Brought to you by Wealth Manager
Is the sun shining again?
sponsor
contents
Listen
Watch
Read
fgfgfgfgfg
PODCAST
fgfgfgfgfgfgfg fgfgfgfgfg fgfgfg
poll
Earn one hour of structured CPD
structured cpd
Vote
Content from: GAM
Investors emerged from the darkness of 2020
Images: Unsplash, iStock, Getty Images and Adobe Stock
fgfgfgfg
FILM: dfdfdfdf
Divi watch
Bargains galore, but watch out for value traps
Serious about sustainability
Content from: fgfgfgfg
Following a long period in the shade, UK equities could be set to light up income portfolios once again
The UK equity income funds on hit lists
Thematic winners
UK equities look undervalued as dividends resume
Images credit: Unsplash, Istock, Getty Images and Adobe Stock
UK equity income
fgfgfg fgfgfg fgfgfg
FILM: fgfgfgfgfg
Has thematic investing changed the face of asset allocation?
FILM: ASSET ALLOCATION
Active vs passive
No substitute for active managers when picking thematic winners
Sector overview
An equity income comeback?
Inflation protection
A UK equity shelter?
Playing the revolution
FILM: Sustainable food
A-rated McVey: Small is beautiful
Undercover Selector
Dividends are back- but what does this mean?
The ‘sin stock’ ESG dilemma
FILm
Shopping baskets
FILM: ghghghghghgh
by John Schaffer
With traditional portfolio construction techniques, such as the 60:40 split, looking stale, is there a case for investing thematically? Although still a relatively nascent area, assets in thematic funds have more than tripled to $595bn (£422bn) worldwide, up from $174bn three years ago, according to Morningstar. The Covid-19 pandemic has also resulted in huge inflows into thematic strategies, paired with eye-catching returns in certain funds. Is it time for thematic investing to become more of a core focus for asset allocators?
Allianz Global Investors Aegon Asset Management
Sponsored content
Film: Inflation Storm Podcast Undercover Fund Selector Film: The $16tn Question Poll Badly Behaving Bonds Desperately Seeking Income Structured CPD
editorial content
Speakers featured in this video include:
Joe McDonnell, head of portfolio solutions EMEA, Neuberger Berman Kenneth Lamont, senior research analyst, Morningstar Anu Narula, head of global equities, Mirabaud
Oil majors, tobacco companies and miners are some of the biggest dividend payers on the FTSE. These firms have been roundly criticised from an ESG standpoint, branded as ‘sin stocks’. Pressured to invest ethically, can managers justify holding the likes of BP, British American Tobacco and Rio Tinto, all of which are core holdings in many UK income funds? Excluding these key sectors shrinks the pond for income managers to fish in, increasing the challenge of meeting yield targets. Tobacco giant Imperial Brands, for example, has a dividend yield of 8.9%. The FTSE All Share average is just under 3%. However, investing in these stocks can lead to some awkward conversation with an increasingly ESG-aware investor base. In this film, Citywire AA-rated Simon Gergel, who has British American Tobacco and Imperial Brands as the two largest holdings in his Allianz UK Equity Income fund, addresses this conundrum. His view conflicts with that of JO Hambro’s + rated Clive Beagles, who hasn’t invested in tobacco for a decade, saying: ‘It kills people.’ He does have big exposure to sin stocks, though. BP is his fund’s largest investment and there are also a number of mining stocks in his portfolio. Another mining investor, Schroders’ Matt Bennison, co-manager of the UK Alpha Income fund, says the stocks are crucial due to the immense demand for copper mining, and discusses the industry’s poor record on working conditions.
FILM
Citywire research has identified 14 UK equity income funds each held by at least two wealth management firms in model portfolios. But, taken together, this group lost £3.2bn over the past year and £2.2bn over the past three years in net outflows, according to Morningstar estimates. Bu this total figure disguises a wide variance. For example, although the Trojan Income fund lost £1bn in outflows over the past year, the Trojan Ethical Income fund gained £20m – with the latter benefiting from the rising popularity of ESG investing. The data shows fund buyers have chosen well, with the majority of the 14 funds ranking in the top third of the UK Equity Income sector in terms of total returns over three years. The most widely held mandate, the Threadneedle UK Equity Income fund, ranks fifth in the sector over the past decade, with a return of 165.5% against a peer group average of 109.6%.
‘The Threadneedle UK Equity Income fund benefits from a very well-resourced team led by an experienced manager in Richard Colwell, who, over his decade-long tenure, has significantly outperformed the sector and the FTSE All Share index. ‘Colwell is prepared to invest away from the benchmark and is happy to avoid the big traditional income stocks completely, with no exposure to BP or Shell, for example, while also being significantly underweight financials, instead backing his conviction in long-term positions in the likes of AstraZeneca, Electrocomponents and Rentokil. Although the fund sits in the equity income sector, with its total-return approach, we view the fund as a core UK equity fund for anyone wanting UK equity exposure. ‘There are many different flavours of UK equity income and therefore it’s important to judge each fund on its merits. With funds focusing on large caps, small caps, quality, value and anything in between, it’s vital to understand how an equity income fund invests, as this will shape the pattern of returns. ‘We have no particular feature that we look for, instead preferring to understand the investment process and then select the appropriate fund for the market conditions or combine different types of equity income fund into a blended portfolio.’
Ryan Hughes, head of investment research, AJ Bell
AB International Health Care is an active, bottom-up, stockpicking fund, with the manager and analyst team focusing on businesses rather than falling in love with the science. It identifies good fundamental business attributes rather than trying to predict exceptional one-off binary events that occur with low probability – for example, the success with one specific drug. The focus is on an attractive return on invested capital profile and the reinvestment of profits back into each business they own. This philosophy has been developed over a number of years by Citywire + rated manager Vinay Thapar, who has a background in academia but has also spent a considerable amount of time as an analyst and investment manager. Thapar is supported by a six-strong healthcare specialised team and this strong fundamental sector-specific research is a key attraction of the fund. More generally on thematic strategies, it really depends on the theme itself and if this is consistent with our house view, but also the construction of each product and in particular any overexposure to individual stocks.
Duncan Blyth, senior investment manager
by Robin Amos
BMO Edentree Fidelity Natixis
Film: The Art of Engagement Undercover Fund Selector Podcast Poll Fishing for the perfect allocation Structured CPD
Click to download the chart
The chart below shows how many MPS vehicles hold each of the 14 most widely held thematic funds, with a toggle to also show the minimum number of wealth firms that own them. With some funds held in multiple portfolios run by the same wealth manager, the number of vehicles may not always match the number of firms.
