Lessons from 20 years’ performance in sustainability
How two decades in charge of Royal London Sustainable Leaders Trust has shaped Mike Fox’s views on Sustainable investing.
November 2023
Disclaimers go here disclaimers go here disclaimers go here disclaimers go here disclaimers go here disclaimers go here disclaimers go here disclaimers go here disclaimers go here
Welcome to another edition of SOURCE, a publication that provides an in-depth analysis of select funds and their managers. This time, we talk to Mike Fox, Head of Sustainable Investments at Royal London Asset Management, and delve into his many years experience tracking down alpha.
investment profile
sector overview
fund manager q&a
ESG
Home
This is a marketing communication for professional investors only. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested.
The backlash against sustainability funds is an opportunity to showcase their consistent long-term performance, says Royal London Asset Management’s Mike Fox.
It’s time to counter the anti-sustainable agenda
Mike Fox is celebrating 20 years at the helm of the Sustainable Leaders Trust this November. He is currently Head of Sustainable Investments at Royal London Asset Management and co-manager of its Royal London Sustainable Leaders Trust, World and Diversified trusts; plus Royal London Global Sustainable Equity and Sustainable Growth funds Before Royal London Asset Management, Fox was head of equities at Co-Operative Asset Management and he brought his investment strategy from Co-op, when Royal London Asset Management acquired it in 2013. Key to Fox’s longevity has been his ability to outperform indexes and peers over long periods. Citywire currently rates him second out of 134 managers for five-year returns in the UK Equity All Companies sector. After exploding in popularity during the pandemic, sustainable investing has been quieter recently, suffering fund outflows amid the rise of anti-environmental, social and governance (ESG) campaigners. The latter have seized on a dip in performance in some funds, as evidence that ESG-related projects are not always in companies’ best economic interests. However, Mike Fox, Head of Sustainable Investments at Royal London Asset Management, is using this backlash as an opportunity to showcase the long-term competitive advantage sustainable investing brings. ‘Sustainability is still in early stages of adoption by investors,’ says Fox. ‘Some people are using the backlash as their moment to say, “aha, we told you this was not worth doing”. But that’s great for us, because people will realise it is not yet as embedded as they thought. Two years ago people thought “everyone does sustainable investing now”. There was a perception we had no competitive advantage.’
Source: cccc
Manager bio here
Meet the manager
Two decades of experience
Fox is celebrating 20 years as manager of Sustainable Leaders this year. He is one of few fund managers in this field with such a tenure, allowing plenty of time to hone his approach. Royal London Asset Management’s Sustainable investment process combines detailed due diligence, independent analysis, and a four-part scorecard approach. This framework has not changed much in the last two decades, but the detail analysed has upgraded massively, says Fox. ‘20 years ago, few companies reported anything on sustainability,’ says Fox. ‘Few thought about their roles in broader society. Much of the work then and even until fairly recently, involved a sniff test (a simple check to see if an investment felt acceptable). ‘Now, the sniff test can still work but we can back this up with granular data such as corporate disclosures to generate more accurate insights. It’s like printed maps versus sat nav. The principles are the same but the accuracy and clarity differ hugely. It allows much better judgement of the company and clearer alignment with portfolio construction.’ Fox believes corporate behaviour has improved massively, compared to 20 years ago because ‘daylight is a disinfectant’. However, some people still underestimate the impact such disclosures can have. ‘Take the banking sector,’ says Fox. ‘Five years ago, you’d struggle to get any disclosure about their loan books. Now you can find out all about them and talk to management to understand them better. That’s a profound change and it accelerates companies behaving better. ‘Some sectors still struggle to integrate sustainability, such as the extractive industries. Many metals and other commodities are in difficult places - it’s a challenge to get them out at scale - which makes embedding sustainability factors harder. But these tend to be quirks of nature and history, rather than companies not wanting to adapt.’
Despite these improvements, many companies do not pass Royal London Asset Management’s four scorecard tests well enough to justify investment. The first test looks at whether each company’s products and services play a positive role in society. For example, in a pharmaceutical firm, is it giving fair access to its drugs? Is it creating new, innovative drugs or just ramping up prices on existing ones? Next, the team asks whether companies act responsibly in managing all material sustainable-related issues. ‘These factors steer us towards companies assisting the transition to a cleaner, healthier, safer, more inclusive society and therefore to better growth and margins, and less risk and cyclicality,’ says Fox. The third and fourth tests assess whether the company is creating value for shareholders; and whether its stock is reasonably priced. In fixed income, Royal London Asset Management also builds in a focus on credit diversification, and bondholder protections.
