Launched in February 2001, this £91m fund is managed by Simon Clements, who is assisted on the portfolio by co-manager Peter Michaelis.
Mr Clements explains: “The fund’s objective is to deliver equity returns with lower volatility than the overall equity market, as measured by MSCI World. The portfolio [comprises] sustainable global equity stocks, but we also use defensive instruments, such as cash and hedging options. The idea is that it delivers capital growth in line with equity markets but with lower volatility, and there should be protection when equity markets fall.”
Mr Clements took over the running of the fund in 2011. The main change he made was introducing the ability to use options and cash in the portfolio, thereby providing protection.
He reveals: “The absolute growth fund starts with a universe of about 3,000 companies that we can invest in, and then we narrow it down to those we think are more sustainable. From that set of companies we pick those we feel have good fundamentals.”
The sustainability of the portfolio’s holdings are measured by Alliance Trust’s “sustainability matrix”, which Mr Clements refers to as the “cornerstone of the sustainable future process”. He notes: “Each company is given a rating both for its product or service and also for the management quality. So if it’s an A, it’s a company that we feel has a sustainable product or service.”
A rating of A, B, C, D or E is assigned to the company, with the manager only investing in companies with an A, B or C rating. “An E is where the cost to society far outweighs any sort of benefit, so heavy pollutant-type industries – such as coal – and tobacco are an E,” he says.
“Each company is also given a management quality rating between one and five. We invest in those companies with better-quality management in terms of the way they are managing the impacts of environment, social and governance on their businesses.”
Turning to the use of protection in the fund, Mr Clements explains that he can hold up to 30 per cent in cash in the portfolio and up to 50 per cent in options.
He continues: “Our macroeconomic view decides how much of the fund is protected. With protection, if markets go up the portfolio is not going to go up as much, but if markets go down the portfolio will not go down as much.”
In spite of this layer of protection, the fund sits at level six on a risk-reward profile of seven levels. Meanwhile, it has ongoing charges of 1.63 per cent.
The fund has outperformed in the past year, which Mr Clements attributes to a couple of factors. “Performance over the past 12 months has been a combination of strong stock selection, and also the fact that the amount of protection the fund has is at the lower end of the scale, allowing it to benefit from stronger equity markets,” he says. “The fund has also benefited from equity markets moving higher during the period.”
In the year to November 5 2014, the fund returned a modest 3.94 per cent to investors, according to FE Analytics, against the IMA Flexible Investment sector average of 3.20 per cent. The absolute growth fund has performed better across five years, delivering 63.21 per cent against the sector’s 43.14 per cent.
Mr Clements notes that one of the best-performing holdings in the portfolio has been Brazilian company Kroton Educacional. He says: “It is the leader in Brazil in tertiary education. It provides long-distance learning for people who want to improve their standard of education. [Kroton] provides an important option for people who want to improve their lives in an economy where large amounts of the population are moving out of poverty and into the middle class.
“Education is the number one thing that emerging market consumers want to spend their money on. It’s our play on education and the growing middle class in Brazil. It’s been the best performer in the fund during the past year.”
EXPERT VIEW
Juliet Schooling Latter, research director, Chelsea Financial Services
The fund has a broad and diversified remit, with more than 70 per cent of the portfolio invested in global equities. The fund adheres to a strict investment process focusing on undervalued companies with good business fundamentals that meet the team’s rules for environmental and social responsibility. The fund has produced steady returns over the long term, posting top-quartile returns across both three and five years.
