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Help! I’m being repressed!

Sustainability sceptics are usually concerned about investment ‘restrictions’. However, all active investors impose restrictions on their investments, it’s called an investment process. A zero restriction global fund would be a 4,000 stock portfolio. All fundamental, valuation and technical analysis is a form of restriction.

by Craig Bonthron, Investment Manager, International Equities

Statistically a company only has a 1% chance of getting into our client’s circa 40 stock portfolio. We impose lots of ‘restrictions’ on our investments and our three dimensions of sustainability analysis are a valuable part of our alpha generating process.

But what about absolute investment exclusions? These are slightly different because we have fixed them in stone based purely on a view that the products or services are not appropriate for our fund. We concede that there are always ethical grey areas and we find that sceptics like to create extensive ‘what if’ scenarios to prove a point.

Some investors disagree with our view on particular excluded products (for example, nuclear power) while others believe that some of these companies are great investments, regardless of the negative product impact (we get this a lot with tobacco).

For us these are moot points for the following reasons:

  1. Style: We are growth investors. Most of the excluded stocks are in mature (often-declining) industries such as tobacco.
  2. Stock picking: There is an opportunity cost to any investment. Whilst some excluded stocks will inevitably outperform the market, there are others that will probably outperform by more. We back ourselves to do better on average than the average excluded stock.
  3. Structural growth: Companies with sustainable products tend (although are not guaranteed to) offer longer-term structural growth.
  4. Small and mid-cap: We focus on small and mid-cap companies. Most of the excluded stocks are large or very large.
  5. It’s a big world out there: Excluded stocks account for less than 10% of our global universe meaning there are 3,600 other stocks to research.

But some ESG and sustainable funds don’t exclude any stocks, so why do we?  We exclude stocks because when we asked our clients what they wanted from a sustainable fund, they made their views very clear. It’s not rocket science, they simply do not want to invest in certain products or services and leaving open the option to do so is disingenuous. Great we said… not only do we agree with your views, those stocks aren’t our bag anyway.

We love our exciting, growth orientated world of stock picking opportunity, so whatever you do, don’t make the mistake of thinking we’re being repressed!

Global Sustainable Equity Fund process diagram

The products we explicitly exclude from investment in the Kames Global Sustainable Equity Fund at the outset are related to tobacco, weapons, nuclear power, gambling, animal welfare, adult entertainment and genetic modification.

Picture (c) – Craig Bonthron, Kames Capital

Past performance is not a guide to future performance. Performance shown is net of charges and gross of tax. Outcomes, including the payment of income, are not guaranteed. Opinions expressed represent our understanding of the current and historical positions of the market and are not an investment recommendation or advice. Any securities and related trading strategies referenced may or may not be held/used in any strategy/portfolio. Any Opinions and/or example trades/securities are only present for the purposes of promoting Kames Capital’s investment management capabilities. Sources used, both internal and external, are deemed reliable by Kames Capital at the time of writing. This document does not constitute an offer or solicitation to buy any funds mentioned, and no promotion or offer is intended in jurisdictions other than those where the fund(s) is/are authorised for distribution. For investors in Sweden – Kames Capital investment Company (Ireland) plc (the “Company”) is a UCITS collective investment scheme registered with the relevant regulator in each jurisdiction. The Prospectus, Supplement, Key Investor Information (KIID)  and reports for the Company together with relevant information and details of paying and information agents, as required by local regulators, are available free of charge and links to them may be found at www.kamescapital.com Kames Capital Investment Company (Ireland) plc (KCICI plc) is an umbrella type open-ended investment company with variable capital, registered in the Republic of Ireland (Company No. 442106) at 25-28 North Wall Quay, International Financial Services Centre, Dublin 1. Board of Directors: M Kirby and B Wright (both Ireland), A Bell (UK). KCICI plc is regulated by the Central Bank of Ireland. Kames Capital plc is the investment manager and promoter for KCICI plc. Kames Capital plc is authorised and regulated by the Financial Conduct Authority. All data is sourced to Kames Capital unless otherwise stated. The document is accurate at the time of writing but is subject to change without notice. Data attributed to a third party (“3rd Party Data”) is proprietary to that third party and/or other suppliers (the “Data Owner”) and is used by Kames Capital under licence. 3rd Party Data: (i) may not be copied or distributed; and (ii) is not warranted to be accurate, complete or timely. None of the Data Owner, Kames Capital or any other person connected to, or from whom Kames Capital sources, 3rd Party Data is liable for any losses or liabilities arising from use of 3rd Party Data. Kames Capital plc is authorised and regulated by the Financial Conduct Authority.
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