Mike Fox, who took over as manager of the £432m Royal London Sustainable Leaders Trust in 2003, says he is interested in “two types of companies” that prioritise environmental, social and governance (ESG) factors.
“Companies that are providing products or services with some kind of social benefit,” he outlines “and companies that are showing leadership in their industries in ESG management.”
“You tend to find that if you invest in innovative, growing companies that manage their ESG issues well, then you end up with quite an attractive universe of companies to invest in.”
What that means, he explains, is “we tend to invest in quite a lot of innovative and growing companies and industries, so [those in the] healthcare and technology [sectors]”.
He elaborates: “Healthcare and technology are great examples of sectors where there are lots of companies we’ve invested in over the years that have created their own end markets through the development of products with some social benefits.
“Equally, on the other side, what’s quite important is what we avoid. So companies that don’t fit into that innovative growth with a social benefit [mould] include [firms in the] commodity sector. We avoid oil and gas [and] we avoid mining – and clearly that’s been very beneficial over the past few years.”
Unsurprisingly, the manager is a bottom-up stock picker and tries not to take a macroeconomic view.
“It’s not that we ignore that [macro view],” he notes. “But if we’re picking companies right, they’re going to do well whatever the economic cycle and that’s the kind of mentality we have.”
Mr Fox recalls that when he joined as fund manager the portfolio had a negative screening approach, with an emphasis on ethical holdings. But he felt this approach was “out of touch” with the development of ESG in the corporate world.
“We did move from that ethical mindset to more of a sustainable mindset which is really more about positive screens,” he says, “so looking for companies with a social benefit [and] industry leaders, rather than negative screening and avoidance. [Although], we still do some of that, so we won’t invest in armaments and tobacco under any circumstances.”
Investors in this fund will note its placement on a risk-reward scale at level five out of a possible seven, with an ongoing charge of 1.53 per cent applying to the A income clean share class.
The fund’s outperformance of its peer group, the Investment Association UK All Companies sector, indicates the manager’s approach has worked. FE Analytics shows that in the 10 years to August 5 it returned an impressive 148.28 per cent, compared to the average 97.52 per cent return of the sector. Its performance has held up in the shorter term too, delivering 17.75 per cent in the past 12 months, against the sector’s average return of 11.54 per cent.
He concedes the fund’s outperformance is as much down to what is not in the portfolio as to what stocks have made it into the fund.
“The [IA] UK All Companies sector allows up to 20 per cent of investments to be overseas, which we do use. So stocks that have been particularly strong for us over [the last year] have been Apple, Amazon, Starbucks – they’re three names that stand out. The US element of the portfolio has been very strong,” he explains.
“And then on the other side of that, avoidance of BP, Shell, BHP Billiton, Rio [Tinto] – that’s been very beneficial as well. It’s been that dual effect that’s led to the strong performance.”
Mr Fox admits he did, however, talk to coffee chain Starbucks about its tax arrangements before buying into the company. He says: “It’s a difficult debate because companies are fully meeting the tax requirements of UK law but clearly public perception is [that] they should be paying more.”
“Starbucks itself did decide of its own choice to start paying more taxation through operating different tax structures,” he adds.
EXPERT VIEW
Jake Moeller, head of Lipper UK and Ireland research, Lipper
Refuting the notion that socially responsible investing (SRI) funds are in some way ‘sub-optimal’, this positively screened and concentrated vehicle has an admirable track record. Mike Fox is prepared to push the limits of the overseas equity component in this portfolio and structural biases have provided favourable tailwinds. The switch to positive engagement provides a more meaningful approach for SRI aficionados and is to be commended.