The top thematic sectors in funds of funds, mixed asset and model portfolio vehicles
Source: Citywire/Morningstar
A fund selector’s view
UK equity income may have been out of fashion for some time, but our data highlights several funds on wealth buy lists, indicating the sector continues to be an important pillar in a balanced portfolio
VEHICLE
Tilney Group Casterbridge Wealth
TB Evenlode Income
Sanlam Parmenion Capital Partners
BMO Responsible UK Income
Bordier & Cie Apollo Asset Management Sanlam
Montanaro UK Income
Brewin Dolphin Casterbridge Wealth
TM RWC UK Equity Income
Brooks Macdonald Asset Management Brown Shipley Luna Investment Management
JOHCM UK Equity Income
Psigma Investment Management Quilter Cheviot Aberdeen Standard Capital
Artemis Income
Casterbridge Wealth Hawksmoor Investment Management Parmenion Capital Partners
Janus Henderson UK Responsible Income
Cazenove Capital Hawksmoor Investment Management AJ Bell Parmenion Capital Partners
Trojan Income
Maia Asset Management Cazenove Capital Hawksmoor Investment Management Tilney Group
Trojan Ethical Income
Wellian IS AJ Bell LGT Vestra Brewin Dolphin Aberdeen Standard Capital Parmenion Capital Partners
Threadneedle UK Equity Income
FIRM
Most popular UK equity income funds
Film Podcast Advertorial
Film Undercover Selector Podcast Shopping Basket Inflation Protection
fgfgfgfgfgfg
fgfgfg fgfgfg fgfgfgfg
fgfgfgfg fgfgfgfg
fgfgfgfg fgfgfg fgfgfg
from WisdomTree
by fgfgfg
fgfgfg
fgfg fgfg fgfgfg
CONTENT BY
Interviews: Emily Hollings Camera: Lucia Garré
Legal & General Investment Management Limited is Authorised and Regulated by the Financial Conduct Authority. The views expressed withing this video are those of Legal & General Investment Management. Past performance is not a guide to future performance. The value of an investment any income taken from it is not guaranteed and can go down as well as up; you may not get back the amount you originally invested. This is not a consumer advertisement. It’s intended for Investment Professionals and should not be relied upon by private investors or any other persons. This video should not be taken as an invitation to deal in Legal & General Investments. Legal & General Investment Management One Coleman Street, London EC2R 5AA Registered in England no 2091894 Source: LGIM unless otherwise stated. ©2021 Legal & General Investment Management. All rights reserved. No part of this video may be reproduced in whole or in part without the prior written consent of Legal & General Investment Management.
Our job is not to find and pick the winners, because it’s too early for that. Our job is to build a portfolio that gives investors exposure to the growth of a whole new economy
Source: Bloomberg
Source: Morningstar Direct. Manager Research. Data as of December 2020.
Howie, what is LGIM doing to help investors contribute to a greener, healthier world?
Small- and mid-cap companies tend to be more vulnerable to economic disruption than their larger counterparts on the FTSE 100. So does it make sense to invest in these companies for income? And should small caps be paying out regular dividends at all? Citywire A-rated Chris McVey, manager of the Octopus UK Multi-Cap Income, makes a powerful case for them, arguing that the lower end of the market, in many cases, offers better dividend cover than the likes of oil majors and tobacco stocks. He highlights some of his favourite picks in his 78-stock fund and discusses how firms have the capability to see dividends rise to pre-pandemic levels. Over the past year, the UK Multi-Cap Income fund has delivered a total return of 44.2% compared with a sector average of 29.1%, with the yield standing at 4%.
Unlike other solutions that take an existing portfolio and make it greener by applying various ESG screens or excluding certain sectors, our sustainable ETF range targets companies that are going to contribute toward a green future. Our thematic approach is very different, in that it focuses on areas we expect to have a considerable impact on a sustainable economy. Those include energy storage, clean energy and, more recently, hydrogen.
Hydrogen production accounts for 2.2% of global greenhouse emissions - more than the airline industry. Why does it still play a major role o the way to a more sustainable future?
First and foremost, it’s important to recognise that hydrogen won’t be the sole driver of a clean energy revolution. You’ve got to look at it in combination with more established forms of renewable energy generation like solar panels and wind turbines. Those have a good foundation already, but hydrogen is still at a much earlier stage. It’s true that grey hydrogen isn’t the way forward to build a sustainable society. That’s why we focus on green hydrogen, which comes from renewable energy sources instead of fossil fuels. Electrification through clean energy and battery technology can get us most of the way to net zero, but green hydrogen is the key to lowering emissions in industries where electrification alone is not enough.
How do you go about selecting companies that can advance a green hydrogen economy?
Since the industry is changing so fast, we need to constantly adapt and evolve our classification system. Our job is to find companies that actively invest in this space and contribute to its growth. Those companies may be driving revenue already, but in many cases, they’re still building the foundations of the hydrogen economy. In other words, you can’t just go into Bloomberg or another classification system and say, what does the hydrogen economy look like? Instead, we target the entire value chain. For instance, when it comes to hydrogen generation, we’re looking at companies that provide things like membranes, catalysts or pump compressors. Ultimately, it comes down to utilising global data and working with a range of experts to carve out the universe.
Is that the same approach you take with your clean energy and battery ETFs?
Yes, absolutely. On top of external or proprietary data, we collaborate with dedicated experts who help us understand how those areas are going to develop and grow. And off the back of that, we build our investment strategies. Using clean energy as an example, we look at component suppliers, equipment manufacturers and utilities in the wind and solar power space. Many investors would call that active research. We ultimately end up with a selection of 50-plus stocks, which gives us a pretty focused high-conviction portfolio that is dedicated to investments into clean energy only. Often, you won’t find a lot of those companies in other funds. That’s something we pride ourselves on - finding unique opportunities that have a low overlap with traditional equity portfolios.
What kind of opportunities would they be?
We do invest in companies that more people might have heard of - Vesta, for example – but we also give a near-equal contribution to newer businesses that investors are less aware of. On the topic of clean energy, we’re talking about companies like SolarEdge or TPI Composites. Even though they’re US-based component suppliers, many traditional US equity portfolios don’t hold them. Our job is not to find and pick the winners, because it’s too early for that. Our job is to build a portfolio that gives investors exposure to the growth of a whole new economy. We’ve seen portfolios that focus on the big names everybody knows and probably already hold elsewhere. What that also means, though, is that you’re increasing concentration risks for multi-asset investors.
You’ve made the case for hydrogen and clean energy investments, but what’s the deal with batteries?
It’s all well and good if you can use the energy that’s generated from solar and wind power right away, but what if you can’t distribute it immediately? You need the capacity to store it. The demand for storage solutions has risen sharply over the past few years. The lithium-ion battery segment, for example, has a compound annual growth rate of close to 14%. Even so, the energy storage space is only at the beginning. It needs to catch up with the amount of infrastructure we’ve built to capture solar, wind and, of course, hydrogen power.
In a nutshell, what’s the investment case for storage technologies, then?
The more people utilise alternative energy sources, the more we need to invest in infrastructure that is able to store that energy. Take electric vehicles as an example: the hottest topic isn’t how fast the technology is evolving but how quickly we can get charging points, so electric vehicles become a means of transportation for the masses.
Are there any issues investors should be aware of?
The challenge is the cost of producing those new battery technologies. Even so, it’s worth noting that it has come down over the past few years and will continue to do so as scalability increases. Companies are more innovative in this space, whether it’s Samsung SDI or Tesla. That spells opportunity for investors.
LGIM’s Thematic ETF range incorporates three sustainable energy solutions:
L&G Hydrogen Economy UCITS ETF L&G Clean Energy UCITS ETF L&G Battery Value-Chain UCITS ETF
All of the funds are forward-looking and focus on building a greener economy. As Howie Li put it: ‘If you really want to make a change, you need to invest in sustainable growth themes. Just excluding specific sectors isn’t enough.’
