distribution or structure.

Each vote will have direct and financially material consequences. With 142 votes, this topic is of major importance, even though it encounters little opposition (9.2 per cent). Voting on a capital increase intended for an acquisition or a redistribution of capital requires an excellent understanding of the company, its balance sheet and, above all, its business model. The six companies subject to at least one negative vote on the capital structure are shown below:

Name Country Resolutions Against % AgainstNaspers Ltd South Africa 8 4 50.00%China Mobile Limited China 5 2 40.00%China Resources Power China 5 2 40.00%Tencent Holdings Ltd. China 5 2 40.00%Yandex NV Russia 6 2 33.33%Richemont Switzerland 3 1 33.33%

Capital structure

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Nearly half our oppositions concerned just three Chinese companies: Saint China Mobile Limited, China Resources Power and Tencent Holdings Ltd. In 2013, those companies submitted to the shareholder vote several controversial capital-increase resolutions. The latter were mainly proposals of capital increases without pre-emptive rights that seemed to us to be too generous, or too diluting for existing shareholders.

In the fourth topic, shareholders’ rights, we have grouped all the items related to equal treatment of

shareholders, anti-takeover measures and statutory changes. The other items that contribute to an improvement in transparency, oversight and sanctions, such as the granting of discharge and the election of auditors, are also incorporated in this last category.

We note that only four companies in our compartment were subject to at least one opposing vote related to respect for shareholders’ rights.

Name Country Resolutions Against % AgainstJbs S.A Brazil 8 1 12.50%Empresas Copec SA Chile 2 1 50.00%Wal-Mart de Mexico Mexico 2 1 50.00%YUM! Brands, Inc. USA 2 1 50.00%

Shareholders' rights

Comgest’s rare oppositions concerned statutory changes that were not sufficiently documented to justify validation. Last, it is worth mentioning a shareholder resolution, filed by the US organisation As You Sow and supported by Comgest, regarding the YUM! Brands company. The NGO demanded that this operator of fast-food restaurants (KFC, Pizza Hut and Taco Bell) with more than 38,000 restaurants in 120 countries develop a global recycling strategy and set precise targets for reducing its waste.

YUM asked its shareholders not to back the resolution, claiming that it did its best to meet those challenges. It considers that product- recycling by

food-service companies is an issue for the industry as a whole. And indeed, as a founding member of the Paper Recovery Alliance, YUM does set the example.

This case clearly shows that the AGM is not always the appropriate organ for dealing with certain kinds of problem requiring detailed analysis. Shareholder engagement and direct dialogue throughout the year produces a better understanding of such issues and the interests of all concerned, leading to sensible solutions that really work. The following chapters describe the concrete results that the Guilé Foundation’s team of experts have achieved since 2009.

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5. Shareholder engagement in 2013 –2014

5.1 Rate of engagement As outlined in the introduction, the GET managed to hold discussions with twenty-six of the thirty-nine companies in the portfolio, representing an engagement rate of 67 per cent. This was achieved

despite the fact that twenty-one of the companies in the compartment are not signatories to the Global Compact. These splendid, stable results, shown in the chart below, testify to the credibility that the Guilé Funds have acquired in the eyes of the emerging-market companies.

The successful results obtained by the Guilé Foundation owe much to the quality of its consultants and its engagement methodology, based on the universal values of the Global Compact. The Guilé Funds’ non-dogmatic “soft power” engagement style is a difference that works in our favour. Because we place the emphasis on efficient ESG integration, according to each company’s business model and constraints, these firms open their doors to us, whereas they refuse to engage in dialogue with others in our field. Finally, and according to some of the companies –cited in chapter 1.1 – it is the added value of the GET’s assessment and practical recommendations that prompts them, year after year, to invest the necessary time in a meeting or conference call.

However, there are thirteen companies with whom it was not possible or useful to hold a conversation in 2013–2014. If we exclude the four new firms that entered the portfolio in the course of the year, and also PingAn, which was removed from the engagement list, there remain eight companies that categorically declined to engage with the Guilé Foundation’s experts. Those who are not signatories to the Global Compact (Mobile

TeleSystems, Samsung Life Insurance, Tenaris and Yandex) will probably be the most difficult to convince. Samsung Life and Tenaris are the most advanced in terms of ESG transparency, and we hope that they will be more sensitised to our assessment, based on the ten principles of the Global Compact. In theory, the GET should have an easier time with the four remaining companies, Bharat Heavy Electrical (India), BRF Brazil Foods, Gail (India) and SABMiller (South Africa), all of whom have signed the Global Compact. Nevertheless, they were not willing to get together with the Guilé Foundation’s experts in 2013. No real conversation has been possible with Bharat Heavy Electrical since the meeting in Delhi in 2009. And we have not yet managed to establish a dialogue with the three other companies. For the present, they have only received one or two assessments from us. The Guilé Foundation will strive to re-start the dialogue with these companies in 2014. In view of the credibility of the Guilé Funds’ approach, which is recognised and talked about by the leading emerging-market multinationals, we have every hope of reviving some of these discussions and even strengthening their impact.

