By identifying and investing in sustainability leaders, the fund is designed to achieve income together with scope for capital growth whilst supporting positive change in the world we live in
Our belief in responsible investment is a firm and long-held one – a view that’s become increasingly mainstream in recent years. Regulatory change has provided much impetus, but so has greater awareness of issues like climate change, biodiversity loss and inequality. As a result, more investors are keen to align their investment decisions with their personal beliefs and preferences. After all, what use is achieving a long-term investment goal if the world isn’t in good shape when you get there?
Sustainability – on a sound footing
There’s also the investment rational to consider. Environmental, social and governance (ESG) related issues can have material impact on companies and the investment returns they offer. You needn’t look far to see that companies ignore ESG considerations at their peril. History is littered with examples of unsustainable operating practices costing shareholders dear. At the same time, the drive for sustainability is transforming the investment landscape and the opportunities it provides. Structural megatrends such as the energy transition away from fossil fuels and the need to make our buildings more efficient provide real and persisting tailwinds for quality ‘sustainable’ businesses leading the way.
Looking for income - mind the value traps
Historically, sustainability-related opportunities have widely been considered the reserve of investors seeking growth – a perspective we strongly believe is shifting, and with good reason. Take a traditional equity income portfolio and its constituents that are selected because they’re able to generate cash and return it to shareholders in the form of dividends. Typically, this resulted in a bias towards sectors like oil, mining and tobacco, none of which tick many (or indeed any) boxes from a sustainability perspective. Businesses in these areas are becoming increasingly challenged and we would argue that it makes sense to be wary of traditional equity income value traps.
A new look for equity income
At the same time, a raft of new sustainable income leaders is emerging and maturing. Businesses that operate sustainably and/or provide solutions to today’s sustainability challenges enjoy competitive advantage over their peers and look set to benefit from supportive tailwinds. In select cases they offer just the sort of cashflow characteristics you’d look for in a business capable of generating attractive and reliable dividends. It’s likely that the income portfolios of tomorrow will look very different to those of the past.
Enhancing Portfolio Income
We recognise that investors may be seeking an enhanced level of yield, over and above that generated by our equity component. To generate additional yield, we employ a simple derivative-based overlay strategy which is managed by our Systematic Factor Investments Team. Derivatives are a type of financial instrument that can be used to manage risk and to generate income. The overlay strategy seeks to enhance the fund yield by 2 to 4%.
AIMing for sustainability leaders
But how best to hardwire sustainability into a stock selection process? Seven themes provide our starting point with each offering long-term tailwinds to well-placed companies. Next comes an assessment of whether a company is really making a difference and here we use our Additionality, Intentionality & Materiality (AIM) framework. We look for the ‘additionality’ of innovation and the ‘intentionality’ of management to direct a business towards sustainability challenges. Thirdly, we want the ‘materiality’ of a clear linkage of revenue and sustainability opportunities. Alongside our AIM framework we also consider a company’s contribution towards the 17 UN Sustainable Development Goals and use this as a signpost for our engagement activities.
Robust fundamental analysis
Once a ‘sustainable opportunity’ is identified we work on it from a pure investment perspective. Quality is a key characteristic – for us that means a readily understandable business model with durable competitive advantage. The quality and commitment of management is key – we want to invest with proven performers who execute well and responsibly allocate capital. The price of our entry point into a business ultimately determines our return so we seek opportunities with scope for meaningful upside and use discounted cashflow to assess intrinsic value.
A differentiated portfolio
The result is a portfolio that contrasts significantly with both our MSCI ACWI benchmark and the composition of more mainstream global equity income portfolios. An emphasis on sustainable leaders within structural megatrends means our perspective is long-term and our portfolio is characterised by relatively low levels of turnover. Of course, the most important outcome of our approach is the returns we deliver to our investors and we’re confident that we’ll be able to generate an attractive income, scope for capital growth and, thanks to our engagement with investee companies, positive impact along the way.