Small- and mid-cap companies tend to be more vulnerable to economic disruption than their larger counterparts on the FTSE 100. So why invest in these companies for income? And should small caps be paying out regular dividends at all? Chris McVey, manager of the Octopus UK Multi-Cap Income, argued that alongside the growth prospects of smaller companies, small and mid-caps also offer better dividend cover than the likes of oil majors and tobacco stocks. The Citywire A-rated manager also highlighted some of his top UK income stock picks, as well as when he thinks dividends across small and mid-caps will recover to pre-pandemic levels. Over the past year, the UK Multi-Cap Income fund has returned 44.2% compared with a sector average of 29.1%.
Octopus’ McVey: Small- and mid-caps offer much better dividend cover
Green hydrogen uses renewable energy production. We can see throughout the entire value chain that it is produced on a carbon-neutral basis
Randeep Somel, M&G Climate Solutions fund
Octopus fund manager Chris McVey says small and mid-caps offer much better dividend cover than oil and tobacco stocks
2021 will be seen as the year UK equity income investors emerged from the darkness of 2020. After brutal, regulatory imposed dividend cuts, as we enter the fourth quarter, payments are being reinstated across the board and there are signs of continued growth. With dividends making up about half the return profile of the UK equity market, this is undoubtedly good news! Joining Amy Maxwell, Citywire Engage’s managing editor, to delve into the details of managing money in this extraordinary environment are two fund managers with decades of experience running UK equity income: Adrian Gosden and Chris Morrison, both Investment Directors at GAM Investments with responsibility for the fund management and investment strategy of UK Equities at the group.
by Amy Maxwell
Listen to the podcast in full here:
Dividends have increased significantly this year, but not everything is as rosy as meets the eye
While the rise of passive investment funds has been one of the stories of the last decade, it has not always chimed with ESG investing. To emphasise how influential passive has become, this type of investing has attracted $24.5bn (£17.8bn) in the last two years. In comparison, active equity funds have seen $5.4bn in outflows, a figure which would have been 211% higher at $16.8bn if ESG strategies were not factored in.
by Maria Azzurra Volpe
Cost considerations
Building blocks of recovery
Kneale has also identified opportunities among housebuilders. ‘The pandemic caused some extreme short-term volatility in the housebuilding market and put some stress and strain on their balance sheets, but it was temporary because the housing market rebounded so strongly,’ he said. ‘So, the businesses are in a stronger position than ever and have very cheap valuations, given the strength of the balance sheets and the robustness of their prospects.’ Alan Dobbie, who co-manages the Rathbone Income fund with Carl Stick, also views housebuilders as a compelling opportunity. The fund, which has returned 7.9% in the three years to the end of August versus a peer group average of 6.4%, is overweight the sector and has recently bought into Taylor Wimpey, adding to existing holdings in Persimmon and Bellway. While Dobbie is bullish on the sector’s prospects, he is also keeping a close watch on the economic picture. ‘Current global supply issues mean that the prices of some building materials are rising. At the moment, escalating costs are being more than offset by house price increases, but we are keeping a close eye on this,’ he says. ‘Also, the sector is highly sensitive to the UK economy. For now, trends in employment, interest rates and affordability are largely supportive.’ Overall, Dobbie feels dividends will form a large part of future total returns, especially now a Brexit deal has been agreed and the Covid-19 crisis has eased. This leaves the UK well positioned for a comeback, he believes. ‘The FTSE 100 trades on a prospective dividend yield above 4%. In a world starved of income, compared with parts of the bond market, we believe this is an attractive yield,’ he said. ‘We target businesses that pay an attractive and, importantly, growing dividend, especially if you believe, as we do, that dividends will form a larger part of future total return.’
One approach that is growing in popularity is utilising passives as building blocks for a wider sustainable portfolio. This is a trend spotted by Invesco multi-asset fund manager Clive Emery, who oversees five low cost risk-targeted portfolios within the fund giant’s Summit Responsible Range, comprising baskets of ETFs. To overcome the engagement hurdle, Emery works closely with the firm’s active business. ‘Passive and active will both have an important role and I think passive is evolving its approach. It is developing its proxy voting and engagement as much as possible,‘ Emery explains. ‘We can use that approach to optimise that non-financial criteria and that level of clarity and transparency in the approach that passives can bring to bear.’ Hampton believes forward looking products aligned to legislation such as the Paris agreement, which has year-on-year decarbonisation targets, are encouraging. However, she leans towards an active approach in her portfolios. ‘We prefer active approaches where the thematic exposure can be considered as part of the overall business and where valuation rigour can protect against concentration in companies where valuations are overstretched,’ she said. Some of the best performing passive strategies over 2020 were heavily tilted towards a particular theme within ESG. For example Invesco’s Solar ETF and WilderHill Clean Energy ETF delivered returns of 223% and 196% respectively. While some active funds also saw impressive returns, they remained someway off. The Guinness Sustainable Energy fund, one of the top performing clean energy funds over 2020, returned 84.1%. On top of this, the passive returns were also achieved at a much lower price for investors. The Invesco Solar ETF achieved its performance with an annual management fee of 0.5% compared to an ongoing fund charge of 1.99% for the Guinness Sustainable Energy fund, but this could come at a cost according to Hampton. ‘The difficulty for investors is knowing which passive managers have this capability and are delivering on it and which aren’t,’ she said.
As firms get back to business following the pandemic crisis, the resumption of dividend payments has created opportunities – but investors need to be wary of value traps. To put the bounceback into context, data from the Investment Association showed that after dividend payments slumped by 57% in the second quarter of 2020, they jumped by 61% in the corresponding period of this year, lifting them back to pre-pandemic levels. Although on the surface there are plenty of bargains on offer in UK blue chips, Citywire A-rated Brendan Gulston, manager of the top-performing Gresham House UK Multi Cap Income fund, believes it is important to be circumspect when stock picking. ‘We invest across the market spectrum, with half of the portfolio in small-cap companies,’ he said. ‘We don’t have to invest in a lot of blue chips and only invest in those companies where we see real opportunities, with GSK being an example.’ This mix of small and large has proved to be a successful approach. The fund Gulston co-manages alongside A-rated Ken Wotton ranked second in its peer group over the three years to the end of August, returning 38.5% against the sector average of 6.4%. His view is echoed by other fund managers, who also see dangers in employing a blanket approach to dividend-paying companies. While many believe this historic shift presents opportunities, they stress it is important to be selective when it comes to picking stocks and employ a blanket approach. Mirabaud Asset Management’s UK equity head, David Kneale, sees value opportunities throughout the FTSE 100 and the wider market, but is aware of the impact that underlying macro factors could have on certain sectors. ‘There are some stocks where I think investors need to trade with some caution,’ Kneale said. ‘For example, we are slightly wary of the resources sector, just because the earnings power of resources companies is entirely a function of the underlying commodity price, and forecasting underlying commodities prices is a real specialist art. ‘We are seeking to avoid businesses where the pandemic has created significant balance-sheet strain, because it’s going to take a couple of years for those balance sheets to be repaired.’ Stocks that pass Kneale’s stress test include wealth management firm St James’s Place, alternatives asset manager Intermediate Capital and fashion retailer Next, which he describes as ‘high-quality franchises with great management teams, structurally robust growth outlooks ahead and not particularly demanding valuations’.
