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Coronavirus and ESG – early fund manager responses

Posted on: March 29th, 2020

Coronavirus and ESG – early fund manager responses

With the ethical and social aspects of coronavirus being plain to see and markets wobbling horribly we have started to pull together some early comments published by the sustainable, responsible and ethical investment fund mangers that partner with Fund EcoMarket.

Su and I will be writing out to all of our partner fund managers asking for their views on the crisis shortly – the following links and text are what we have been sent (or sought out) so far.

We will update this information as more is received.

Please note the information and links below are intended for investment professionals and do not constitute advice or any form of recommendation.  Please contact your financial adviser for investment support. (Or you can find an adviser here.)

Coronavirus impact on the market and the portfolios’: Our investors will be familiar with the 20 long term sustainable themes that underpin our investment process. These identify areas of the economy which are growing while making our lives cleaner, healthier and safer. Our themes have been part of our approach over nearly twenty years and have stood our funds in good stead through both economic shocks and more placid times. The terrible impact from Covid19 on our health, livelihoods and economies does not change our view that it is companies exposed to these themes which will see strong growth in coming years. Indeed, longer term we can expect investment in areas such as healthcare to be prioritised.

Within the team we have been working through scenarios around the impact of Corona on each of our holdings to assess the impact on 2020 revenues, the ability of the balance sheet to withstand it, and tentatively what the likely earnings of the company will be in two to three years. There are many unknowns – in particular how governments will intervene, but it does highlight stocks which are beginning to look compelling longer term.

To keep our clients abreast of actions in our portfolios we will set out significant changes to our strategies each week. Although you should not expect anything too dramatic. We follow the carpenter’s approach of ‘measure twice, cut once’ in making our decisions and experience shows that there is no necessity to rush into fallen markets.

(End of Liontrust text)

  • Rathbones – Quarterly update – A Novel Danger and Response . Rathbone Global Sustainability Fund  Markets had another traumatic week as investors seem unconvinced that the monetary and fiscal responses around the world are sufficient. It’s becoming apparent that markets are unlikely to base out until the number of cases in Europe and the US begins to show signs of peaking, which could be three to four weeks away. Until then, fear and uncertainty will be all that’s left stalking the streets.

We wanted to let you know how we are navigating our way through these turbulent times and remind you of the importance of looking beyond short-term noise. There is a lot of certainty at the moment, but the fund’s focus on quality is helping us today and should allow us to benefit over the long term.

The fund has a lot of exposure to high-quality businesses with durable economic moats – that means businesses with decent competitive advantage which allows them to maintain their market share over the long term. Further protection should come from the clear commitment to sustainability found across all of our holdings. There’s no exposure to energy and mining, but there is a structural overweight to global healthcare and technology.

We’ve been taking advantage of the volatility to increase existing positions and using our 5% cash to buy some new stocks. Valuations of various high-quality businesses look attractive in light of the recent falls, so we’ve taken a position in Edwards Lifesciences, a global leader in heart valve replacements and cardiac monitoring. We also bought Hannon Armstrong Sustainable Finance, a US specialist sustainability lender as we see an attractive long-term opportunity here.

The next few weeks will be challenging for investors. We will be in touch regularly to let you know how we are managing the fund and to answer any questions you may have.

Rathbone Ethical Bond Fund .  Markets had another traumatic week as investors seem unconvinced that the monetary and fiscal responses around the world are sufficient. It’s becoming apparent that markets are unlikely to base out until the number of cases in Europe and the US begins to show signs of peaking, which could be three to four weeks away. Until then, fear and uncertainty will be all that’s left stalking the streets.

We wanted to let you know how we are navigating our way through these turbulent times and remind you of the importance of looking beyond short-term noise. Over February, the 10-year gilt sank from 0.53% to 0.45%.

Following month-end, the benchmark yield fell further to 0.16%. After the UK government unveiled a truly astonishing amount of stimulus worth roughly 15% of GDP, the yield spiked above 1.00% before halving again. Corporate bonds have been particularly pressured, with liquidity nonexistent in many cases – even for bonds issued by solid companies and which are backed by strong assets. The traders just aren’t there to buy what others are selling. This is leading government bonds to sell off as people sell the most liquid assets on their books in order to meet liabilities.

In short, it seems a lot of leveraged speculators are getting squeezed into selling at any price, which is showing some heavy falls in credit markets. This has been exacerbated – or perhaps driven – by the meltdown of fixed income exchange-traded funds (ETFs). Many of these passive portfolios are trading at 4-8% discounts to their underlying investments because of their inability to redeem investors without fire-selling their assets.

Thankfully, this isn’t us. We have a good pot of cash that we can use to ensure the daily liquidity of our fund. We have sold some ultra-quality AAA floating rate corporate bonds to raise yet more cash as well. There are some truly ridiculous prices getting bandied about for credit risk at the moment. Soon, we hope to start buying up some bargains. However, for now, we believe it’s best to shore up our fund and remain relatively defensive.

(End of Rathbones text)

  • Janus Henderson – Views from fund managers here.  Commentary from Hamish Chamberlayne, Portfolio Manager on the Janus Henderson Global Sustainable Equity Strategy shares his perspective on COVID-19 below:

For professional investors only | For promotional purposes. This communication is an update for existing investors.

Janus Henderson Global Sustainable Equity Strategy update.  Hamish Chamberlayne, Portfolio Manager on the Janus Henderson Global Sustainable Equity Strategy shares his perspective on COVID-19.

We have been asked a number of questions recently about the Global Sustainable Equity Strategy in relation to the recent period of market weakness and elevated volatility.

