InvestmentsNov 18 2014

Fund Review: Royal London CIS Sustainable Leaders

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This £407.67m fund is run by Mike Fox with the aim of delivering a “strong investment performance” through investing in companies that make a positive contribution to society.

The manager clarifies: “In terms of the positive contributions to society, that breaks down into two areas. One is companies with products or services that have a social benefit to them.

“The second one is companies that lead their industries in environmental, social and governance (ESG) management. They can be areas not typically associated with sustainable funds but because they lead their industries in the way they manage themselves, we think they do make a positive contribution to society.”

Armaments and tobacco companies are the only sectors excluded by the fund.

The fund launched in 1990 and originally had a negative screening process. Mr Fox explains: “The current [positive screening] investment process was embedded in the fund in 2003. That’s when we made the switch from ethical to sustainable.

“There are still some negative screens but it’s more about finding companies that have a positive element to them rather than excluding companies that have a negative element to them.”

He points out that companies in healthcare, technology or infrastructure tend to offer products or services that are deemed to have some social benefit.

When it comes to finding “industry leaders” in ESG management, he describes it as a ranking exercise. Says the manager: “The process there is that we will look at an industry, we will look at the companies in it, we will look at their ESG policies and performance, and we will take a view as to whether we think that is what we describe as industry leading.

“Then within those industries, providing they don’t do anything on the other side that contravenes any other principles of the fund, we will look to invest.”

Those companies are then put to an external advisory committee before they get in the investable universe. After that, it is a traditional fund management approach, according to Mr Fox. “It’s looking at each investment from a financial perspective and understanding which ones we think are going to deliver the best performance,” he notes.

Turning to macroeconomic factors, he adds: “The fund will evolve through market and economic cycles, there’s no doubt about that.

“But healthcare and technology don’t become less interesting in terms of the way the fund is structured or how we screen companies. We might just have a different weighting in those areas depending on what we perceive the macro environment to be.”

The fund sits towards the riskier end of a risk reward profile at level five out of a possible seven, while the ongoing charge is 1.53 per cent.

FE Analytics shows that this fund has produced a consistently top quartile performance in the IMA UK All Companies sector across all time periods. In the 10 years to November 4, it delivered a respectable 156.13 per cent return, against the sector average of 107.45 per cent. Over three years, the fund generated a return of 61.69 per cent, outperforming the sector average of 40.78 per cent.

The manager observes that performance in the past 12 months has been helped by the fact that the portfolio has very little exposure to commodities.

He points out: “Although they are not specifically excluded, the environmental impact of a number of these businesses, particularly the mining sector but also within the oil and gas sector, is such that we don’t think they’re suitable for a fund of this nature and that’s been very beneficial.”

On the basis that valuations have moved on and the growth outlook now seems a little more uncertain in the UK, the manager has repositioned the portfolio this year from a risk-on construction to a more balanced one.

He comments: “Last year we owned a number of companies that were beneficiaries of the improving growth rate, particularly in the UK economy, such as homebuilders and other early stage cyclicals.

“In April this year we sold a number of those and moved into what we’d describe as longer term growth businesses… not just companies that are dependent on the economic cycle but companies which have products or services that we think will grow regardless of the economic outlook.”

Juliet Schooling Latter, research director, Chelsea Financial Services

VERDICT

The fund aims to provide capital growth from a concentrated portfolio of typically 40 to 50 mainly UK based stocks. The fund has a disciplined approach focusing on companies that contribute positively to ethical, environmental and human welfare. This means the fund will not invest in all areas of the market, such as defence and tobacco stocks. This constrained and concentrated approach adds an extra degree of risk when compared with more diverse and flexible strategies. Having said this, the fund has delivered respectable top quartile outperformance over three and five years.