Europe AUM Growth ($Bn)
Film: The Art of Engagement Undercover Selector Podcast Poll Fishing for the perfect allocation Structured CPD
Source: Morningstar Research, Date as of March 2021
We are avoiding businesses where the pandemic has strained balance sheets, because it’s going to take a couple of years for them to be repaired
David Kneale, Mirabaud Asset Management
As UK companies start to pay dividends again, and M&A activity picks up due to cheap valuations, a rare opportunity is opening up for investors, according to Adrian Gosden and Chris Morrison, managers of the GAM UK Equity Income fund. The UK currently stands at a 50-year low relative to global equity markets, although as Gosden points out, the return of dividends is the key factor as an investor. ‘Market valuations are theoretical in the end. If compared to the US or Asia, the UK seems undervalued but we’re seeing dividends come through, that gives us confidence. If we can get, for example, a 4% yield from the market, that compares to zero on cash in the bank or 0.5% on 10-year government bonds. So, that’s clearly good value and that’s why we are prepared to put clients’ money to work,’ he says. The backdrop to all of this, and the reason why the market looks so undervalued has been a number of terrible years for the UK market, with Brexit and the pandemic both taking their toll. ‘The pandemic caused problems globally of course, but the UK did particularly badly: the FTSE was down 10% in 2020, while the Nasdaq ended the year up 40%,’ Gosden says. The key reason for this is the fact that the UK market is so driven by dividends, which make up around half the return profile for the entire market. ‘Once you start slashing dividends, as happened in 2020, you’re eroding the enthusiasm for UK equities, which had already been weakened by Brexit, among international investors.’ The upside, though, is that as we move into the latter part of 2021, companies have improved their position to the point that they can return to dividends. ‘It’s particularly significant, we think, that the banking regulator sanctioned the return to dividends by that sector. This is why the newspapers are full of stories about the very strong return to dividends, and that’s a very positive story for UK equities as a whole,’ he says. Another key aspect that is boosting the market is high levels of M&A activity, an area from which Gosden and Morrison’s portfolio has benefited. ‘We’ve seen a huge amount of activity across all sectors: defence, supermarkets and healthcare are just three in the news recently. The reason why it has affected some of the companies we hold is that private equity investors tend to look at markets through a lens of cashflow, which is very much the approach we take. We look at companies that we believe can generate a lot of free cashflow relative to their market value, and we want them to pay dividends from that cashflow and also to reinvest in their businesses. The upshot of looking through a similar lens to private equity buyers is that we have seen some of the companies in our portfolio being subject to bids.’
fgfgfgfgfgfgfg
Important legal information The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.
The biggest driver for this is valuations, Gosden says. ‘Going back to 2016, the time of Brexit, we all know that sterling weakened, and UK markets became particularly unpopular among international investors. Domestic companies have been really out of favour, and trading at low prices, while in many cases these are good businesses, generating a lot of cash: the cost of debt-financing is incredibly low.’ Private equity buyers are pouncing on these low valuations, which has benefited Gosden and Morrison’s portfolio. ‘One of our software holdings, for example, was bid for at a 100% premium, which is very good for our clients and also beneficial because we can recycle that capital into new ideas. We have around 50 stocks in the portfolio and while the number of names has been reducing because of the bid activity in the market, there are still a huge number of companies out there for us to look at, and we’re having no problems at all finding new ideas,’ he says. Gosden notes that a number of excellent UK companies are trading on modest valuations relative to their peers elsewhere. ‘The biggest employer in the whole of Scotland is SSE, a power generator which is striding forward with renewables at a rate to match anyone in the world. It currently trades on around 16x earnings. Compare that to Orsted in Denmark, a wind power company that everyone loves, which is on 45x earnings. These companies are not identical, they have different amounts of debt for example, but there’s clearly a huge discrepancy in the price, this is not just the difference between 16x and 17x, it’s the difference between 16x and 45x,’ he says. Co-manager Chris Morrison notes that the fund’s wide spectrum and ability to seek out small and mid-cap stocks gives it a wide opportunity set. ‘Our starting point for the portfolio is approximately 50% within FTSE 100 names, with the remainder in mid and small caps – the FTSE All-Share alone has approximately 650 companies and within that universe there are some very good, fast-growing companies that can be picked up on good valuations.’ This is where the fund’s research-intensive process comes to the fore: ‘Especially down among the mid- and small-cap companies, we think it’s very important to visit them, and to sit and discuss with them where the next product is coming from as well as the company’s growth. This rarely makes it into the press: they are mostly focused on large caps. The fact that we have around 50% of the portfolio invested in the small- and mid-cap end of the market reflects the opportunities we have been able to find thanks to our hands-on approach,’ Morrison says. A recent example of the benefits this research can yield is truck shortages, which Gosden and Morrison anticipated after speaking to company managers. ‘We were able to buy into logistics companies that were on the front foot as the problems began, and that have been recruiting well. They’ve got new fleets with electric vehicles and are positioned to do well,’ he says. ‘In periods where markets are severely rattled, be it Covid-19, the 2008 banking crisis or the tech bubble, those are the opportunities to really add value when you’ve got to decide what you want to do for your clients. We believe now is one of those opportunities to make a real difference for our clients.’
The pandemic caused problems globally, but the UK did particularly badly: the FTSE was down 10% in 2020, while the Nasdaq ended the year up 40%
Adrian Gosden
by Christopher Johnson
The relative cost of passive funds and their lack of deep-dive research means fund selectors continue to see the value in thematic managers
Once a top guest at the income table, Brexit uncertainty followed by the pandemic dented appetite for UK equities. The statistics make for grim reading. UK equity income funds have gone through a record 14 consecutive months of outflows, totalling £5bn, according to statistics from the Investment Association. However, with the UK open for business again and inflation on the rise, could domestic equities reclaim their place as the cornerstone of portfolios in the hunt for yield? Smith & Williamson chief investment strategist Daniel Casali sees the success of the vaccine rollout and the fact the pandemic has not led to persistent macro weakness, as well as the resumption of dividend payouts, as making a strong case for equity income. ‘There has been a strong recovery in investment, limited bankruptcies or stress in credit markets and no significant rise in long-term unemployment,’ Casali said. ‘Considering this relatively healthy growth backdrop to earn dividends, it would be reasonable to include high-dividend stocks in a typical balanced portfolio.’ Casali does not believe clients in search of income should put all their eggs in the UK equity income basket though. ‘A more flexible “total return” approach, even for clients with high income objectives, is more style-agnostic and can deliver returns through the economic cycle,’ he said. ‘Income-paying stocks remain an important part of this, just not the entirety.’ Others are not convinced that yields will be able to hit the heights reached in 2018 and 2019 for a few years. Brown Shipley senior asset allocation strategist Cyrique Bourbon expects the move away from dividend-paying stocks to be imminent, especially when ESG is factored in. ‘At Brown Shipley, our portfolio on the equity side only invests in sustainable ESG funds or stocks. So, by design we aren’t going to invest in the likes of tobacco, oil and spirits, which are the ones providing dividends to shareholders.’ He also noted that income stocks have also been hit by the recent 1.25% dividend tax hike to fund social and healthcare spending. ‘Now, companies will be focused on total return of their shares, rather than having a dividend as a bigger proportion of their portfolio,’ Bourbon said. ‘At the marginal level, it would make more sense for people to draw down from capital than to pay the income tax on the dividend.’ This is not a view shared by Tam Asset Management chief investment officer James Penny, who sees a big mispricing opportunity in dividend stocks following the carnage wreaked by Covid, especially among mid-caps.