While we are somewhat reluctant to focus our attention too much on the short-term, or on short-term market moves, we are also aware that in periods like the current one, there will naturally be questions. Here are our thoughts on a selection of frequently asked questions:

  • What does the Strategy seek to achieve over the long term and what are the short-term implications from COVID-19?
    1. The strategy aims to provide capital growth over the long term (5 years or more) by investing in companies whose products and services we consider as contributing to positive environmental or social change and thereby have an impact on the development of a sustainable global economy. Additionally, we seek to construct a highly differentiated portfolio with a similar level of volatility to the broader global equity market, defined by the MSCI World Index. We have a firm belief that companies on the right side of sustainability issues will be more likely to have resilient growth characteristics and therefore the ability to compound wealth over the long term and invest in companies with products or services that are considered market leading.
    2. As a team, we aim to deliver a better return for our clients than they could achieve by being passively invested in the global equity market, or by being invested with our peers. This is a brief period and typically we do not wish to focus on such a short time frame, however, we felt compelled to do so below given the fluidity of existing market conditions.
  • Which areas of the market do you feel will be supportive during this period of extreme uncertainty and what are the sectors that you are avoiding?
    1. Technology is an area that we feel will be supportive, particularly with a longer-term view. It is penetrating every part of the global economy thanks to the fourth industrial revolution, and information technology (IT) is a sector where we hold a number of our largest positions in the strategy. Within IT, companies focused on cloud computing platforms are providing tools to a wide range of users. Their solutions can be quickly deployed and provide a way for customers to improve efficiency. These digitisation solutions are transforming how we work and, in this unprecedented time, offer an effective means to remote working. We see this as a key enabler of sustainability. Many of the Software companies we own have utility like characteristics of recurring subscription-based revenues allied with strong balance sheets which has afforded them resilience in current economic conditions and this has been reflected in their share prices. It has been these companies within the software and semi-conductor industries that have been some of our strongest relative performers. Finally, as technology continues to enable us to more efficiently organise our economy, the telehealth industry (an example of technology negating the need for face to face visits to the doctor) has shown its value during the COVID-19 outbreak and it is an area of the portfolio that has performed strongly.
  1. There are areas of the equity market where we are not invested due to a combination of our negative exclusion criteria and in other cases because we find those areas less attractive. We avoid investing in businesses that contribute to environmental harm and as a result, we have little to no exposure in fossil fuels, travel and heavy industry. As this is a low carbon strategy we hold no energy names, this sector has been negatively affected by the recent weakness in oil prices. Additionally, with the seizure in international travel taking hold around the world, airlines have been hugely impacted and as we avoid exposure to heavy fossil fuel consumers such as airlines, this has left the portfolio well positioned. Finally, within the financial sector we hold no banks, and this has been an industry which has particularly suffered since the start of the year given falling interest rates.
  • Has the strategy’s investment philosophy changed in relation to the coronavirus pandemic?
    1. Since inception almost 30 years ago, the investment philosophy of the strategy has remained a constant. The strategy is founded on the belief that investing through a lens of sustainability helps us to find companies with resilient growth characteristics that are more likely to compound wealth over the long term. Our philosophy means that we tend to avoid companies which are less likely to have these characteristics (we believe companies on the wrong side of sustainability issues/trends are less likely to have resilient growth; rather they have greater discontinuity risk). Essentially, we believe the consideration of sustainability issues helps us make better investment decisions. It helps us to anticipate change, to look into the future, and to identify risk.
    2. Our focus on the ‘triple bottom line’, where we consider the planet, its people and profit has led us to higher quality and growing businesses. This consideration has always been foundational to the strategy’s philosophy regardless of market environment. We invest with a long-time horizon and we believe we can outperform by investing in these companies with compounding characteristics. We think about risk from the perspective of volatility and we aim to control this by appropriate diversification of macro variables and stock specific risk. The portfolio has so far shown a reasonable degree of relative resilience and our investment strategy will remain unchanged regardless of COVID-19.
  • What changes have you made within the strategy?
    1. Over the last two years the team has focused on repositioning the strategy to be resilient to the effects of the US-China trade war and this has been beneficial in defending against the impacts from COVID-19. So far there has been very little change in names within the strategy. We have looked at the businesses we own and assessed their relative exposure to being impacted by COVID-19. We have, in some instances, reduced or divested our exposure in a small number of businesses that we feel will be disproportionally impacted because of the outbreak. We are uncertain how long the economic disruption associated with the pandemic will continue. As a precautionary measure, we will continue to adopt our prudent approach to risk management in relation to the uncertainty of the duration of government intervention in response to the outbreak. Additionally, we continue to actively seek opportunities to invest in companies we want to be long-term owners of and will make modest changes to the portfolio when opportunities arise. We have initiated a small number of new positions in businesses that we believe are trading at attractive valuations but more so, that we believe have a resilience to their business models which positions them for the long term.

We invest in what we perceive to be great companies and believe in their products and that they can and do play an important role in society. The team will continue to look for and invest in strong businesses with secular growth outlooks that should continue to compound over time.

We will be providing our normal quarterly commentary in April and this will contain the teams outlook.

Note: Views expressed as at 25 March 2020

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The views presented are as of the date published. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and investors may not get back the amount originally invested. There is no assurance the stated objective(s) will be met. Nothing in this email is intended to or should be construed as advice. This email is not a recommendation to sell, purchase or hold any investment. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.

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See ESG and Coronavirus personal reflections blog here.

 

And on a separate note – please ‘Hold the date’ for our next Good Money Week conference: 21 October – Barbican, London… fingers crossed!