Deep investment process
Investment profile
The investment process then moves to fundamental analysis, which is the harder part, says Fox. ‘We don’t rely on third-party research providers for ESG or financial data,’ he says. ‘There’s too much value from reading the source with your own eyes. So our analyst team do this time-consuming work themselves.’ Fox also takes a high-conviction approach. ‘Your 48th best idea won’t be as good as your fifth,’ he says. ‘So we balance allocating better ideas with acknowledging the world isn’t certain, so some breadth is good.’ Typically, top 10 holdings make up 30-40% of allocations in Royal London Asset Management’s equity funds, with the rest comprising another 30 names. ‘That gives the most bang for your buck, but with appropriate diversification’ says Fox. ‘The opportunity set continues to grow - you can find firms that pass the sustainability tests in a range of areas.’
Detailed fundamentals
Head of Sustainable Investments, Royal London Asset Management
Mike Fox
‘Granular data such as corporate disclosures help to generate more accurate insights. It allows much better judgement of the company and clearer alignment with portfolio construction.’
'Your 48th best idea won't be as good as your fifth, so we balance allocating better ideas with acknowledging the world isn't certain - some breadth is good.'
Although Royal London Asset Management always excludes some areas, such as tobacco and armament manufacturing, Fox says his team finds positive screening - choosing companies that do some good rather than avoiding bad ones - is more relatable and intuitive. ‘Negative screening can be divisive because my ethics and yours can be very different, plus you can end up investing in not-so-good companies,’ he adds. However, as nothing is perfect, he also takes a pragmatic approach in looking for companies with attractive financial returns, but with unrecognised and improving stories; or who have sustainably neutral products but are still good corporate citizens. Subtle approaches like these have helped Fox hone his performance across 20 years. It’s a track record that is all too rare in his industry.
Why use positive screening?
Past performance is not a guide for future performance. Royal London Sustainable Leaders Trust. The Trusts are authorised unit trust schemes. The Manager is RLUM Limited, authorised and regulated by the Financial Conduct Authority, with firm reference number 144032. For more information on the trust or the risks of investing, please refer to the Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.com. Issued in November 2023 by Royal London Asset Management Limited, 80 Fenchurch Street, London, EC3M 4BY. Authorised and regulated by the Financial Conduct Authority, firm reference number 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.
Frank Talbot
Sustaining an edge
Video title here
Two decades of outperformance
Mike has generated one of the strongest track records in UK All Companies over his tenure. Over nearly 20 years as lead manager he has come close to doubling the returns of the average active manager and index. This has been achieved by consistently managing assets in a sustainable fashion over that time. He has the longest track record in sustainable investing of anyone in the peer group. What was very much a niche style of investing at the start of his career has ballooned into the mainstream, his investment discipline hasn't been the detriment of returns and they have been remarkably consistent. In the past 10 calendar years the Royal London Sustainable Leaders Trust has finished the year in the top decile seven times, a further time in the second decile and in the bottom half twice in 2016 and 2022.
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Maecenas hendrerit volutpat ultricies. Praesent et nisi sit amet leo facilisis porttitor. Integer posuere, sapien vitae lacinia accumsan, nisi ex suscipit lectus, a congue augue est facilisis massa. Curabitur commodo nisi posuere nibh egestas, et convallis lacus blandit. Nulla ac nunc sem. Mauris sodales, felis ut suscipit accumsan, lectus dolor consequat odio, et aliquam quam tortor sed felis. Sed pretium ipsum non augue finibus ultricies. Aliquam pharetra vehicula sem, ac volutpat urna vestibulum sit amet. Aenean eget placerat magna. Donec posuere quis dolor ac consequat. Nam sit amet hendrerit dui, id porttitor purus. Aliquam pulvinar efficitur eros, nec elementum erat posuere at. Quisque ullamcorper auctor neque, non volutpat nisi euismod id. Curabitur facilisis eleifend arcu vitae consequat.
