Also key to risk management is our fundamental analysis. We carry out thorough bottom-up fundamental research and analysis where we look at firms in terms of multi-year revenue compounding, the culture of innovation, financial resilience, predictability of revenues, consistency of margins, cash flow, and having a strong balance sheet. These are all considerations as part of the risk management process. ESG analysis is carried out as part of this too, a process which includes using third party data providers such as MSCI, Sustainalytics and various others. Where we see severe ESG risk we won’t invest. As an example, we saw that a plastics ban was coming from the European Union so any company which was heavily invested in plastic we saw as particularly risky and we sought to avoid.
We are not sector constrained and whilst we do look at sectors as part of our portfolio construction the main thing for us is end market. As an example, we can look at an information technology sector company like Autodesk. Autodesk makes software products primarily for architects and engineers. Therefore, this holding is governed more by what is happening in the construction sector rather than IT. Another example, Teladoc, which offers video conferencing GP appointments is classified as IT even though its business is healthcare.
When it comes to geographical diversification, we do follow our benchmark as we are a global fund.
Across the portfolio we will typically hold between 50 and 70 stocks. We currently have 58 holdings which ensures that we have a broad asset allocation approach.
We have three different position sizes as part of our portfolio construction process – these are small, standard and substantial. Our small position size is between 0.25% and 1% of total assets whilst standard exposure is 1.5% to 2% and substantial position represents anything above 2%.
Our small position sizes are typically for companies that may be less liquid or at an earlier stage of their life cycle. As a result, we wouldn’t want to have a larger position. Our standard position is the initial size for most of our investments when they enter the portfolio. Finally, for those holdings in which we have a strong conviction, these are given substantial position. These are the companies where we see a superior combination of predictable revenue growth, financial strength and valuation upside. It typically represents 30-40% of the overall portfolio.
IFAM: What do you see as the key trends in ESG? Are you hearing particular issues being raised by clients?
AS: One trend which I’ve certainly noticed is an increase in scrutiny – especially an increase in third party certification and legislation. We work hard to provide our customers information about what we do so that they can tell their clients. We produce an annual sustainability report and quarterly reports on impact and voting and engagement which all support transparency. We’ve also achieved third party certifications on the strategy including the ISR label from France, Febelfin from Belgium and FNG-Seigel from Germany . We consider this as important as we want to give our clients confidence that we are who we say we are, and we do what we say we will do. After all we don’t have anything to hide.
One of the biggest trends in this space is the push away from fossil fuels. Many clients are coming to us expressing the strong view that they don’t want to have their money invested in fossil fuel companies. I think this trend will continue. Taking this into account, we have been working with P1 Investment Management and the University of Oxford – as co-founders of Net-Zero Carbon 10 (NZC10). The NZC10 target helps funds better align investment policies with carbon-neutrality, not just emissions reduction. We’ve already had some successes. For example, we started to engage with Microsoft about becoming net zero carbon based on scope 1,2, and 3 last year. We asked the company if it would look to become carbon neutral and we were delighted that Microsoft announce earlier this year that the company would be carbon negative by 2030 and have offset all the emissions ever produced by the organisation by 2050. That is an incredible achievement on Microsoft’s part. I will be monitoring progress of this commitment over the next few years.
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