Top five ESG funds managers explain their outperformance

Top five ESG funds managers speak to What Investment about why they have outperformed others over the last three years.

 Top five ESG funds

The managers of five best performing Environmental, Social and Governance (ESG) funds according to data by research consultants FE Fundinfo, explain how they have outperformed others over the last three years.

Fund name (institutional share class and rebased in euros) Data from 31/12/2016 to 31/12/20193 year cumulative performanceFE Crown Fund Rating3 year monthly return3 year volatility 3 year Sharpe Fund size (m)Legal domicle Currency
Mirabaud Equities Global Focus D GBP in EU **59.16516.769.551.39340.10LuxembourgGBP
Kames Global Sustainable Equity B Acc GBP in EU53.78315.4214.830.8130.00IrelandGBP
Legg Mason ClearBridge US Equity Sustainability Leaders $ Acc USD TR in EU **52.06414.9912.690.9142.20IrelandUSD
AB Sicav I Sustainable Global Thematic Portfolio I USD in EU**49.02414.2211.240.95761.90LuxembourgUSD
Janus Henderson Global Sustainable Equity I Acc TR in EU48.55414.1013.590.781053.80United KingdomGBX
** This history of this unit/share class has been extended, at FE fundinfo’s discretion, to give a sense of a longer track record of the fund as a whole. Source: FE fundinfo

 

RANK 1: Mirabaud Equities Global Focus

  • Why has your fund outperformed other sustainable funds over the last three years?

Anu Narula, head global equities and lead portfolio manager of the fund, said:

“The fund is a multi-thematic global portfolio which seeks to find innovative opportunities and take advantage of long-term trends and sustainable growth.

“These thematic trends have a focus on sustainability, such as ageing population or health and wellbeing, and towards growth companies focusing on long-term trends.

“Our environmental, social and governance (ESG) process identifies the best players in those sectors, giving an important quality tilt strengthened by ESG criteria. The whole process is complemented with bottom-up research, which identifies best practices and also material ESG opportunities and risks.

“Our long-term view towards multi-thematic trends and growth companies, along with our ESG criteria and process have produced long-term risk adjusted returns for the fund over the last three years.”  

  • How was the ESG strategy crucial to the success of the fund’s performance if you compare it to other strategies?

Narula continued: “Our ESG strategy and process involves both a top-down as well as a bottom-up approach. We have a best-in-class and best-in-universe screening which is accompanied with our ongoing meetings with company management.

“These meetings help us to better understand a company’s business strategy and practices and allow us to properly engage on a variety of topics, including ESG issues that may present a potential, material risk to a company’s financial performance.

“We also are not, and have never been, exposed to the vices as we don’t want to run the risk of exposures in sectors which are subject to regulatory changes. We intrinsically believe that having a robust, fully-integrated ESG process is crucial to finding market leaders and delivering positive returns.”

  • Looking at 2020, which types of macro-economic and/or geopolitical risks could impact the fund positively/negatively and why?

He replied: “The market had a very strong re-rating in 2019. A supportive liquidity backdrop drove this with the 10-year yield falling from 2.7% at the start of the year to 1.9%.

“Looking ahead, the macroeconomic environment that is most challenging for the fund is the period when there is an end and start of mini-cycles, as we have seen in 2011, 2016 or more recently from September to November 2019.

“During these periods the market gets worried about a recession […]. The good news is we just had one of those periods which makes it less likely to happen in the immediate future.

“On the positive [side], an environment which helps the fund is when we move from beta to alpha, as in 2018 when the fund was up 9.5% and the market down 3.5%. This is clearly more likely this year given how strong 2019 was.”

RANK 2: Kames Global Sustainable Equity

  • Why has your outperformed other sustainable funds over the last three years?

Craig Bonthron, investment manager for international equities and co-manager of the fund, said:

“We are high conviction investors, which means we have about 40 stocks in our portfolio and an active share of over 99%. We focus on mid-cap ($1bn (€0.9bn) to $10bn market cap) companies that have the ability to grow to a multiple of their current size.

“We have successfully identified and invested in a number of companies over the last three years that have done just that, driving significant stock-picking alpha when considered in the context of a concentrated portfolio.

“We made a decision to consciously free ourselves from the baggage of the index, predominately large-cap, mature companies, and invest where we could have the most impact.

