Ethical investing has become increasingly popular among investors in the past three to five years, causing a wealth of funds to launch or rebrand as sustainable in an attempt capture the inflows. But not every fund should be sustainable, according to Mike Fox, manager of the Royal London Sustainable Leaders Trust, despite him claiming that they should just five years ago.
The FE fundinfo Alpha Manager has run the Royal London Sustainable Leaders Trust since 2003 with George Crowdy and Sebastien Beguelin joining as co-managers last year.
Over 10 years the fund made a total return of 215.2%, ahead of the average IA UK All Companies fund (100.1%).
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Fox said, since he started, he has “spent most of my time being looked at like the crazy guy and being asked ‘why would you want to invest like that?’”.
Today though, the manager has seen a lot of “hot money” moving into this area because “it is more commercial now than it has ever been.”
Indeed, data from Calastone revealed that environmental, social and governance (ESG) products have been the main driver of equity inflows. This trend has been going on for several years and shows no sign of slowing.
The latest Fund Flows Index (FFI) found that last month “ESG funds continued to beat the rest of the pack”, with £641m being added to ESG equity strategies and £598m flowing out of non-ESG portfolios.
Below, Fox explains that not every fund should be focused on ESG and why it is irresponsible management to rebadge a product as sustainable.
What is your stock picking process?
It is a three-part process. First, to find the most sustainable companies in the world. Secondly, within those to find the most financially attractive. And then thirdly, using engagement as the tool to improve the sustainability of the companies we invest in.
What have been the best and worst performers in the past year?
Novo Nordisk would have been one of the best returning stocks last year. Its base business is treatment for diabetes and it has developed a drug which helps with obesity, which has a lot of untapped potential, particularly in the US.
Obesity is quite interesting, because not everyone assumes it actually is a medical condition, but it actually is.
In the past year the share price has risen 62%.
A stock that gave us problems last year was Adidas, that would have been one of the biggest losers.
It’s share price is down 18.2% in the past 12 months but it had a specific situation because it came out and said that it was not going to be taking any supplies from Xinjiang because of the persecution of the Uighur population, so the Chinese government delisted it from all the main commercial websites in China. As sustainable investors we were cheering them on, but it was the worst performer.
The fund has struggled in the past 12 months, why?
We have a very defined view of the future, lower carbon, more digital, a healthier and safer planet and that leads us to a very specific sector choice: lots of healthcare; technology and lots of chemistry.
We don't have any oil and gas or tobacco or mining and we think that's a very logical choice, but there'll be periods of time where markets think different from it. It's inevitable, and we're in one of them now.
ESG funds have taken a hit recently. Have investors panicked?
Investor buying has slowed definitely but if current trends persist this year it could be a good test of investors mettle in these portfolios. Some people might decide they’d rather be in something that’s a slightly different profile. Hopefully most investors will remain, but we’ll see.
Is it right that managers are rebranding their funds as sustainable?
No, not at all. It is not responsible of them. ESG a set of beliefs ultimately, it’s a purpose and it’s a passion. That's different from it being an investment variable.
I think you must have the culture and the operational structure to make it work. And it's not to say that no one can do it, but I think simple rebadging and changing the criteria of a fund significantly underestimates the complexity in running a sustainable franchise.
Do you think that managers are experiencing a lot of pressure to appear ESG-focused?
There’s huge pressure to have an ESG presence for all managers and I don’t think it's helpful.
I have respect for any manager that says that ESG isn't used in their process and it's not something that is relevant to them, because you know what you're getting and it's honest, people will find their place with that.
The problem is it's become so commercial and there is almost a belief that a non-sustainable fund is at mortal risk. I think that that needs to get dialled back a little bit and it could happen this year if oil does well and sustainable funds don’t perform as well. Then it might calm down a bit, which probably is no bad thing.
Why has ESG become so commercial now?
Year after year sustainable funds were at the top of performance tables, which dispelled the myth of sacrificing performance for principles.
I always thought that was a strange idea. I was raised that if you did the right thing you got a better outcome. The fund management industry was the only place that told me if I did the right thing, I’d get a worse outcome. It's philosophically and logically weird.
There’s also just a greater awareness of the severe sustainable issues. In my generation you didn’t question how you could get a pair of jeans for £10 it was just a thing of wonder whereas now I meet people from my generation and older that are just as passionate about ESG as the millennials.
Should every fund be sustainable?
Around five years ago, we were saying all funds will be sustainable funds, but we never really meant it. We were agitating, you know, like when you need to get somebody's attention and you say something, just to kind of be controversial.
Now we hear people say that all funds should be sustainable and we’re like, I'm not so sure about that. We should not take over the whole industry.
What do you like to do outside of fund management?
I really like impressionist art and going to the galleries in London.
I personally think that there're huge misconceptions about what fund management is and people who come into it think it’s all mathematical and economics. It's not it’s arts. You can look at how a painting is constructed the same way as an investment idea.