As the pandemic fog begins to clear, divi payers could be set to make a comeback
‘While the FTSE 250 is at elevated levels, the dividend paying stocks within those sectors are not as highly valued following Covid,’ he said. ‘Therefore, there's a price dislocation, there's an opportunity to invest in a mispriced asset within dividend paying stocks.’ Penny likes the SPDR UK Dividend Aristocrats Ucits ETF, which tracks the performance of certain high dividend-yielding equity securities in the UK. With inflation becoming more of an issue, he feels it is important to have some exposure to UK equity income. ‘Fixed income yields are negative, which causes a real problem for the billions of pounds invested in fixed income like in pensions. And what we have on the other side is income paid companies that are looking quite attractive because share prices are paying good levels of dividend yield,’ Penny said. Meanwhile, the Threadneedle UK Equity Income fund, managed by Richard Colwell, is widely held across portfolios managed by Tilney Smith & Williamson. ‘The fund invests both in core portfolio quality growth companies that can compound their cash flows and stocks that [Colwell] believes are undervalued with recovery potential,’ Casali said. ‘One of the fund’s investments is Morrisons, which has been the subject of a major bidding war between private equity giants.’
Considering the relatively healthy growth backdrop to earn dividends, it would be reasonable to include high-dividend stocks in a typical balanced portfolio
Daniel Casali, chief investment strategist, Smith & Williamson
For professional/institutional investors only Investing involves risk and an investment may lose value. All investors should consider the risks that may impact their capital, before investing. Concentration risk is the risk of amplified losses that may occur from having a large percentage of your investments in a particular security, issuer, industry, or country. The investments may move in the same direction in reaction to the conditions of the industries, sectors, countries, and regions of investment, and a single security or issuer could have a significant impact on a portfolio’s risk and returns. Investments in emerging and frontier countries may present risks such as changes in currency exchange rates; less-liquid markets and less available information; less government supervision of exchanges, brokers, and issuers; increased social, economic, and political uncertainty; and greater price volatility. This material and its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase, shares or other securities. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. The views expressed are those of the authors as of the date of publication and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. Wellington Management Europe GmbH, is authorised and regulated by the German Federal Financial Supervisory Authority (BaFin). Registered office: Bockenheimer Landstraße 43-47, 60325 Frankfurt am Main, German. This material is directed at eligible counterparties or professional clients as defined under the German Securities Trading Act ©2021 Wellington Management Company LLP. All rights reserved.
We believe that we are on the cusp of the next big tech wave and, in our view, we’re all poised to benefit. Innovation is constantly improving the lives of people across the globe, transforming our homes, schools, businesses, and daily lives. From digital payments helping to make finance more accessible; to the cloud and the Internet of Things (IoT) boosting efficiency everywhere from farms to factories; to artificial intelligence solving problems from auto safety to disease diagnosis – the world’s progress is grounded in innovation.
Dhananjay Phadnis, Lead Portfolio Manager
From Yash Patodia, portfolio manager; Anita Killian, CFA, portfolio manager; Bruce Glazer, portfolio manager; Michael Masdea, portfolio manager; Brian Barbetta, portfolio manager
Widespread tech innovation: Don’t miss the forest for the really big tree
Most investors can agree that environmental, social and governance (ESG) factors help determine a company’s prospects for long-term value creation. But how should we quantify the valuation impact of sustainable investing?
A long runway for growth
But the tech sector’s strong recent performance has some investors asking, ‘are we too late?’. In our view, the answer is ‘no’ and the innovation trend continues to offer a long-term secular opportunity. Though areas of the market currently have elevated valuations and the growth curves for some innovations may have accelerated or even plateaued, we think there is still a long runway for growth ahead.
Automation The rise of automation is often thought of in terms of factories replacing workers with more productive robots. After all, the world is not growing as fast as it once was – and we need innovation to offset the slowdown. But the opportunity this technology offers stretches far beyond factories and robotics. The hidden opportunity: Even the headline trend of automation increasing productivity has numerous underlying themes, including machine vision, 5G, the cloud, and AI to capture, transmit, store, and analyse an exploding amount of data. These opportunities are powered by many small companies across the globe, requiring investors to have substantial regional and industry expertise. But automation is also increasingly enhancing decision-making, adding convenience and efficiency to myriad consumers and businesses. Entertainment companies use AI to improve customer content choices, insurance firms automate their customer service, and advertisers use machine learning to automate customer engagement decisions, among many other examples. In fact, it’s estimated that AI has the potential to add up to US$5.8 trillion in yearly value to 19 industries (Figure 2) .
E-commerce The long-term growth of e-commerce has brought increased convenience and accessibility to new markets, companies, and customers – something that the COVID-19 pandemic has brought into greater focus. Some may think that we are in the late stages of this disruption and the opportunity has passed. But, in our view, there are still many areas for e-commerce to grow. The hidden opportunity: Areas like grocery delivery, digital payments (Figure 2), and sustainable packaging are still very early in their growth curves. For example, grocery delivery grew by 43% in 2020 but still has less than 50% market penetration . This growth was powered by demand that was orders of magnitude higher than companies had seen prior to the pandemic, offering them the scale to invest in this area. In some countries, like China, the community group buying model is expanding the market to previously untapped populations with community leaders buying in bulk and then distributing goods to the community . In addition, the companies enabling the cloud and digital transformation continue to have significant room to grow as e-commerce reaches new sectors and segments of society.
Bottom line
In our view, the key to investing in the long-term secular themes driving tech and innovation is to look beyond the hype and the news flows. We cannot stress enough the need to dig deeper into fundamentals and understand ‘the trends beyond the trends’ that can sustain growth for the long term. We think investors need the depth and breadth of research to harness the opportunities innovation creates beyond the traditional ‘innovative’ sectors. Tech progress has marched on through the pandemic, trade wars, and economic cycles. This pervasive innovation continues to disrupt industries and drive growth while, in our view, making the world a safer, more efficient, increasingly equitable, and overall better place. We believe the question should not be ‘Have we missed it?’ but rather ‘What’s next in innovation?’ and ‘How do we capture that growth?’.
We believe traditional exposures to technology are too focused on big tech names and lack the research depth to capture the full investment opportunity in the years to come
Source: Allianz Strategic Bond Fund C (Inc) GBP; Bloomberg, as at: 31/01/2021. Strategy inception date: 21/06/2016. Past performance is not a reliable indicator of future results.
Register now: 11 May, 8:30-9:30am
Electric vehicles There are several high-profile electric vehicle (EV) chains that are rapidly growing. But competition is heating up from many other companies, including established automakers transitioning from combustion engines to EVs. This is a long-term secular trend that is highly likely to persist while having an important impact on the environment and society as a whole. However, with elevated valuations, many investors are wondering how to access the opportunity it presents. The hidden opportunity: While the market focuses on the automakers, we’re more interested in the massive demand they’re driving for the numerous components these cars will require (Figure 1). For example, by 2030, electronics are likely to be 45% of total car cost . Regardless of who wins the EV war, we believe the companies supplying the picks and shovels of innovation – the companies mining nickel for batteries, the advanced chip manufacturers, and the AI firms, among many others — will likely continue to have a growing market for their products, including broader use cases beyond EVs.
