Sustainable investing is often ignored by most investors but supporters point out that this approach to the market promises rewards that will play out over a multi-decade time horizon.
One of the reasons why this has been the case in the past is because a perceived flaw of taking such an investment approach is that it demands stripping out areas of the market which have delivered strong returns over the years – such as tobacco, oil or emerging markets with poor governance.
However, Mike Appleby – investment manager at Alliance Trust Investments – says investor mentalities need to change as adopting a strategy which incorporates sustainability will be one of the best ways to beat the market over the longer term.
Appleby, along with other members of his team such as head of equities, Peter Michaelis, and FE Alpha Manager Stuart McMaster, who manages the fixed income portion of the portfolios, use four themes within their portfolios which have helped the Alliance Trust Sustainable Future Managed fund to outperform the wider market over recent years.
Performance of fund versus sector and index over 5yrs
Source: FE Analytics, as at 06/03/2015. Past performance is not a guide to future performance.
The manager says these four mega-trends – climate change & energy efficiency, quality of life, sustainable consumption and resilience – will help their funds to outperform over coming decades as companies that play these themes offer very attractive long-term opportunities in the current anaemic growth environment.
“In a world where economic growth has slowed, you need to find companies that can give you exposure to longer term growth industries,” Appleby said.
“There is a misconception that you won’t make as much money investing in more sustainable companies as you will investing in less sustainable ones. However, because sustainable companies tend to make things we need more and more of, they are the ones that will grow and continue to be rewarded by the market.”
In this article, Appleby runs through the four themes that are playing out in the Alliance Trust Sustainable Future funds, why they will become increasingly important within the wider market and, in turn, why they should help to deliver superior returns over the long term.
Climate change & energy efficiency
Investors will be very aware of the potential effects of climate change and the diminishing amounts of fossil fuels available.
A recent Bank of America Merrill Lynch report on thematic investing revealed that extreme weather now covers 8 per cent to 10 per cent of the planet – up from 0.1 per cent to 0.2 per cent between 1951 and 1980 – and highlighted the effect climate change is having on everyday lives.
Meanwhile a world running low on oil creates problems of its own, but Appleby says there are a number of companies that are tackling this trend and, as a result, should deliver decent growth over the coming years.
Appleby points out how the main economies have all put increasingly stringent regulations in place to increase energy efficiency and reduce carbon dioxide emissions.
He says a company which can take advantage of this trend in regulation towards more energy efficient trucks and cars that pollute less is Borg Warner, the US-listed automotive components and parts supplier.
“Essentially, the company makes a bit of kit that makes a car go further on less fuel by reducing inefficiencies,” Appleby said. “This company can grow more than the automotive industry in general because it is selling into an under-penetrated market which is seeing increasingly tighter regulation and car manufacturers are using Borg Warner products to comply with regulation and enable people to spend less money filling up their car.”
Quality of life
The next theme, quality of life, leads the team to focus on companies whose products and services deliver real improvements in wellbeing such as healthcare providers, particularly in life-saving drugs and those supplying education on healthy eating and healthy lifestyles.
A number of interesting statistics point to why this theme will be an important one in the years ahead: half of the European population will be 50 or older in 10 years, the average life expectancy around the world has risen by 20 per cent since 1980 and 65 per cent of all US healthcare spending is by people 65 or over.
However, one stock Appleby and the team hold looks beyond the developed world and benefits from the increasing levels of wealth in emerging markets. This is Vectura Group, the FTSE Small Cap-listed respiratory product development company.
Performance of stock versus index over 5yrs
Source: FE Analytics, as at 06/03/2015
The stock has delivered market beating returns over recent years and Appleby expects this to continue as it focuses on the therapies to treat lung diseases, including chronic obstructive pulmonary disease (COPD).
“COPD is projected to rank fifth worldwide as disease burden, according to the World Health Organisation, and affects older people who smoke or who are exposed to polluted air.”
He added: “The combination of a high prevalence of smokers and poor air quality in many emerging market cities is expected to drive growth in sales of Vectura’s products which enable people to improve their quality of life if they have COPD.”
Sustainable consumption
Alliance Trust Investments’ sustainable consumption theme covers technologies that enable companies and individuals to use resources more efficiently, most notably in terms of water management.
There are now 47 countries classified as water-stressed, according to Bank of America Merrill Lynch, while 768 million people across the globe lack access to clean drinking water.
Given that water management is becoming an increasingly important trend around the world, Appleby says California-based Trimble is in a good position as it is using technology to reduce wasted inputs, save farmers money and reduce negative impacts of industrial farming.
“Trimble supplies geo-positioning hardware and software used in agriculture, which enables farmers to intelligently apply inputs such as fertilizers to their fields as it links data on nutrients in the field to the tractor when applying fertilizer,” Appleby said.
“The company benefits from strong secular growth in resource efficiency. The stock was identified as providing eco-efficiency gains following work we undertook on how IT can improve efficiency in agriculture.”
Resilience
The final theme is resilience and, although a relatively all-encompassing one, leads the team to companies that enable us to strengthen what can be a fragile system that we all rely on.
One particular sector within this trend is data security, according to Appleby. There are an estimated 122,000 cyber-attacks per week in the US while the average successful cyber-attack cost is $12.7m per US company in 2014.
As a result, Appleby says there is a growing demand for products which can protect corporations against online hackers and therefore he thinks the outlook for Checkpoint Software, the US listed technology company, looks very promising.
“Our resilience theme is linked to the big data theme as it includes finding companies than can secure information we have from hackers,” he said.
“Security is a big theme at the moment and will continue to be as it is one area which hasn’t been hit by big cuts from companies. Checkpoint Software, which is US listed, is an example of a stock we are using as they have developed enterprise security systems.”
Year on year performance of the Alliance Trust Sustainable Future Managed fund
| End Q4 2013 to end Q4 2014 | End Q4 2012 to end Q4 2013 | End Q4 2011 to end Q4 2012 | End Q4 2010 to end Q4 2011 | End Q4 2009 to end Q4 2010 | |
|---|---|---|---|---|---|
| Retail - share class 1 | 5.2% | 21.3% | 12.4% | -5.6% | 9.3% |
| IA Sector (Mixed Asset (40-85% equities)) | 4.9% | 14.5% | 10.0% | -5.5% | 12.3% |
| Quartile | 2 | 1 | 1 | 2 | 4 |
Source: FE Analytics, as at 31/12/2014. Past performance is not a guide to future performance.
Important information
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This article is not intended as an investment recommendation and should not be treated as such. Instead it is intended as an example summary of the work we do looking at longer-term changes we anticipate happening in the market which we analyse to inform our investment decisions. This analysis forms only part of what is considered in making an investment decision.