0%

10%

20%

30%

40%

50%

60%

70%

80%

Dialogue No dialogue

Contacts with companies in the compartment

2012-2013 2013-2014

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5.2 Effectiveness of the engagement Although the dialogue must maintain a certain rate of engagement to be influential, that ratio does not suffice to judge its effect. With that in mind, the Guilé Foundation has developed a scale of six levels, designed to provide a transparent measure of the extra-financial impact of the engagement with the companies. The effectiveness targets set for the Guilé Funds are ambitious. We want to create a continuing dialogue with all the companies, so that we reach at least level 3. This first goal has been

reached with almost half the GEMEF’s thirty-nine companies. We have still to convince the twenty-one companies that respond only sporadically to the GET’s attempts to make contact. The second objective is to demonstrate that year on year we are increasing the proportion of companies that have reached levels 4 and 5, and that they agree with clearly defined progress targets and are showing improvement on at least one of the weak points raised by the GET. We have met this goal in the case of 35 per cent of the companies in the compartment.

Companies Level Description

2 (6) (Publicizes Guilé's recommendations)

1 5 Shows improvement on at least one weak point raised by Guilé

11 4 Approves the progress objectives clearly specified by the Guilé assessment

4 3 Displays awareness and accepts the principle of a regular (annual) dialogue

8 2 Agrees to a detailed discussion about our assessment

13 1 Acknoledges receipt of our assessment

This means of measuring the extra-financial impact corresponds to our measurement of the compartment’s financial performance. By continuing to demonstrate that this dual performance can be delivered, the Buy & Care strategy will become established as a true alternative. The graph below charts the results of

the level of engagement since 2010 and shows that it was indeed possible to improve the efficiency significantly. While in 2010, only one company had reached or exceeded level 4, today a good third of the companies engage in regular dialogue and approve the progress targets suggested by the Guilé engagement team.

0%10%20%30%40%50%60%70%80%90%

100%

2010 2011 2012-2013 2013-2014

Distribution of engagement level 2010 - 2014

Level 1 Level 2 Level 3 Level 4 Level 5 Level 6

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5.3 Long-term results Can it be said, based on the evolution of the companies in the portfolio in relation to the ten Global Compact principles, that companies that act responsibly also perform better? Our empirical findings would seem to indicate that, all else being equal, responsible companies are more successful at protecting their competitive edge, tend to gain more market share and find it easier to access new markets. Some studies also show that high ESG quality reduces their risk and their cost of capital.11 By winning the loyalty of their customers and most talented employees these companies can compensate for the capital invested and even

increase their margin. They seem to be better equipped to meet their shareholders’ expectations, while also responding to society’s increasing demands.

The track record of the GEEF since 2006 and the GEMEF since 2009, combined with their low turnover, can help to answer the question. It enables us to identify and follow the evolution of fifty companies, 70 per cent from the GEEF and 30 per cent from the GEMEF, over a period of seven years. Furthermore, the stability of the assessment methodology developed by the Guilé Foundation guarantees the homogeneity of the measurements over time.

Apart from a slight readjustment in 2007, the chart shows continuous overall progression. This general uptrend of around 6 per cent a year appears in relation to all ten principles of the Global Compact. It reveals the added value created by the Guilé Funds. The improvement in ESG performance indicates, first, that the company is generating more value for all its stakeholders and therefore for society. But it also signals that the portfolio is exposed to fewer extra-financial risks. In principle, when the markets become aware of this progression, a corresponding contraction in the risk premium will register directly in the share price, to the benefit of existing shareholders.

Performance on the “Complicity” and “Freedom of association” principles has advanced more than 100 per cent since 2006. For the first, the improvement

11 Cheng, Beiting, Ioannis Ioannou, and George Serafeim."Corporate Social Responsibility and Access to Finance."; Harvard Business Review, 2011.

relates to human rights abuses, of which many companies, including Nike, Syngenta and Apple, were accused a few years ago. In fact, those controversial cases, extensively covered by the media, mainly concerned their suppliers. Having wrongly considered the latter beyond their sphere of influence, the companies have since realised that their reputation pays little heed to the legal niceties. The progress seen on the “Complicity” principle is therefore related to the integration of suppliers and other members of the value chain into the companies’ social responsibility policies.

The “Freedom of association” principle obtained the lowest score in 2006. As this principle seems obvious, the companies often ignored it and replied to only 25 per cent of our most stringent criteria. The progress seen is no doubt partly due to our

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advice. Although the emerging markets are more highly exposed to this risk, we know that large western companies such as Wal-Mart are faced with major controversies in this area. For several years now, the GET experts have been encouraging the companies to address this principle in their strategic priorities, spelling out why they consider it to be of limited importance (materiality).

The next step is to fine-tune our analysis of the ten Global Compact principles by focusing on the eight comprehensiveness criteria by which we measure the quality of implementation.12 Unsurprisingly, the overall progress is the same as for the ten principles, i.e. 6 per cent a year.