Inside Fidelity: Sustainable engagement
Learn about Fidelity’s active engagement
Learn more about the Fidelity Sustainable Asia Equity Fund
Flora Wang, Co-Portfolio Manager
120
million
In China, one issurance company now has over 120 millions users on its app, where over 90% of claims can be handled via self-service.
Electric vehicles will need to grow by roughly 36% per year to reach the international Energy Agancy’s 2030 sustainable development goals
36%
We’re at the beginning of a multi-decade journey of massive disruption and we see opportunities for investors to access the tech driving this innovation.
Tech innovations like digital payments, AI, the IoT, the cloud, and digital transformation are still early-stage, in our view, and are disrupting every segment of the economy, extending beyond technology and health care. We believe traditional exposures to technology are too focused on big tech names and lack the research depth to capture the full investment opportunity in the years to come. As the world rapidly changes, we think investors’ tech exposure should evolve along with it.
In our new video, we explore the technologies behind the coffee bean, highlighting innovations such as farmers harnessing cutting-edge sensors in their soil to power new data insights from AI, and consumers using advanced digital payment methods to purchase a cup of coffee. Innovation has far-reaching impacts on consumers, businesses, and society as it creates opportunities for everything from the raw materials up through the supply chain to a technology’s numerous end markets.
Digging deeper to find hidden opportunities
We believe the key to accessing these opportunities is to take a targeted, active approach to try to identify the potential winners and losers of long-term structural innovation trends across industries. We harness our deep and broad research resources to discover underlying opportunities hidden beneath the surface of well-known tech names. In our view, this helps avoid trying to pick the winners of a megatrend and instead looks to invest in the many potential winners across the supply chain. As supply chains become more integrated, particularly in Asia, companies have many different end markets. For instance, microprocessors used to sell into one industry, but they now fuel countless other sectors. Critically, we think many investors are missing the full opportunity of the firms powering these long-term themes. Below are three examples of areas where some investors worry the market is overly exuberant, but that we think continue to have robust growth opportunities beyond the headlines.
Coffee farms using drones can decrease water usage by 30% - 50%, reduce chemicals by 90%, and lower planting costs by up to 90%
90%
Yash Patodia, portfolio manager Anita Killian, CFA, portfolio manager Bruce Glazer, portfolio manager Michael Masdea, portfolio manager Brian Barbetta, portfolio manager
Source: McKinsey & Company, “Notes from the AI Frontier,” 2018. | These estimates combine the value creation potential of various AI techniques across nine business functions and 19 industries. This analysis also shows what percentage that potential value represents of the overall value creation potential from analytics broadly. For illustrative purposes only. Actual results may vary from forward looking estimates.
1 Sources: Company reports, Wellington Management. Data as of 31 December 2020. 2 International Energy Agency, 2021. 3 Source: STiR Coffee and Tea International, September 2018. 4 Sources: IHS, Deloitte Analysis. 5 Source: McKinsey & Company, “Notes from the AI Frontier,” 2018. 6 Source: eMarketer, March 2021. Penetration in online grocery is defined as consumers who have used it at least one time, meaning there is even more potential for growth within the existing market. 7 Source: Pandaily, “Why is the Community Group Buying Model Surging in China?,” December 2020.
For more insights and opportunities in the tech and innovation sector (UK, Switzerland, Germany), please visit our tech and innovation page or contact a member of Wellington’s distribution team (UK, Switzerland, Germany).
Anita Killian, CFA Portfolio Manager Anita has over 30 years’ experience investing in the technology sector, with a specific focus on the semiconductor and IT hardware industries. Yash Patodia Portfolio Manager Yash has over 10 years’ experience covering the technology sector, specialising in the software and internet sectors. Bruce Glazer Portfolio Manager Bruce has over 25 years’ investment experience in the technology and business service sectors, with specialisms in the analysis of transaction and information processing and information technology professional services. Michael Masdea Portfolio Manager Michael has over 20 years’ experience in following industries characterised by rapid change and disruption. He is also the head of Wellington’s Investment Science Group. Brian Barbetta Portfolio Manager Brian has been covering the technology sector for over 10 years and has a particular focus on internet and video game software companies, undertaking research and managing investments across both public and private equities.
About the authors
Figure 1
4
5
Figure 2
6
7
Figure 3
Source: McKinsey & Company, “Notes from the AI Frontier,” 2018. | For illustrative purposes only.
LGIM Wellington Management WisdonTree
Film: Asset Allocation Thematic Winners Podcast Film: Sustainable Food Active vs Passive Top Fund Picks
Growing demand for meat and dairy due to population growth and rising incomes have exacerbated the impact of agriculture on the environment. But more sustainable food alternatives have developed significantly over the past five years. Consumer demand for vegan meat and dairy substitutes has also grown exponentially, especially in developed markets, due to the growing awareness of how dietary choices impact the world around us. Initial public offerings such as Beyond Meat and more recently Oatly have been successful, but massive levels of volatility have followed equally large waves of hype. Is the sector investable?
Yuko Takano, co-lead manager of Newton’s Future Food fund Stuart Forbes, co-founder of Rize ETF Jeneiv Shah, co-manager of the Sarasin Food & Agriculture Opportunities fund
The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations, you may not get back the amount originally invested. Past performance should not be seen as a guide to future performance. If you are unsure which investment is most suited for you, the advice of a qualified financial adviser should be sought. EdenTree Investment Management Limited (EdenTree) Reg. No. 2519319. Registered in England at Benefact House, 2000, Pioneer Avenue, Gloucester Business Park, Brockworth, Gloucester, GL3 4AW, United Kingdom. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association. Firm Reference Number 527473.
Thematic investments are making waves, not least due to their ability to turn structural shifts into compelling investment ideas. Instead of focusing on traditional criteria like countries, sectors, factors or regions, thematic investors follow a more innovative approach that enables them to make the most of upcoming trends. But there are challenges. Keeping track of the ever-increasing number of investment solutions in the thematic space is tough, particularly when there is no recognised classification. In fact, the complete absence of a nomenclature to organise the thematic universe represents one of the main issues investors are facing.
WisdomTree’s thematic classification brings order to chaos
The pandemic has brought social issues into much greater prominence, clearly highlighting the social inequities and injustices that exist within the current global financial and economic system
Takes the impact of human activities on the planet into account.
Those numbers are likely to grow, especially as interest in thematic investments started to gain momentum at the turn of the century. The first wave between 2000 and 2007 concentrated mainly on growth-oriented, diversified investments and strategies with a focus on environmental and sustainability themes. While the global financial crisis brought an abrupt end to the initial rise of thematic funds, things have changed in the last five years. Interest started to pick up again, notably around technological and demographic shifts as well as environmental pressures. As of 28 February 2021, $285bn were invested in Europe-domiciled vehicles across all three areas. Gannatti pointed out that the European thematic ETF market continues to be a small player in this global phenomenon. ‘On the global scene, Europe-domiciled ETFs are growing, but they remain both small against the total due to their later entry and the earlier influence of active managers in the space,’ he said. At the end of February this year, only $36.4bn were invested in 70 ETFs in Europe. In comparison, North America recorded 218 ETFs with $154.4bn in assets, while the number of thematic ETFs in the rest of the world - mainly Asia - amounted to 122 and a total of $23.7bn in AUM. Be it active or passive, it’s fair to say that thematic funds are on a roll - and with its classification approach, WisdomTree is aiming to give investors a head start into the thematic universe. As Gannatti put it: ‘Thematic investments always tell a story. Our goal is to take that emotional connection investors have with a given story and underpin it with facts that align with how an investor envisions building their broader portfolio.’