“In practice, this means we have focused on disruptive technological trends that are intersecting with increasing sustainability challenges. These intersections will create a meaningful source of future economic value in our view.”

  • In your opinion, how was the ESG strategy crucial to the success of the fund’s performance if you compare it to other strategies?

“Our intention is simply to signal to clients that we believe investing sustainably is a source of alpha and there need not be a performance cost.

“Our mission is to generate investment alpha for clients by investing in disruptive companies that have a positive impact. Viewing the world through the lens of sustainability, the impact of a product or service is closely linked to its strategic positioning, and the sustainability of a company’s practice is closely linked to its operational effectiveness.

“Seen this way – and applying a disruptive framework to how we invest – we hope to see change and sources of future economic value earlier than those [fund managers] who seek near-term certainty and a persistence of the status quo.”

  • Looking at 2020, which types of macro-economic and/or geopolitical risks could impact the fund positively/negatively and why?

“We look out five or 10 years rather than one year. Paradoxically, it is much easier to get conviction around the long-term direction of the powerful technological, environmental and social trends over that time frame than on near-term election cycles or interest rates, where we have zero insight.

“Unlike elections, the aforementioned trends are virtually inevitable, so we spend our time trying to figure out which companies will capture value from them in the long term. Doing this is orders of magnitude more productive in our view,” Bonthron added.

RANK 3: Legg Mason ClearBridge US Equity Sustainability Leaders

  • Why has your fund outperformed other sustainable funds over the last three years?

Derek Deutsch, managing director and co-portfolio manager of the fund, said:

“We manage a high-conviction, concentrated portfolio of our best ideas — companies with strong fundamentals and leading ESG practices. Our active [approach] overweights in technology — holdings like Autodesk, a software-as-a-service provider that sources 100% renewable power; and ADP, a payroll and human resources software and services provider leveraging the cloud and delivering improving results with less environmental impact.

“We seek to help investors limit carbon emissions by investing in companies developing clean energy sources. Our active picks in utilities like Brookfield Renewable Partners, which generates power from hydroelectric sources […] have also been responsible for strong differentiated performance.

“Looking outside the index in the industrials sector, owning a large position in Trex, a manufacturer and marketer of wood alternative decking products made from recycled wood fibers and plastic waste, has also been supportive of returns.”

  • How was the ESG strategy crucial to the success of the fund’s performance if you compare it to other strategies?

“Owning sustainability leaders with strong fundamental characteristics that operate in growth areas of the market and serve real sustainability needs is crucial to long-term investment performance. Many of our holdings are businesses whose products or services help solve sustainability problems the world faces,” Deutsch said.

“We own leaders in renewable energy; ride share, a substitute for car ownership; water efficiency and sustainable packaging industries; as well as companies with leading sustainability profiles benefiting from the ramp up in 5G technology. We believe these areas have large growth potential over the long term and contribute positively to performance.

“Our ESG integration – analysing ESG characteristics as part of fundamental financial analysis – also contributes to risk management. Our ESG analysis offers a lens on material factors that can affect a company’s long-term growth potential, and lowers our risk of exposure to stranded assets and governance-related or reputational risks from undesirable social practices, for example.”

  • Looking at 2020, which types of macro-economic and/or geopolitical risks could impact the fund positively/negatively and why?

“We see progress on international trade as a potential catalyst for a manufacturing recovery.

“We also anticipate that continued accommodative monetary policy and a strong and confident consumer will be supportive of economic growth and, in turn, equity prices. At the same time, we are mindful of risks in an election year as concerns grow about potential policy changes, as well as valuations that are above average.

“Our focus on companies with high-quality financial characteristics and those that have leading sustainability profiles and robust ESG practices embedded in the business makes us optimistic on the outlook for the portfolio.

“We believe companies with these characteristics should do well over the long term, regardless of the economic environment.”

RANK 4: AB Sustainable Global Thematic

  • Why has your fund outperformed other sustainable funds over the last three years?

Daniel Roarty, chief investment officer of thematic and sustainable equities and manager of the fund, said:

“Our experienced research team evaluates potential investment candidates in two ways – financial potential and social potential. The objective of the strategy is to use a disciplined fundamental evaluation process to find companies that excel in both areas, which results in a focus on owning ‘good actors selling good products’.

