Best in Class: Liontrust Sustainable Future Managed

Societal changes have resulted in an unprecedented rise in appetite for sustainable investing in the past five years.

Increasing awareness of climate change, the impact of the pandemic and the growing influence of millennial investors are just three examples which have accelerated this trend even further in the past 12-24 months.

A debunking of the myth that you must sacrifice performance to invest sustainably has also played a key role in increased adoption from investors.

There is almost too much to choose from in the market today, so for us it all boils down to experience and track record

We conduct around 250 fund manager meetings a year and every single presentation now has a slide on its Environmental, Social and Governance credentials (ESG). It’s no longer a nice to have, but a necessity.

In fact, there is almost too much to choose from in the market today, so for us it all boils down to experience and track record, and this week’s fund has both in abundance as it prepares to celebrate its 20th anniversary.

Since launch in February 2001, the Liontrust Sustainable Future Managed fund has returned 263.7 per cent to investors – 110 per cent more than the sector average of 153.8 per cent.

Managers Peter Michaelis and Simon Clements have almost 35 years of combined industry experience between them and are part of a team of 14 investment professionals.

The team transferred to Liontrust from Alliance Trust Investments in April 2017 and now manage some £7.5bn across their entire range.

Every investment in this fund has to meet four set criteria: thematic drivers; sustainable credentials; good fundamentals; and attractive valuation.

The investment process begins with a thematic analysis designed to uncover emerging trends and long-term structural growth themes. These range from the development of personalised medicine to the transition to lower carbon fossil fuels.

The team has identified three mega trends with strong and dependable growth prospects. These are: better resource efficiency (cleaner); improved health (healthier); and greater safety and resilience (safer).

Within these three buckets the team has identified 21 areas of predictable and resilient growth.

The team then undertakes a sustainability analysis for each company and also determines ESG factors that are important indicators of future success. The team then assesses how well these are managed through their proprietary sustainability matrix.

The matrix ranks companies in terms of product sustainability from A to E. Management quality is also rated from 1 to 5 – this assesses whether a company has appropriate structures, policies and practices in place for managing ESG risks and impacts.

A company which has strong sustainable development embedded in its business and an excellent management team would be rated A1. Companies must score C3 or higher to be considered for the fund.

The third stage covers fundamentals, with the team ensuring the companies it invests in have robust business fundamentals with proven ability to deliver high returns on equity through sustaining margins and asset turnover.

The valuation stage sees the team integrate its view of quality into these businesses, predicting the likely sales, earnings and other financial returns they expect to see from these companies over the next three to five years. The team specifically targets a return in excess of 10 per cent a year.

On the fixed income side, the managers aim to produce an income yield, with the prospect of some capital growth, by investing predominantly in corporate bonds and by actively managing the interest rate exposure.

In conjunction with its sustainable franchise, the team is heavily involved in discussions with company management. In 2019, the team met with 185 companies face-to-face and raised 245 key ESG issues.

The final portfolio has 40-60 holdings. It can hold 60-85 per cent in equities, 0-40 per cent in bonds and can hold up to 10 per cent in cash. The fund has an ongoing charge of 0.88 per cent.

Backed by an experienced and excellent team, this fund has everything in its favour. It has a well-defined process which has emphatically proven sustainable companies have better growth and are more resilient than the market gives them credit for.

Darius McDermott is managing director of FundCalibre