Environmental pressures
WisdomTree’s classification provides a holistic framework for selecting thematic funds, thus taking the general lack of a standard selection toolkit into account. - Diversified thematics if funds try to harness a large number of megatrends in one go. Those strategies tend to have a broader focus, which can make it harder to find sources of potential differentiation against a benchmark. - A specific cluster if they aim to harness multiple themes within one particular cluster. For example, a fund investing in robotics, cloud and cybersecurity would be classified as a ‘technological shifts’ fund. - A particular sub-cluster if strategies intend to invest in most of the themes within a specific sub-cluster. For instance, a fund investing in cloud computing, platforms, cybersecurity and fintech would be regarded as a ‘hyperconnectivity and digitalisation’ fund. - A theme if the investment strategy is focused on a specific, clear theme. ‘We help people understand ways in which they can look under the hood. Take artificial intelligence as an example: there might be seven or eight different strategies that are focusing on AI, but they’re certainly not all the same,’ Gannatti explained. ‘Some are going to have more semiconductors, others will be more focused on software, some are going to be selected by people, others by algorithms. We believe investors should first and foremost understand the theme, so they can decide if it’s in line with their way of thinking.’ WisdomTree’s classification makes sense of the rapidly rising amount of thematic investment strategies by providing tools to track performance and flows across regions and themes, enabling investors to identify trends quicker and more accurately. On top of that, the system creates peer groups that can be used to compare funds and benchmark their performance. ‘None of the thematic funds are really trying to give you anything similar to the main benchmark,’ Gannatti said. ‘Again, I’ll use artificial intelligence as an example because there are many funds in that space: it’s nice to know whether artificial intelligence is beating the Nasdaq-100 or not, but it might be better to come up with an average performance of all AI strategies. That might tell you more about how one specific approach to artificial intelligence is doing against other approaches that are aiming at the same thing.’
A guiding light in the jungle of thematic offerings
The thematic universe is expanding
UK equities overlooked
Ketan Patel, fund manager of the EdenTree Responsible & Sustainable UK Equity Fund
Philip Harris, fund manager of the EdenTree Responsible & Sustainable UK Equity Opportunities Fund.
To fill that gap, WisdomTree has developed a thematic classification approach that divides thematic investments into 35 themes across four main clusters.
Focuses on the consequences of globalisation and the changing geopolitical world order.
Geopolitical shifts
Concentrates on themes that originate from changes in population and society.
Social and demographic shifts
Refers to everything related to technology and innovation, including the impact they have on societies and economies.
Technological shifts
We want to remind people that even though technology certainly gets tonnes of attention, there are also demographic, social and geopolitical shifts,’ said Christopher Gannatti, head of research at WisdomTree Europe. ‘It’s important to remember that you can diversify your thematic exposure in all sorts of ways that aren’t necessarily linked to technology.’
WisdomTree’s Megatrends ETF range includes:
Battery Solutions | WisdomTree Europe
AI Value Chain | WisdomTree Europe
Cloud Computing | WisdomTree Europe
Cyber Security | WisdomTree Europe
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of April, 2021 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary. Before investing, consider the fund’s investment objectives, risks, charges, and expenses. You may obtain a prospectus or a summary prospectus on our website containing this and other information. Please read it carefully. This material is provided by Natixis Investment Managers UK Limited (the ‘Firm’) which is authorised and regulated by the UK Financial Conduct Authority (register no. 190258). Registered Office: Natixis Investment Managers UK Limited, One Carter Lane, London, EC4V 5ER. When permitted, the distribution of this material is intended to be made to persons as described below: In the United Kingdom: this material is intended to be communicated to and/or directed at investment professionals and professional investors only. In Ireland: this material is intended to be communicated to and/or directed at professional investors only. In Guernsey: this material is intended to be communicated to and/or directed at only financial services providers which hold a license from the Guernsey Financial Services Commission. In Jersey: this material is intended to be communicated to and/or directed at professional investors only. In the Isle of Man: this material is intended to be communicated to and/or directed at only financial services providers which hold a license from the Isle of Man Financial Services Authority or insurers authorised under section 8 of the Insurance Act 2008. To the extent that this material is issued by Natixis Investment Managers UK Limited, the fund, services or opinions referred to in this material are only available to the intended recipients and this material must not be relied nor acted upon by any other persons. This material is provided to the intended recipients for information purposes only. This material does not constitute an offer to the public. It is the responsibility of each investment service provider to ensure that the offering or sale of fund shares or third party investment services to its clients complies with the relevant national law. The above referenced entity is a business development unit of Natixis Investment Managers, the holding company of a diverse line-up of specialised investment management and distribution entities worldwide. The investment management and distribution subsidiaries of Natixis Investment Managers conduct any regulated activities only in and from the jurisdictions in which they are licensed or authorized. Their services and the products they manage are not available to all investors in all jurisdictions. Although Natixis Investment Managers believes the information provided in this material to be reliable, including that from third party sources, it does not guarantee the accuracy, adequacy, or completeness of such information. The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of the portfolio manager(s) as of the date indicated. These, as well as the portfolio holdings and characteristics shown, are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material. This material may not be distributed, published, or reproduced, in whole or in part. Mirova is affiliate with Natixis Investment Managers. MIROVA Limited liability company RCS Paris no. 394 648 216 Regulated by AMF under no. GP 02-014 59 Avenue Pierre Mendès-France, 75013 Paris. Mirova US 888 Boylston Street, Boston, MA 02199; Mirova US is a U.S.- based investment advisor that is a, wholly owned affiliate of Mirova. Mirova is operated in the U.S. through Mirova US. Mirova US and Mirova entered into an agreement whereby Mirova provides Mirova US investment and research expertise, which Mirova US then combines with its own expertise when providing advice to clients
I was working for a Belgian bank, KBC, at the beginning of my career, which also had an asset management business. They hired me as a financial analyst. We were working together with an Irish team and, at the time, there were a number of common projects. Ultimately, KBC asked me to move to Dublin to further develop their thematic strategies from Dublin. Towards the end of the 90s there was a lot of talk about technology and the ‘next generation’. In contrast, there was also growing awareness of demographic changes in the developed world and KBC had launched a fund focused on investments related to an ageing population. In addition, there were also strategies related to water and alternative energy, as well as financial themes like IPOs and buybacks. Although the strategies proved very successful, a lot of the growth came through performance rather than inflows. I witnessed competitors emerge and raise millions and sometimes billions with a shorter or less compelling track record than ours. In the mid-2000s, I went with a business plan to my senior management at the time which effectively said, ‘Listen guys, if you’re serious about becoming a world leader in thematic investing, we need to build a dedicated team around that’. So we built out a thematic team which very quickly began to focus purely on the environmental side of those themes. We launched an agricultural strategy, as well as a climate change strategy and a multi-environmental strategy. Fast forward 10 years and, one day, I received a call from Philippe Zaouati (Global CEO of Mirova), who I had met on several occasions. He asked me whether I’d be interested in joining the new sustainability branch of Natixis, which a few months later was renamed Mirova. I accepted and moved to Paris.
