Investing in the regrowth of the future

Much of the challenge is identical to that facing investors in technology shares, as they try to separate the hype from the reality, and avoid the risk of investing in a bubble in an asset class that has become very fashionable.  

Sarah Norris, investment director at Aberdeen Standard Investments, says that because sustainable investing is more than just a theme, one should not be chasing the latest bubbles, but she adds that those mandates that “integrate ESG into their process” may be prone to focusing on fashionable themes and as a result end up investing in areas where an investment bubble may be forming.

Shaunak Mazumder, global equity investor at Legal & General Investment Management, says the question of how to invest in the winners of the future “is one we grapple with every day”.

He says the first step is to identify the themes of the future, then to try to select a small number of companies that could be the winners from the theme, but notes that in order to avoid being stuck within an investment that is a bubble, one then should look at the valuations of each of the companies within the theme.

Valuation considerations

The question of valuation is one that is also central to the thoughts of Hugh Cuthbert, global equity fund manager at SVM, who notes that while electric vehicles are a significant growth area of the future, there is a wide dispersal in the valuations of Tesla, relative to some of its competitors, with the former probably entering bubble territory.

Edinburgh-based fund house Baillie Gifford is among the very largest shareholders in Tesla, though James Budden, the company's director of marketing and distribution, says some of the holding was sold last year on valuation grounds.

Budden says his company, which via its Global Discovery and Positive Change funds seeks to invest in many of the more disruptive companies of the future, begins by identifying what they believe to be the areas of future growth, then the management teams they believe will succeed.

Budden adds: “We do care about valuation, it’s very central to what we do. We still believe in Tesla, and we still think it is run by a genius who is trying to change the world, but the valuation got to a point where we had to sell some.”

Andrew Parry, head of sustainable investing at Newton, says one of the ways to avoid investing in a bubble is to select the more interesting themes, but to invest in companies that do not provide the finished product, but rather in companies that supply the businesses with services, skills or materials that help to create the final solution that consumers want.

Among the sustainable investment trends that Newton says will be important in future are nutrition and sustainable food production, an area where they do not believe valuations are high relative to some of the more technology related ESG themes. 

Angus Parker, who runs the HSBC Global Equity Climate Change fund, agrees that changes to the way food is produced will be the next frontier for sustainable investment funds. 

Ian Aylward, head of manager and fund selection at Barclays Wealth, has a fund of impact investment funds. He says one of the things he makes sure to be aware of is that “the funds we invest in, they cannot just be about ‘blue sky thinking’ or a theme, the fiduciary duty is to deliver attractive returns for clients.” 

The fund he invests in to mostly achieve this is run by Impax Asset Management, a business in which he has invested for many years. 

He says: “There are as many types of ESG fund as there are ESG products on the market. We tend to focus on impact investments as those are the ones perhaps that are most focused on the future.”

Natural capital

Kristina Church, head of sustainable solutions at Lombard Odier Investment Management, says: “Environment remains a key area of focus and we expect 2021 to drive further investment opportunities in both climate mitigation and adaptation, but also increasingly in the field of natural capital.

"Nature has largely been ignored as an investable opportunity to date, but with more than 50 per cent of global GDP dependent on nature, and more regulatory focus on the need to protect this most productive asset and place a value on its regenerative capabilities, we expect funds focusing on opportunities in the natural capital space will see significant upside."

She adds: "Technology can help provide more inclusivity through, for example, access to healthcare, banking and clean energy. Digitisation is also enabling the virtualisation of print media, e-commerce and paper-based record keeping, reducing material footprints. Cloud computer, sharing and leasing models are gaining ground and smart, AI-enabled, production techniques and the use of advanced materials are all likely growth opportunities.

"For instance, our climate transition strategy includes many companies in heavy-carbon industries but which are enabling a net-zero transition by investing in new technologies and solutions to reduce their carbon exposures."

Paul Niven, head of multi-asset portfolio management at BMO Global Asset Management, says: "With cost considerations to the fore, the push to passive has been significant. Passive strategies have also enjoyed the tailwinds of favourable market conditions – an environment that has led to many questioning whether the additional cost of active management is worth paying.

"We think, at the right price point, it is, for three key reasons. First is the scope to outperform – something a passive strategy inherently can’t do. Second, is the ability to protect capital in more challenging markets.

"Passive strategies enjoy the benefits of rising markets but suffer when markets do. An active strategy, however, obviously faces challenges when markets trend downwards but the impact can be limited by active decisions such as reducing market exposures, adjusting asset class and geographic weightings or emphasising more resilient companies.

"Third is the potential for harnessing volatility, either to harness returns or protect capital."

David Thorpe is special projects editor at FTAdviser