Best in Class: LF Montanaro Better World

“The greatest threat to health in our history has coincided with the twin challenges of climate change and a social crisis as we emerge from the pandemic.” The words of Montanaro founder and fund manager Charles Montanaro really do resonate as we all look to find our new normal

I have often mentioned that in the 250 fund manager meetings we do a year, each presentation now has a slide on environmental, social and governance themes. But a slide is not enough today – we need to know how embedded ESG is within a fund’s process. It is fair to say some talk the talk, while others walk the walk and try to do something about these challenges.

The company's suite of funds all follow the same, simple philosophy: invest in companies you can understand, buy things that are growing

Having had ESG at the core of its investment process since 2005, Montanaro Asset Management is definitely the latter. The company introduces this focus into every aspect of their business – whether it is having two beehives on the roof (each containing up to 50,000 honeybees) to offsetting carbon emissions from business travel.

The company's suite of funds all follow the same, simple philosophy: invest in companies you can understand, buy things that are growing, back quality management, engage with your companies and do not over trade.

However, this week’s Best in Class goes one step further. LF Montanaro Better World is a positive impact fund investing globally in small and mid-cap companies whose products or services help solve some of the world’s greatest problems, like the three mentioned above.

Mark Rogers is lead manager on the portfolio. He joined the company in 2014 from Fidelity, where he was director of European equity research. Mr Montanaro is co-manager on the fund.

The process has three stages, the first of these is what differentiates this fund from its peers in the suite: looking for companies creating a positive impact. To identify these companies, the team has six impact ‘themes’: environmental protection, the green economy, healthcare, innovative technologies, nutrition and wellbeing. The team will also exclude companies that are causing harm, such as those involved in tobacco, weapons and fossil fuels extraction.

The initial stage will look at the product or service of the company and assess what problem it helps solve. At least 50 per cent of the company's revenue will need to come from one of the six themes, with opportunities to improve the business through engagement with the board. This part of the process is supported by a sustainability committee, which typically rejects one in five companies on impact grounds.

The second stage sees the team screen companies using 14 different criteria, rating the company’s growth, profitability, leverage, cash conversion and volatility. Detailed fundamental analysis is then undertaken, including meeting management, site visits and talking to industry contacts, customers and suppliers. The analysts then score a company based on an internal qualitative check-list.

Companies must also pass a corporate governance check-list.

The final stage is to assess company valuations. Here, the analysts will look at the economic return the company is creating on the capital it uses.

The end portfolio consists of around 50 companies. The fund has returned 69.3 per cent to investors in the past three years, while ongoing charges stand at 1 per cent.

But what about those examples of positive impact on the world? Look no further than the battle against the pandemic for answers. Investments held by the fund included global medical tech company Masimo, which developed a new product to help doctors monitor patients remotely, to Sartorius Stedim Biotech, whose equipment played a role in the production of Covid vaccines. The latter is still the largest holding in the fund at 3.3 per cent.

We have always preferred small and medium-sized companies whose quality and growth potential has been under-appreciated by the wider market. The fact this fund has a global mandate, with a straightforward positive impact screen, is an added benefit to a rock-solid investment process. We think this fund will be a star of the future.

Darius McDermott is managing director of FundCalibre