Sector overview
Source: Citywire Discovery/Morningstar as at 31 October 2023. Performance is total return in GBP, calculated net of fees, gross of taxes, bid to bid, ignoring the effect of initial charges and with income reinvested at the ex-dividend date.
Head of investment research, Citywire
This outperformance has been achieved with less volatility than the average active manager and comparable to the index. While at its worst during the credit crisis the maximum drawdown was again less than the average manager and comparable to the benchmark.
Risk metrics long-term
Royal London Global Sustainable Equity since launch
Mike's investment philosophy has translated well into global equities following the launch of the Royal London Global Sustainable Leaders in February 2020. Global equities is second only to US equities as the hardest area to outperform in with less than 20% of managers doing it over a rolling three year basis for more than a decade. But that hasn't stopped Mike and his team outperforming the global equity index since launch and more than double the gains of the average fund in Morningstar's Global Large-Cap Growth Equity category. This is no mean feat given some of the headwinds ESG has experienced in that time. 2020 and 2021 were both excellent for the fund and even in the more difficult 2022 the fund restricted losses to less than the average. While year to date the fund has returned 15.6% compared with 12.4% for the MSCI ACWI GR USD and 11.4% for the average fund.
Source: Morningstar as at 13 November 2023. Performance is total return in USD, calculated net of fees, gross of taxes, bid to bid, ignoring the effect of initial charges and with income reinvested at the ex-dividend date.
When looking at all the sectors Mike is active in, we can see that there is a consistency of quality, particularly over longer-term time frames. Managing sustainable mixed asset portfolios has also been successful for the group, with the manager in the top percentile within the Mixed Asset - Aggressive GBP sector over five, seven and 10 years for performance generated on the Royal London Sustainable Growth Fund and Royal London Sustainable World Trust.
Total return rankings for Mike Fox in all sectors
Source: Citywire Discovery as at 31 October 2023. Total return ranks are calculated net of fees, gross of taxes, bid to bid, ignoring the effect of initial charges and with income reinvested at the ex-dividend date based on managers tracked by Citywire in each peer group globally.
Past performance is not a guide for future performance. RL Sustainable Leaders Trust, RL Sustainable World Trust, RL Sustainable Diversified Trust, RL Sustainable Managed Growth Trust, RL Managed Income Trust The Trusts are authorised unit trust schemes. The Manager is RLUM Limited, authorised and regulated by the Financial Conduct Authority, with firm reference number 144032. For more information on the trust or the risks of investing, please refer to the Prospectus or Key Investor Information Document (KIID), available ia the relevant Fund Information page on www.rlam.com. RL Global Sustainable Equity Fund The Funds are sub-funds of Royal London Equity Funds ICVC, an open-ended investment company with variable capital with segregated liability between sub-funds, incorporated in England and Wales under registered number IC000807. The Authorised Corporate Director (ACD) is Royal London Unit Trust Managers Limited, authorised and regulated by the Financial Conduct Authority, with firm reference number 144037. For more information on the fund or the risks of investing, please refer to the Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.com. Issued by Royal London Asset Management Limited, 80 Fenchurch Street, London, EC3M 4BY. Authorised and regulated by the Financial Conduct Authority, firm reference number 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.
Mike Fox track Record in UK All Companies
Royal London Asset Management’s Mike Fox talks about how he plans to maintain performance for another 20 years.
Keeping pole position
Since you started managing Royal London Sustainable Leaders trust in 2003, it has outperformed repeatedly. How?
Sustainable Leaders hasn’t outperformed every year over the last 20 years and it won’t in future. However, across that period, there’s a clear distance between the index and peer group. That's not automatically evidence of good process, but it's a start. Was it due to our analysis of each company’s sustainability performance, or traditional financial analysis, or both? That’s hard to deconstruct, but I believe that those 20 years are enough to say that there must be something there - especially given much of the first 10 of those years was a value-driven market, before it reverted to growth for the next 10. I think that outperformance over different cycles adds credibility. We focus on psychological aspects of fund management and the battle between short-term emotions and long-term thinking. Most bad events happen over the short run, most good over the long run. This supports the view that investment returns come from time in the market, not timing of the market. You can react to the news every day - recessions, wars, government deficits, all sorts. We avoid that. In sustainable investing, the longer your time horizon, the more certainty you feel you have about a positive outcome. Each generation tends to live a cleaner, healthier, safer and more inclusive life than the last. Invest behind that and you will have a happy experience as an investor. We also don’t try to forecast what will happen in markets. We simply observe, rely on our research process, put conviction in our selections and have the patience to let them work.
