While managers often required to wear several different hats, what happens when you have two strategies with completely different benchmarks and approaches?
This is the challenge for Lazard Asset Management’s Barnaby Wilson who oversees the £74.9m Lazard Managed Equity and the $19.4m Lazard Global Sustainable Equity funds.
The Lazard Global Sustainable Equity fund was originally launched as an offshore mutual fund but has recently become available for UK retail investors launching in the IA Global sector in June, where Wilson’s Lazard Managed Equity fund operates.
He said the differences between the sustainable fund and his other strategy come down to several things, namely risk and benchmark diversification, opportunity set and long-term outlook.
Running a bottom-up stockpicking process for both, Wilson said that all stocks fall into three ‘buckets’: “those whose products and service contribute to making the world more sustainable, those who offer a product or service which doesn’t particularly tie into making the world more sustainable or not; and, are those that offer a product or service that is damaging from a sustainability perspective”.
With his sustainability managers’ hat on, Wilson said his stockpicking universe really only consists of companies in the first bucket.
This means that the Lazard Global Sustainable Equity fund will look entirely different from the MSCI AC World benchmark as it’s “unlikely” that the fund will be invested in energy, utilities or real estate for example.
“These don’t really have any stocks that we find interesting from a sustainability and a financial productivity perspective,” Wilson said.
Although both funds invest in what Wilson called “compounders” – high-quality businesses which can sustain and grow profits over long periods of time – Lazard Managed Equity picks from a different stock selection.
Greater deviation from the benchmark in the sustainable fund can ultimately lead to more risk relative to the benchmark, according to Wilson, especially over shorter time frames.
But this short-term risk is counteracted by a longer investment outlook, Wilson explained, as many sustainability themes can take years to develop.
“We think that the offset to that [risk] is when think about these businesses where the sustainability drivers are really contributing to generate profits over time,” he said. “We would expect them to be delivering a higher level of return to their investors over a longer time period. So that’s the kind of trade-off that you take.”
This year has seen greater interest in sustainable and ESG (environmental, social & governance) strategies as more attention is paid to companies’ environmental and social responsibilities during the coronavirus crisis.
Having worked on the sustainable fund for two years now Wilson said investors considering sustainable or ESG investments in their portfolios for the first time need to make sure they understand why the manager of such a strategy believes his investments are sustainable and will generate a better return.
“I think that they need to be careful that the manager is not just chasing the latest theme that’s hot and investing in some momentum behind sustainability rather than the business fundamentals behind the companies that they’re buying,” Wilson said, adding that a manager needs to be able to vouch for a company’s sustainability credentials rather than just relying on third-party providers of ESG and sustainability data.
“In our experience, a lot of that data is very low quality and quite difficult to interpret and there’s really no substitute for having analysts who really understand this and the industry in which it operates and really digging into these ESG and sustainability issues for each company,” he said.
On the Lazard Global Sustainable Equity fund Wilson has three major categories to assess the sustainability of a company.
The first, ‘human capital’, assesses diversification and health and safety policies. The second, ‘natural capital’, assesses the resources and company supply chains. And thirdly, corporate governance.
Ultimately all companies in the portfolio must offer a product that facilitates a transition to sustainable practices and minimise the negative effects that the external business makes.
Wilson said that there is a high saturation of sustainable companies now available meaning that you need to find what separates one company from the rest.
“The problem for us with some of these companies is that we don’t see over the long run what is their competitive advantage to sustain a high level of profitability,” Wilson said.
One company which has this edge and sustainability drive is German flavour and fragrances company Symrise, which was founded in 2003 has now become involved with adding the texture, smell and taste to vegan, meat-free alternative foods.
“One of the themes that has been focused on a lot over the past few years is the development of plant-based protein and the most obvious companies involved in that are Beyond Meat, and the sustainability drives there are very clear,” Wilson said.
“It’s healthier to eat plant- rather than animal-based proteins and it’s also much better for the environment.”
What gives Symrise this desirable market niche, said Wilson, is that “for many years that business has been driven by the need to produce food that tastes nice but has less sugar, salts or fats in it".
“So there is already this healthy driver, but ultimately we think that if plant-based proteins become very widespread in terms of options – and we think that that will happen – this creates a whole new range of products that will need even more flavours in them,” Wilson said.
“And so we think that that’s an opportunity to play, what we feel is a driver that is very much driven by sustainability trends, and that [the] company will generate a far higher level of profitability.”
Over the past two years, the offshore Lazard Sustainable Equity fund - co managed by Louis Florentin-Lee - has made a total return of 20.39 per cent over the past two years, outperforming the MSCI AC World index (19.32 per cent).
Performance of fund vs benchmark since start of data
Source: FE Analytics
The onshore Lazard Global Sustainable Equity Select fund has ongoing charges of 1.14 per cent.