While a strict screening process means that the fund manager’s universe of stocks is much smaller, Clements points out that the political and social demand for sustainable practices is a significant tailwind for a number of companies from many different investment sectors.
Focusing on companies looking to tap into this increasingly important theme, he says, can help fund managers beat the competition and, as an added bonus, do something good from an ethical point of view.
Clements’ Alliance Trust Sustainable Future Global Growth fund is ahead of its IMA Global sector average by some distance since he took it over in late 2010, with returns of just under 33 per cent.
Performance of fund and sector since Nov 2010
Source: FE Analytics
The fund has also been very consistent under the manager, beating its sector average in each of the last three discrete calendar years.
Discrete calendar-year performance 2008 to 2013
| Name | 30/09/2012 - 30/09/2013 | 30/09/2011 - 30/09/2012 | 30/09/2010 - 30/09/2011 | 30/09/2009 - 30/09/2010 | 30/09/2008 - 30/09/2009 |
|---|---|---|---|---|---|
| Alliance Trust Sustainable Future Global Growth | 19.2 | 18.8 | -4.5 | -1 | 6.7 |
| IMA Global | 18.8 | 13 | -4.9 | 8.6 | 12 |
Source: FE Analytics
On his stock-selection process, the manager said: "The starting point is finding those that fit in with our sustainability matrix. Our fund has a universe of around 3,000 companies overall."
"After the company has passed the screen, we ask ourselves whether or not it fits important criteria to determine whether it is viable for our portfolio."
"First of all, we ask if it’s a growth company, which is very important given that we’re running a sustainable growth fund. We have to be confident that it can outgrow its peers and the wider market – not necessarily this year or next, but over the market cycle."
"When we’re satisfied that they tick that box, we look for those with a competitive advantage. Part of that is their sustainable nature giving them an edge, but also more fundamental measures like enjoying barriers to entry and leading industry positions. All of these attributes go hand in hand with delivering a high return on invested capital."
Clements has a watch list of between 100 and 150 stocks, and at any one time has between 40 and 60 holdings in his portfolio. He says that valuation is the "final piece of the puzzle" to get it down to this number.
"It can be the best growth company in the world, but if that’s reflected in the price before you buy it, you’re not going to make any money," he added.
Here, Clements highlights five companies that he believes are particularly well-placed to deliver strong long-term growth.
Alexion Pharmaceuticals
"This is a US biotech company whose main function is developing and distributing Soliris – a drug that treats ultra rare diseases related to the kidneys," he explained.
"It’s been very successful, attracting interest from some very big companies. There are rumours that Roche is interested in potentially acquiring the company."
"The drug obviously has a very strong sustainability angle as it’s trying to help improve the quality of life of many individuals. It’s also a high-growth, high-return business. It is now approved in Asia and Europe and has a very bright future."
Clements points out the stock has already had a very good run, almost doubling in value over the last two years. He thinks that revenue growth of more than 30 per cent for the next four or five years will result in attractive returns.
Alliance Trust Sustainable Global Future Growth is one of four funds that hold Alexion Pharmaceuticals in their top-10. Clements has a 3.26 per cent weighting to the S&P 500 constituent.
BorgWarner
"This is another US company, which manufactures turbo chargers for cars and other automobiles," said Clements.
"They supply makers from all over the world, as they enable cars to use smaller engines that are more fuel efficient."
"In the last 20 years, the global automobile industry has been growing at 3 per cent a year, while BorgWarner has been growing at 11 per cent. This trend is showing no signs of abating, considering that there is a growing need for fuel efficiency. Emissions allowances will be a lot stricter from 2020 and so the product this company offers will be a lot more popular."
Clements says that the company is confident that it will be able to grow 10 percentage points above the sector average in the coming years, and has margins that are superior to its industry competitors.
"It has a strong competitive advantage in that its research capabilities are so superior," he added.
BorgWarner is also a top-10 holding for Clements. Eleven other funds hold the stock in their top-10, including the Standard Life Global Equity Unconstrained portfolio.
Clements says the stock has been a major holding for some time, but that he is particularly excited about it now because of emissions regulations and the recovery in the European automotive industry.
ARM Holdings
"From a UK perspective, ARM is the standout company," said Clements. "Its major business is in making and distributing processors for tablets and smartphones. The company is crucial to the producers of these devices, and so it has grown as they have grown."
"It’s a very well run, efficient company, increasing top-line growth between 30 and 40 per cent year-on-year. ARM is on one of the highest multiples of any stock I own, so it’s far from cheap, but as long as it keeps delivering on its earnings – which I think it will – it can still deliver strong returns."
"I have a great deal of conviction in the products it has," he added.
FE data shows that ARM is one of the best-performing stocks in the FTSE 100 over the last five years, with returns of close to 1,000 per cent.
Performance of stock and index over 5yrs
Source: FE Analytics
The FTSE 100 company is a top-10 holding in 16 funds, including the five crown-rated Unicorn Free Spirit portfolio. It is currently trading on a forward price/earnings [P/E] ratio of 41 times.
Trimble Navigation
"Trimble is in the GPS and software industry," said Clements. "Its biggest clients are civil engineering and agricultural firms."
"This is a play on the need for more food to feed a growing population from a limited area of arable land. In the past, experts have pointed to the seeds and fertiliser, but in recent years there’s been more emphasis placed on technology."
"This company provides farms with sensors in order to measure what areas of a farm are more productive, where surface run-off is occurring more than it should and so on. It feeds this information back into the system and helps the farmer to optimise performance."
"It’s used in a similar way for construction," he added.
Clements says the company is likely to see top-line growth of between 5 and 10 per cent in a bad year and more than 10 per cent in a good one.
This is one of the manager’s smallest companies, which he says makes it particularly compelling as it has more potential to grow.
He adds that the company would get an added cyclical driver if agricultural spend were to increase from its currently depressed levels.
Only two other funds – Schroder Global Climate Change and FP WHEB Sustainability – hold the US-listed stock in their top-10.
AthenaHealth
Last but not least, Clements identifies another US-listed stock – AthenaHealth – as one he is tipping for great things.
"This is a brand new holding I’ve only recently added to the fund," he said. "It’s a Boston-based technology company which helps doctors surgeries help organise their schedules."
"The healthcare system in the US is very complicated and under-funded, and so help with billing and appointments is in huge demand. The company also provides software to remind them about appointments and give them information on their prescriptions."
"Again, it has a sustainable driver and has a very high return on invested capital."
No funds hold AthenaHealth in their top-10.
Alliance Trust Sustainable Global Future Growth requires a minimum investment of £500 and has an ongoing charge of 1.64 per cent.
This article was written in collaboration with and is sponsored by Alliance Trust Investments.
