For this month’s three-year track record article, Juliet Schooling Latter, research director of FundCalibre examines the charities focussed CCLA Better World Global Equity fund.
What does an investor want when they look for a sustainable product? I’d argue that for the majority the main goal is still to make money, but to do so knowing that their money is doing something useful for society and the environment as well.
Charities are a classic example – while their mission is to drive change, the majority of them still need good investment returns to be able to carry out their work. CCLA is a business which has been focused on the charities sector since the 1950s and now looks after more charities than any other UK asset manager.
The firm was a not-for-profit business until 2021, when the decision was made to go out to the wider market. This included the launch of the CCLA Better World Global Equity fund in 2022 – the ethos of the portfolio follows the long-term aims of the business. It is not a sustainability portfolio, it is a core global equity fund, which invests broadly across the market. What it does do is use the sustainability infrastructure within the business to engage with companies to drive change.
Managed by Charlotte Ryland and Joe Hawkes, the fund looks for quality businesses, with a good track record of returns on invested capital. They aim to look beyond the short-term noise in the market – to buy and hold quality companies at attractive valuations, which can grow and compound their cash flows at high rates of return over the long term (defined as any rolling period over five years).
Their philosophy is to find these companies by looking for four different characteristics. Firstly, they want companies that have enduring competitive advantages, as these companies will likely benefit from cost advantages and have brand power. They also want companies that have multiple sources of growth which can be resilient through the economic cycle; and companies that have a track record of using their capital efficiently. Finally, CCLA look for companies that have ESG standards – with roughly 10% of the portfolio screened out for certain revenue exposures to the likes of adult entertainment, alcohol, armaments and oil & gas (impact on climate change).
The better world focus goes far beyond just climate change – they also look at issues which affect people’s real lives like mental health, slavery and labour standards. This falls under three engagement pillars – better work, better health and better environment.
This is where I want to touch on the infrastructure within CCLA. In addition to both an investment and investment solutions team, they also have a sustainability division, headed up by James Corah. James has hired a team of people who are all specialists in their field, but are not necessarily investment specialists. For example, Dame Sara Thornton, director modern slavery, who was previously the UK Independent Anti-Slavery Commissioner.
Investment leaders – where small changes can make big differences
When you look at some of the big names in the portfolio, you would not necessarily associate them with sustainability, but the USP of CCLA is very much to get into these businesses, engage, and try to make small improvements.
A good example is Amazon, which has had problems with labour standards. The firm filed shareholder resolutions on labour standards, particularly relating to the right of workers and fulfilment centres to form unions. Those resolutions got around 30% of the shareholder votes and CCLA have used that as a tool to push Amazon to make changes. More recently a number of representatives from Amazon came from across the globe to discuss mental health with CCLA at their offices. In short, Amazon, a business with 1.5 million people working for it, is now looking to make changes with regards to mental health standards.
Hawkes says: “Engagement is not about saying you do this and that wrong – and let’s talk. We are running top-down engagement programmes and working with companies in and outside of the portfolio on the theory that a rising tide lifts all boats. Making changes in certain areas encourages others.”
Performance – there have been headwinds but could a big tailwind be coming?
As mentioned, the focus is on quality businesses, with a strong valuation discipline. This leans towards companies with strong margins and pricing power. The final portfolio is typically diversified between 70-80 names, although the team are happy to hold a few names in the same space if the quality growth characteristics are there.
There have been both headwinds and tailwinds for performance. 2022 was challenging on a relative basis compared with the market, this was due to the quality focus and having no exposure to the energy sector. 2023 saw better returns from the likes of technology, financials and industrials, while last year the fund lagged the market due to an underweight to the Magnificent Seven and a preference for quality financials, hence not holding banks.
The team are relatively optimistic on the outlook. While US president Donald Trump rips up the book on global trade, they feel their quality focus offers a degree of protection, by having a relatively low exposure to the pain of tariffs. Having sold businesses like Nike and Starbucks and added to firms like Compass Group, the team believe their positioning is relatively low to businesses with imported sales to the most affected countries like China, Indonesia and other parts of south-east Asia.
They also have financials exposure through services-focused businesses, like data providers and exchanges, which are relatively unaffected by tariffs as they don’t import to the US. Healthcare and industrials may face higher costs – but the focus on quality will allow these businesses to pass on prices to the consumer.
“While not immune, particularly if we see a recession in the US, we feel we have a portfolio of companies that can manage this. We must also remember we are investing for the long term,” Hawkes says.
We like funds which stand out from their peers and we believe this core global offering does exactly that. It is trying to make change without sacrificing investment returns and the quality focus could be a strong tailwind for future growth.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
Main image: lesia-and-serhii-artymovych-y7Z0wRKoMys-unsplas
