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The long-term investment theme that analysts are overlooking

24 March 2014

Alliance Trust’s Peter Michaelis explains why you cannot afford to turn a blind eye to the importance of sustainable business models.

By Jenna Voigt,

Features Editor, FE Trustnet

Question: What are the key aims of SRI investing?

“The key aims of sustainable and responsible investment are to deliver strong investment returns by investing in more sustainable companies. The second element is to use our influence to improve the way companies are run.”

“Now just on the first aim, in terms of generating strong investment returns, we believe very much that companies which are more sustainable – those that are aligned with society’s interests – actually have an advantage, and it’s an overlooked advantage. I’d point to a survey done by Accenture where over 90 per cent of chief executives said that their position on sustainability was crucial for the future success of those companies and yet often sustainability is never looked at by conventional analysts.”

“So we feel that by analysing sustainability it can give you an investment advantage which can enable you to deliver stronger investment returns.”

Question: Will investors have to sacrifice returns to invest responsibly?

“Absolutely not. I think if you look at the evidence in terms of the performance that’s been generated by our fund range or by other competitors doing sustainable and responsible investment, it’s actually a very, very positive investment story.”

“Now the reasons for that we believe is that if you chose more sustainable companies, these are companies that are more likely to be growing faster, they’re more likely to have stronger management and, as we say, it’s an overlooked edge. There’s increasing academic evidence or academic research to back this up. So when we look at companies involved in energy efficiency, they have long term growth prospects which is exactly the sort of thing we want to be investing in.”

“So in terms of investment performance, sustainable and responsible investment funds definitely deliver, to our mind, and then when you look at the volatility of those returns it’s no different from the volatility that you see either in the index, so in the mainstream benchmark which we benchmark ourselves against, or versus mainstream funds that are our competitors. So it’s an investment strategy which we believe leads to you better companies and better investment returns.”

Question: What sectors are excluded under the SRI umbrella?

“We end up excluding companies in sectors such as tobacco, gambling, arms manufacturing. But the vast majority of our time is spent selecting those companies that, if you like, have got the right stuff to make it into our portfolios. So these are the companies which are more sustainable. It’s almost by default that we end up excluding those companies which are more challenged in terms of their future outlook.”

Question: What does a sustainable company look like?

“In terms of some examples, I’ll give you three examples from the US which we hold in our funds and sort of show the type of characteristics that we look for.”

“The first is a company called Trimble and it does navigational software and hardware. You’d think why is that in a sustainable and responsible investment fund? Well it’s under our theme of resource efficiency. What Trimble allows farmers to do is to know exactly where in a field to put the seed, where to put the fertilizer. So it allows them to vastly reduce their costs, reduce their environmental impacts and increase yield and production. So it’s a really good example of how a company can benefit from helping to achieve a more sustainable outcome.”

“A second example is a company called Acuity. Now there’s a huge change going on in the way we light all our buildings and homes and offices. And Acuity sell lighting services, so they are helping in the move from incandescent lights, which as we know generate light as a by-product and heat as the main output, to LED lighting which is about 80 to 90 per cent more efficient. Acuity, their whole business model, is predicated on providing lighting at a lower cost. Again, it’s been very successful because it’s using less energy in the way it manages resources. So that fits under our climate change and energy efficiency theme.”

“The final company sits under the quality of life theme. Everyone will have heard about US healthcare reform, it’s been the big political topic. It’s actually a nightmare for medical practitioners on the ground because there are all these different schemes and subsidies to gain and huge amounts of paperwork. And the company we invest in is called Athena Healthcare, and they take all that back office stuff away from the medical practitioner, allow them to treat the patient, and they make it a much more efficient way for the medical practitioner to deal with all their back office software systems and records to make sure it links in properly.”

“So three companies whose business success depends on making their part of the world a better place and delivering a more sustainable future while actually delivering very strong investment returns.”

This video and article were written in collaboration with and are sponsored by Alliance Trust.


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