Columbia Threadneedle’s UK Ethical Equity Fund saw an overhaul last year when the group decided to re-launch it as the UK Sustainable Equity Fund in July
Along with the name change, the benchmark was shifted to the FTSE All-Share, and the aim of the mandate was refocused on not only to investing in companies that deliver positive sustainable outcomes, but to outperform the UK stock market as a whole.
Here, Sonal Sagar, currently co-manager on the fund alongside James Thorne but soon to be sole lead manager, answers ESG Clarity’s questions on how the fund looks now, and the sustainable investing landscape as a whole.
The fund is top quartile over one and three years. It has returned 3.5% over the past three years amid the Investment Association’s UK All Companies sector loss of 2.9%, according to FE fundinfo.
Why was it decided to relaunch this fund in this format last year?
This was a legacy fund, based on exclusions and best-in-industry names. When I inherited the fund, I wanted to move the philosophy beyond this, to focus on positive inclusion of companies that have a positive sustainable outcome. At Columbia Threadneedle, we use the term ‘outcome’ rather than ‘impact’ for equity investments, as we think true impact is hard to achieve as a marginal buyer of a stock. We want to be owners of the future cash flows and returns of products and services that have a positive outcome.
How does this fund differ from other sustainable funds?
Our ‘USP’ is that we look at a company’s net revenues – i.e. looking at both positive and negative business activities and investing in those companies with a net positive position – a higher hurdle, which align with our sustainable investment themes, based on the UN Sustainable Development Goals.
Do you use screens? What are you looking for in a company?
I look for three things in an investment: a net positive sustainable outcome, good or improving return on capital and good management of internal environmental, social and governance risk factors. I look for investments across all UK companies, and exclude those with an inherently negative sustainable outcome, for example tobacco, fossil fuels, alcohol and weapons. The portfolio is quite concentrated, with less than 60 names.
As an all-cap fund, can you explain the different entry points? Ie examples of recent new additions that are small, medium and large?
Last year, we participated in the IPO of Argentex, a £200m company providing foreign exchange services. About 90% of its business comes from small- and medium-sized businesses – Argentex as a financial services provider is key to their growth and broader economic development. Some of the smallest companies are the most innovative with strong IP and disruptive qualities and being an all cap fund allows me to capture the alpha as these companies mature and grow.
On the larger side, we initiated a position in Reckitt Benckiser in 2019 because it is exposed to some of the faster-growing categories within the household personal care and personal health sector and boasts strong brands with robust market positions. RB is a strong sustainability name; its products reduce preventable disease, enhance hygiene and improve child nutrition. We believe its ESG risk management practices have also improved over the last few years.
What are the major themes running through the fund?
The fund has a strong quality/growth bias. I am attracted to companies with viable business models, strong market positions and clear competitive advantages and of course
, a positive sustainable outcome. The health, wellbeing and food security theme is the largest weighting at the moment, which is timely given the pandemic. As the picture becomes clearer around how the government is going to stimulate a recovery, I expect the regeneration and infrastructure theme to grow, as eco-friendly building and green infrastructure projects are announced.
Did you make any changes to the fund in Q1 volatility? What about in the Q2 rebound?
The fund is defensively positioned which has helped performance during what has been an extremely volatile environment the last few quarters. I continue to feel that volatility is here to stay with many unknowns ahead. We have not changed the shape of the fund materially but have been opportunistic and added to names which have looked oversold but whose business models remain intact.
Our engagement activities have focused on pertinent issues including the resilience of firms’ operating models and balance sheets, workforce safety and management, and board oversight.
Has your engagement with portfolio holdings and potential portfolio holdings changed since Covid-19 impact?
Apart from moving to virtual meetings, no, not a lot. In the first few weeks of lockdown, engagement focused on company resilience and strength of balance sheets as well as health and safety of workers – but this has always been a key tenant of our engagement activities; coronavirus has brought the ‘S’ of ESG to the fore, and investors are increasingly focusing on how companies treat their workers.
Do you think the debate that responsible investing does not necessarily means a sacrifice of returns has gone away?
I hope so! This fund has a strong track record vs the benchmark and UK peer group and has performed very well throughout the recent market turbulence. I strongly believe that you don’t have to sacrifice returns to do good through your investments.
How do you see the ESG investing landscape evolving over the next five years? How will Columbia Threadneedle play a part in that?
The ESG landscape has been evolving rapidly over the last few years and will become more mainstream. I feel over time capital allocation decisions by companies will be more ESG and sustainability focused be that in alternative energy or health and wellbeing. Companies will also begin to disclose more thorough and consistent data, which will increasingly feed into traditional valuation models.
See also: – Can ESG outperformance continue?
I also see a greater shift away from looking at ESG funds as negative exclusion based to positive inclusion focussed – something this fund is already embodying. We have a well-resourced and growing Responsible Investment team, and the work I do will increasingly be informed by the themes they are working on. In the next few years ESG and sustainability will become a more normal point of analysis when reviewing an investment, and increased disclosure will help to drive the standards up and importantly deliver a better future.