It’s easier because the amount of information you get now helps with research and the opportunity set is greater. However, the speed of market narratives hitting you through the media makes the behavioural aspects harder. Those factors net off. The general shift in focus from long-to-short-media in the investment industry is counter productive. 20 years ago, your main source of information was long-form media, when you had time to read and absorb it. Many of our best ideas over the years have come from 400-page books. Suddenly, you're one of three people in the investment community that have read it and that gives you an advantage. Short-term media, soundbites and tweets don’t always add anything to your knowledge base or investment decisions, and sometimes can encourage short-term thinking. Dialling the noise out - that’s the mentality you need. It’s also a challenge to help people understand that, like all investment styles, sustainable investing will have good years and not-so-good years. We have to help people understand that the key factors behind our investing haven’t changed, no matter the cycle or what themes come and go.
Is that process easier to implement now than 20 years ago?
Fund manager Q&A
There’s been too much simplistic thematic investing, which sometimes allows managers to do more superficial things compared to using bottom-up research. This has led them more towards more speculative investments, which hasn’t worked out well. It’s not symptomatic of anything in sustainability - it’s just bad investing. At Royal London Asset Management, we can talk about themes, but we want the securities to pick the themes, not the themes to pick securities. That makes for better investment decisions. We get things wrong sometimes too, but it tends to link to operational, not thematic, issues. Our maxim is ‘’If you find an exciting area, buy the dullest company in that space.’ Many investors have gone for exciting, early-stage companies, not remembering that most of an equity’s value arrives when a company is 10 years old and onwards. My generation needed a decade to recover after the 1999 tech crash. We learned that you need to be aware of the longevity of the companies you own. The next generation has had to learn that lesson themselves.
What other challenges does sustainability investment face?
The desire to decarbonise is still a massive opportunity. Politics may change, but I don’t sense any societal shift away from that. There’s still a big misalignment between where assets are invested and where they need to be to achieve net zero. Another theme is how generative AI will change the certain parts of the working world. Some of the hype is probably right. It could profoundly impact our lives - for example, we could be entering a huge productivity boom. An additional potentially transformative opportunity is obesity drugs. Obesity causes a tremendous amount of disease. Reducing that will massively impact the health service, with many potential corporate winners and losers. You could even solve climate change if everybody ate 20% less!.
What are the most exciting current opportunities?
80% of what we do has not changed in the last few years, but we have slightly moved out of areas that are more impaired by the return of higher interest rates. Also, our investable universe of companies with suitable sustainability credentials continues to increase gradually. That means more opportunities for us to look at. Financials are potentially interesting because the lending industry is becoming more sustainably aligned; plus those companies are benefiting from higher interest rates. The biggest curiosity is who could win or lose from obesity drugs. For example, if people take obesity drugs and reduce their intake of greasy or sweet foods and alcohol, that will be a detriment to the companies who make them. Others, such as surgical providers, could benefit. For example, many people who can’t be operated on because of weight issues could suddenly become patients. People struggle to forecast this area. However, we’re watching it closely.
What changes have you made to portfolios recently and why?
'We focus on psychological aspects of fund management and the battle between short-term emotions and long-term thinking.'
At Royal London Asset Management, we can talk about themes, but we want the securities to pick the themes, not the themes to pick securities. That makes for better investment decisions.
If you want outperformance, you have to by definition own what outperforms. However, the technology sector will not outperform every year. So what’s interesting is whether your process enables you to evolve into other areas. At great sporting teams like Barcelona or Real Madrid, managers and players come and go, but there’s an infrastructure that regenerates. Our equivalent is our investment process, which allows us to evolve. Innovation could come from many areas such as healthcare and consumer, as well as tech. There is so much more to invest in beyond tech and no need for it to dominate.
How much do your sustainable funds rely on their high weighting to tech stocks for performance?