“In general, this approach tends to result in a portfolio that is more growth- and qualityoriented. This has been positive as quality and growth factors have been a tailwind over the past three years.

“We also consider ourselves to be relatively benchmark agnostic. We invest where we see the best combination of financial and social potential, not where benchmark weights are the highest. This flexibility allows us to focus on those companies that are helping solve tomorrow’s most important global challenges while delivering strong results today.”

  • How was the ESG strategy crucial to the success of the fund’s performance if you compare it to other strategies?

“We embrace sustainability at the beginning of our process through the use of the UN Sustainable Development Goals (SDGs),” Roarty added.

“We believe that the SDGs, formally launched in 2016, offer a robust and comprehensive definition of sustainability and we adopted them as our overarching framework.

“We thoroughly assess the SDGs to identify all potential investment opportunities for private capital.

“Investing in companies linked to the SDGs – combined with a detailed bottom-up stock analysis that includes a comprehensive assessment of material ESG factors, stringent valuation process and balanced portfolio construction – improves our ability to generate attractive financial returns and construct a more impactful portfolio.

“Further, our strategy is active, which has helped us navigate a more volatile environment.

“We avoid simple exclusionary screens and instead focus on companies that are benefitting from large structural growth trends and that have created competitive advantages by addressing pressing social issues. Abiding by our disciplined fundamental process ensures we pay reasonable prices to own those companies.”

  • Looking at 2020, which types of macro-economic and/or geopolitical risks could impact the fund positively/negatively and why?

“The US election will be a clear source of volatility through the primary and general elections. Investor sentiment will vary widely based on the primary democratic candidate, which may have implications for sectors such as healthcare.

“More recently, the coronavirus is posing challenges to the markets. The implications of the outbreak are still unknown but remain a key focus for global investors.

“While the fundamental outlook has recently been firming across many regions, we do think global markets should continue to be stuck in a very moderate growth environment. That type of background should favour more growth and quality-owned investments.”

RANK 5: Janus Henderson Global Sustainable Equity

  • Why has your fund outperformed other sustainable funds over the last three years?

Hamish Chamberlayne, head of SRI and co-manager of the fund, said:

“Our objective is to produce leading returns against the wider global equity peer group.

“We see a close alignment between sustainability, innovation and growth and we believe our sustainable investment approach has helped us to identify companies that are exposed to powerful, secular investment trends.”

  • How was the ESG strategy crucial to the success of the fund’s performance if you compare it to other strategies?

“We think of our sustainability approach from the perspective of superior selectivity. We believe including a consideration of sustainability issues into our investment thinking helps us to look into the future and identify winning investments.

“Companies that make the world a better place will be more likely to grow, compound wealth and deliver the best investment returns. We also have exclusionary criteria, focused on avoiding companies that do environmental or social harm. This plays an important role by steering us away from higher risk of capital loss.

“We believe the next decade will be one of exceptional economic change with two generational investment trends: the transition to a low-carbon economy and the fourth industrial revolution, the merging of the industrial, consumer and technological economies, aligned with sustainability and creating big winners and losers.

“We see a lot of negative risk in the companies which are excluded in our negative screening. They are not part of the future.”

  • Looking at 2020, which types of macro-economic and/or geopolitical risks could impact the fund positively/negatively and why?

Chamberlayne continued: “We have worked hard to construct a balanced portfolio with well-diversified risk and exposure to resilient and idiosyncratic growth. We have a significant allocation to companies with a high degree of recurring revenue and strong balance sheets, and which are more insulated from broader global macroeconomic trends.

“We believe our sustainability framework helps us to navigate uncertainty, enables us to find investments with resilient growth characteristics which will compound wealth through periods of economic turbulence.

“There are many companies which are growing strongly due to having products or services exposed to secular trends, and our investment framework is specifically designed to help us identify these types of company.

“Technological change and innovation-driven growth have not slowed down.

“Sustainability issues will continue to grow in importance, with active managers making a positive impact by consciously allocating capital towards companies that are contributing to a more sustainable planet, and away from those doing harm.”

Further reading: ESG investing for ISAs and five top funds for you to consider

This article first appeared on What Investment’s sister website Expert Portfolio.

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