Stockholm (NordSIP) – As previously reported by NordSIP, Catella, the Swedish financial advisory firm and asset manager with specialist expertise within property, fixed income and equities, recently upgraded its Catella Reavinstfond equity fund to a sustainable fund entitled Catella Sverige Aktiv Hållbarhet. The fund offers a concentrated portfolio of carefully selected Swedish shares with the potential to obtain better results than the Swedish equities index and invests with a focus on large and medium-sized businesses, now with the additional dimension of doing so according to UN PRI principles.
Below, we reproduce a just-published interview (June 8) with portfolio managers Anna Strömberg, Henrik Gripenvik and Henrik Holmer (appearing in Catella’s most recent newsletter), in which they discuss the fund’s central philosophy of actively seeking out companies that integrate sustainability into their overriding conception, instead of simply opting out of non-ESG compliant companies:
The fund goes back to 1998, but was this year given a new name and a new direction under the management of Anna Strömberg, Henrik Gripenvik and Henrik Holmer. Anna Strömberg, who for several years worked at Nordea as a manager of Swedish and global equities, has recently been involved with sustainability issues and, with Catella Sverige Aktiv Hållbarhet, it is now time for her to realise these ambitions.
“What attracted me was working with both fund management and sustainability, and really seeing it make a difference to the portfolio. Not building up a separate structure, but having it fully integrated. It’s very exciting to see what business opportunities are being created,” says Anna Strömberg.
When the fund managers sat down at the drawing board, they thought about how sustainability issues could be handled in a way that creates value for unit holders. Sustainability issues themselves are usually about risk and external analysis, but the team chose to focus more on opportunities and business models; on finding companies where sustainability is a value driver for the business, and selecting those that benefit from sustainability.
Henrik Gripenvik, who has worked as an engineering analyst and covered many Nordic companies, believes the trio complement each other well.
“I have worked a lot with fundamental corporate analysis. The interest of the investor community has gradually increased, as has that of the companies themselves, and these are issues that are discussed on a regular basis,” he says.
Henrik Holmer, who has been at Catella since 2005 and was part of the old team on Catella Reavinstfond since 2010, describes the old fund as a traditional Swedish equity fund.
“The fund started in 1998 and has performed well, except for the last three years when it has underperformed index and we felt it was time to re-profile it. It felt natural to add sustainability to the fund’s profile,” he says.
Anna Strömberg describes how the team approaches the concept of sustainability from three different angles: what they invest in; what they do not invest in; and the internal efforts of the companies.
“We want to be clear about what we are investing in, and this is about positive selection – seeing the opportunities and identifying companies that are driven by sustainability and that make money from their sustainable products and services. But it is also important to be clear about what we do not invest in. For this reason we have chosen to exclude controversial products and services that contrast with our sustainability philosophy. Then we constantly monitor the internal sustainability efforts of these companies,” she says.
Can you tell us more about companies that have sustainability as their business objective?
“We mainly seek out companies whose entire business concept is driven by this type of issue. Take Finnish Outotec, which we have in the portfolio: this is a business that helps mining companies to extract metals from mined ore, and might not seem an obvious sustainability case,” says Henrik Gripenvik, adding:
“But we think it has many relevant sustainability themes, such as energy efficiency and reduction of greenhouse gas emissions. Outotec helps its customers to improve their productivity by extracting more metal from the same amount of mined ore, while consuming significantly less natural resources in the form of water and electricity, and even less chemicals. This feels like a very interesting sustainability angle. And it’s also an extremely exciting case from a purely financial perspective, in a mining industry where all its customers have been cutting investment for a number of years, which means that much of their equipment is old and there is a great need for investment.”
But do we also have companies that focus purely on sustainability?
“Yes, technology is often the key to more effective solutions. One example is Nibe, whose entire business concept is to sell energy-saving solutions that replace oil, gas and electricity for heating. Looking at the types of global challenges we face, Nibe has very intelligent answers to a number of them. Tomra is another – its entire business is based on recycling metals. These are both examples of pure sustainability companies that clearly have sustainability at the heart what they do,” says Anna Strömberg.
The fund management trio point out that they look for ‘upside potential’, which means one or more factors that the market is not yet fully aware of and that could increase the company’s share price in the future. There are no simple tricks here, and it requires the gathering of knowledge. A focus on sustainability can improve the gathering of information, and provide greater accuracy. A share with strong sustainability aspects but a high valuation is not given room in the portfolio on its sustainability alone.
You have a group of companies that are particularly attractive on sustainability as a clear value driver. Can you give some examples of companies that might not have an obvious sustainability angle?
“We can take the example of Sobi. The pharmaceutical industry has received a lot of criticism for high prices that mean not everyone can have access to vital drugs. Sobi’s research is in rare conditions, known as orphan diseases, that affect a small part of the population but with sufferers often needing lifetime care,” says Henrik Holmer, and continues by describing what this means for Sobi.
“Their largest field is in haemophilia, where there is an enormous care need. Seventy-five percent of those affected by haemophilia do not have access to the care they require. Sobi has a drug that it sells in the United States and has now started rolling out sales in Europe and in emerging markets. Its sales are growing rapidly and were up 85 percent in the first quarter compared to final quarter of last year. The interesting thing about Sobi from a sustainability perspective is that it has chosen to set the price of its product based on a patient perspective instead of, like most pharmaceutical companies, charging the highest price possible. A lower price level means that it also reaches more patients. An effective product that both helps the patient and reaches its patient group.”
But you have also chosen to opt out of some companies.
Sustainability in the name brings an obligation. “When we say we have a sustainability fund, we have the ethical stance of our clients to consider. We draw the line at controversial products that we believe have no place in a sustainability fund. These are tobacco, alcohol, pornography and gambling companies. We have also chosen to exclude fossil fuel production and extraction, but not service companies. Oil service companies can really fit into our fund if they have a solution that makes production and extraction more environmentally friendly and efficient,” says Anna Strömberg.
Henrik Holmer points out that, in Sweden at least, this does not mean that a large proportion of companies are therefore excluded.
“From the entire index, around 3.5 percent are excluded. We do not have much oil production, but there are some gambling companies and a tobacco company.”
We do not believe there is any cost to excluding these companies, but nor do we believe we generate value through a strategy of exclusion.
The stock market has risen quite a lot since the start of this year, and last year was strong. Shares have been fairly strong since 2011, and then there was brief dip. Is the market expensive?
“You could say that multiples are currently quite high. There is a lot of political uncertainty and also some doubt about where the economy is heading. We have chosen to keep a slightly higher level of cash in case there is a slump,” says Henrik Gripenvik.
He adds, though, that there are also things to suggest the opposite.
“We are in a phase where we are beginning to see higher earnings estimates for many companies. We have not seen positive adjustments to market expectations for a long time. We are only at the beginning of this phase so it may be stronger than we think.”
In recent years there has been greater momentum in small caps than in larger companies. Hasn’t this fund historically had more large caps than medium-sized companies?
“Small companies have performed better for a relatively long time, and have a premium valuation compared to large caps. But earnings growth has also been stronger among small companies. The fund has increased its investments in small companies, as well as in companies in the rest of the Nordic countries. This increases the choice of companies with a sustainability angle, but it is important to be selective,” says Henrik Holmer, pointing out that it is the share price potential that that directs the holdings.
