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:
- Style: We are growth investors. Most of the excluded stocks are in mature (often-declining) industries such as tobacco.
- 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.
- Structural growth: Companies with sustainable products tend (although are not guaranteed to) offer longer-term structural growth.
- Small and mid-cap: We focus on small and mid-cap companies. Most of the excluded stocks are large or very large.
- 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