But we also note the increasing professionalism with which the companies implement their social responsibility. The most striking improvements appear both upstream and downstream of the eight-step process. First, the companies improved their description of the materiality (+53 per cent) of each principle in relation to their business model. The definition of consistent strategies and concrete objectives and the publication of explicit commitments from senior management were already established practice in the fifty companies in our sample. As early as 2006, those three criteria obtained the best scores. Lastly, to estimate the ESG and financial impacts of their activities more effectively, the companies improved the relevance of the indicators (+76 per cent) and set up internal

or external oversight and monitoring systems (+56 per cent).

To reply to best practice, the companies must visibly establish an ESG strategy with clearly defined targets. For the strategy to be credible and accepted, its implementation must also be checked regularly by means of tangible performance indicators. Despite the progress made, few companies proved able to detect ESG problems quickly and take adequate remedial action where necessary. The Guilé Foundation’s specialists have the knowledge of best practices needed to provide the necessary guidance. By making reasonable suggestions that are relatively simple to implement, they help the companies to continue improving their ESG performance.

12 See chapter 2.3.

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We can also observe developments in the quality of the ESG information published, though the progress is more uneven. The slight decline seen in 2010 in the following chart corresponds to the launch of the GEMEF compartment. It reflects the generally inferior quality of the emerging-market companies’ ESG publications compared with that of the Europeans’ reports. We also note that, contrary to the comprehensiveness, the quality of the information published has not progressed continuously. Quality is harder to improve, particularly when it comes to the “accuracy”

criterion. The amount of information tends to increase, but the indicators published are poorly consolidated at the group level, badly explained and usually incomplete. In this area in particular, 2013 saw important developments that should ultimately help to improve the accuracy of the information published by the companies. The launch of G4, the fourth generation of the GRI guidelines, and the release of the IIRC international integrated reporting framework represent major advances in extra-financial transparency, to the benefit of companies and investors.

The companies have progressed particularly in terms of the clarity, comparability and reliability of the information published. In those three areas, and since 2006, the improvements have reached nearly 5 per cent a year. The increased reliability is explained above all by the growing number of companies that have their ESG reports validated or certified by authorised independent third parties. Leading financial auditors such as Deloitte, PWC, Ernst & Young and KPMG have noted this trend and significantly strengthened their skills in this area over recent years. While the shareholder engagement is nonetheless more difficult in the emerging-market countries, the companies in our compartment are progressing and developing more rapidly. Our engagement

approach, now shared by other investors, is better understood by businesses today than in 2009. The prospects are bright, both for increasing the quality of our dialogues and for seeing further progress on the ESG issues, a progress that we have helped to create. We believe that the markets are now more aware of our successful dialogues in the emerging-market countries. Investors recognise and price in the improvements in governance and reputation. They are reassured to see that high-growth companies can nevertheless adopt familiar publication and transparency standards. The Guilé Funds’ dual performance, attested by this report, is and will no doubt long remain the finest testament to the efficiency of responsible investment and, particularly, the Buy & Care strategy.

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6. Confidential report

The assessments of the underlying companies presented in the following pages were compiled by the Guilé Foundation. They provide an account of the dialogue conducted, on behalf of the Guilé Funds investors, with each company in the portfolio as at 31 March 2014.

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Prepared by:

Dominique Habegger, Head of Institutional Asset Management (de Pury Pictet Turrettini & Cie S.A.) Melchior de Muralt, Partner (de Pury Pictet Turrettini & Cie S.A.) Juliette Alves, Fund Manager (Comgest) Thomas Streiff, Head of the Guilé Engagement Team (Guilé Foundation) Doris Rochat-Monnier, Director (Guilé Foundation) Paola Abdelnour, Analyst (Guilé Foundation)

NOTICE This document is published for information purposes only. The content of this document does not constitute an offer for sale or a solicitation of an offer to purchase nor does it constitute an incentive to invest or to engage in arbitrage transactions. It may not be construed as a contract under any circumstances. The information contained in this document has not been analyzed with regard to your personal profile. If you have questions regarding any investment or if you have doubts as to whether an investment decision is appropriate, please contact your particular client representative or, if applicable, seek financial, legal, or tax advice from your customary advisors. de Pury Pictet Turrettini S.A. makes every effort to verify the information provided but cannot give any guarantee as to its accuracy. Past performance that might be indicated in the information transmitted by de Pury Pictet Turrettini S.A. in no way determines future returns. Any decision to invest or divest that may be made by the reader of the information appearing herein is made at the sole initiative of the investor who is familiar with the mechanisms governing the financial markets. All documents legally required to be made available to investors, in particular the prospectus relating to an investment company with variable share capital (SICAV), will be provided to them upon their request.

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Should you have any questions about this report, please contact:

Dominique Habegger Head of Institutional Asset Management

[email protected]

www.ppt.ch

De Pury Pictet Turrettini & Cie S.A. 12, rue de la Corraterie P.O. Box 5335 CH-1211 Geneva 11 Tel. +41 22 317 00 30 Fax +41 22 317 00 33 www.ppt.ch