Continuing her ‘three-year track’ record series for professional Paraplanner Juliet Schooling Latter, research director, FundCalibre looks at the Rathbone Global Sustainability fund.
“We don’t invest in themes, we invest in good businesses.”
That’s the view of Rathbone Global Sustainability manager David Harrison, who believes 2020 could well be the year sustainable investing went mainstream. There are pros and cons to that – while flows have significantly increased into sustainable businesses, those same businesses are increasingly being valued at a premium for that very reason. For some that might be a challenge, but with a global remit and an investment universe of 3,000 stocks (and growing), this fund can sidestep this issue to find a number of hidden gems and satisfy this growing investor demand.
Last year was exceptional for the fund on the performance front. It returned 32% to investors compared to 15.3% by its average peer*. The manager attributes this performance to three factors: the focus on quality/durable franchises; the ability of the companies he held to “walk the walk” in terms of sustainability – essentially companies working closely with employees, supply chains and wider communities; and thirdly, the focus on companies in growing structural end markets.
David joined Rathbones in June 2014 and has more than 20 years’ experience in equity analysis and fund management. This fund has a similar philosophy to Rathbone’s other equity products: it is a high conviction, multi-cap fund whose process creates a natural bias to cash-generative companies. As such, while capital growth is the primary target, the fund will have a reasonable income element to support total returns. The fund also has fully integrated sustainability analysis, undertaken in collaboration with the Rathbone Greenbank Investment team – a dedicated ethical and sustainable investment division.
Ideas come from a variety of sources, but primarily from the company’s quality and value screens, which are looking at return on capital and earnings yield. Ideas will also come from existing holdings and company meetings.
Holdings will be assessed via three tranches of fundamental and sustainable analysis. The first will assess a business and identify the characteristics that they are looking for: durable franchises, value through strong cash flows, appropriate capital allocation and reasonable valuations. These are modelled on a discounted cashflow model to understand what the share price assumes about the company and its prospects.
The second tranche will look at the company, assessing the corporate culture, the governance and analysing where it could go wrong. At this point, the team will also perform the first part of the ESG screening. Initially, it works on removing companies it doesn’t like through negative screening, such as those involved in alcohol, armaments, oil & gas extraction, tobacco and gambling. The analysis is provided by the Greenbank Investments team who have final say on whether a holding is acceptable or not.
The third tranche looks for any positive sustainable approaches and whether they create solutions to environmental or societal issues. This is monitored through adherence to the UN’s Sustainable Development Goals, and whether the returns of the company are driven by one of these goals.
This analysis will lead to a portfolio of 30-50 names, with construction driven by the risk each stock adds to the portfolio.
Since its launch in July 2018, the fund has returned 47.2% to investors, well ahead of 34.1% return for the average fund in the IA Global sector**. It has an ongoing charge of 0.9 per cent***.
This fund has three key factors supporting it: a repeatable process which has proven to succeed across other funds; a huge wealth of knowledge courtesy of the Greenbank Investments division; and last – but certainly not least – a manager with extensive experience of sustainable investing. There is no reason why it cannot continue to perform in the long term.
*Source: FE fundinfo, total returns in sterling, calendar year 2020
**Source: FE fundinfo, total returns in sterling, 19 July 2018 to 5 May 2021
***Source: fund factsheet, 31 March 2021
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.