Jens Peers CEO, CIO & Portfolio Manager Mirova US
By Jens Peers
‘We try to find companies that… are among the first movers within their peer group. Then we then try to identify the laggards. And finally we connect the dots. There's no magic formula to it, unfortunately.’ ‘Instead of being a satellite allocation, I felt that such an investment strategy could have its place in the core of an investor’s portfolio.’
For me, it was an opportunity to broaden out from pure environmental investing, especially given I had past experience managing demographic strategies as well. The way I saw it, there were so many opportunities to bring a range of themes together in a single portfolio fund. Instead of being a satellite allocation, I felt that such an investment strategy could have its place in the core of an investor’s portfolio. However, for this to work it would require the support of a large team of analysts and portfolio managers covering a wide range of areas beyond just environmental equities. This was exactly what Mirova had to offer in addition to the global reach of the Natixis organization as a whole.
As a company whose ‘raison d’etre’ is about creating a positive impact, we’ve been forced to ask ourselves whether the rise of more mainstream managers positioning themselves on the topic of ESG is a good or a bad thing. I think on the one hand it's positive because it helps raise awareness for companies like ours. Even though many of these companies may have much deeper marketing pockets than we might. But just like the water strategy I was managing back in the 2000s, at the time it probably would not have grown as much as it did if it wasn't for some big competitors spending a lot of euros bringing attention to water as an investment opportunity. That said, there’s a big risk of ‘greenwashing’, even though I very much dislike the term. It is important to make sure that people understand what the different degrees or different approaches are to ESG so that they can compare apples to apples. And that's something I feel is still missing in the market. Do we need to evolve our business model as a result? The way I see it, historically 5-10% of investors wanted to be more sustainable than the average. As the rest of the market begins to move in their direction, they may feel the need to become increasingly more extreme. For those clients we have a range of solutions, from Amazon rainforest preservation strategies, ocean clean-up strategies or land degradation strategies.
To learn more visit: www.im.natixis.com/uk/esg-sustainable-investing-solutions
It is likely that the composition of tomorrow's stock market indices will look very different than they do today. In the years to come, there’ll be less demand for fossil fuels, continued demographic change and ever more scrutiny of environmental, social and governance-related responsibilities. Companies will need to adapt their business models and practices if they are to stay competitive. And some are already making great strides in the right direction. Jens Peers, CEO & CIO of Mirova US and manager of the Mirova Global Sustainable Equity Strategy, reveals how nearly two decades of thematic and environmental investing have helped hone his skills in identifying the companies that are transitioning towards the future.
What interested you about Mirova?
We do a lot of research. We talk to people, we talk to companies. We make sure we're surrounded by good people in our own company as well. We're one of the few houses to have a dedicated ESG team that’s been together for so long. What we’re looking for is the speed at which various companies are transitioning their businesses toward the future. We see a world where the demand for fossil fuels will be in decline. It’s a world undergoing continued demographic change, be it population growth or urbanisation. And it’s a world where corporate governance and corporate social responsibility come under increased scrutiny. We try to find companies that have identified trends such as these early, and that are among the first movers within their peer group. Then we then try to identify the laggards. And finally we connect the dots. There's no magic formula to it, unfortunately.
You launched Mirova’s Global Sustainable Equity Strategy in 2013. How do you go about identifying suitable investment candidates for the strategy?
Can you provide examples of companies that have been successful at doing this in the past?
You’re the CEO of Mirova US and living in Boston. Where did it all start for you?
The coronavirus crisis has highlighted how funds focused around themes such as technology can thrive in the right (or wrong, depending on your perspective) circumstances. But tech is far from the only theme popular among investment firms. Among Citywire’s 18 thematic sectors, Ecology, Infrastructure and Healthcare strategies are those best represented (see Graph 1) in fund of fund, mixed asset and model portfolio data provided by Morningstar and gathered through our own research. The top 10 most popular thematic funds among wealth and asset managers (see Graph 2) drew a total of £8bn in net flows over the last year, and £13bn over three years. All but one – the Polar Capital Healthcare Opportunities fund – individually achieved net sales over both time frames. The Polar Capital Global Technology and Pictet Global Environmental Opportunities funds alone accounted for more than half the new money among the group over both time periods. However, they are not the strategies held in the most portfolios: that honour falls to the Polar Capital Global Insurance fund.
fgfgfgfgfgfgfg fgfgfgfgfgfgf
We think that thematic strategies have a place in client portfolios. Thematic strategies are often managed by experts in a particular sector or area, so they are well placed to take advantage of emerging trends or sectors, which are overlooked by the wider investment community because they are hard to analyse. We hold the Polar Global Insurance fund because of the interesting attributes it brings to client portfolios. The strategy is dedicated to the insurance sector and since inception in 1998 it has delivered strong compounded returns. The team of Nick Martin and Dominic Evans, try to find the best quality insurance companies globally, focusing predominantly on those in the non-life insurance industry. The fundamentals for non-life insurance companies tend to be defensive, as insurance is often required by law. This provides a source of demand even through recessions, and means the strategy can exhibit a counter-cyclical profile and behave differently to other funds in portfolios. The team focus on high quality specialist insurers with strong underwriting credentials, and because the industry as a whole does not meet its cost of capital, the best underwriters tend to take share from weaker ones. The best underwriters also tend to be compounding machines and deliver steady book value growth.
Alastair Dean, director at Stonehage Fleming Investment Management
AB International Healthcare an active bottom up stocking picking fund with the manager and analyst team focusing on businesses rather than falling in love with the science. They aim to identify good fundamental business attributes rather than trying to predict exceptional one off binary events that occur with low probability e.g. success with one specific drug. The focus is on an attractive return on invested capital profile and the reinvestment of profits back into each business they own. This philosophy has been developed over a number of years by the manager, Vinay Thapur, who has a background in academia but has also spent considerable amount of time as an analyst and investment manager. Vinay is supported by a six strong healthcare specialised team and this strong fundamental sector specific research is a key attraction of the fund. More generally on thematic strategies, it really depends on the theme itself and if this is consistent with our house view but also the construction of each product and in particular any over exposure to any individual stocks.
FP WHEB Sustainability Fund
Ninety One Global Environment Fund
AB International HC Port
Pictet - Global Environmental Opps
Smth&Wllmsn Snlm Artfcl Intllgnc Fd
FP Foresight Global Real Infras Fd
Polar Capital Healthcare Opps Fund
Polar Capital Global Technology Fund
Legg Mason IF ClearBridge Glb Infras Inc
Polar Capital Global Insurance Fund
Sanlam (4)
Casterbridge Wealth (6)
Sanlam (5)
Liontrust (5)
Casterbridge Wealth (3)
Canaccord Genuity (3) Brooks Macdonald (3)
EQ Investors (2) Kingswood (2) Cazenove Capital Schroder & Co (2)
Most held ESG funds
Hawksmoor Investment Management (3)
Threadneedle UK Social Bond
The below chart shows how many vehicles hold each of the 10 most widely-held ESG funds, along with a toggle to show the minimum number of asset management and wealth management firms that own them. By scrolling over the boxes you can also see which firm or firms hold each fund in the most portfolios.
