Managing a long-term investment portfolio means managing future risks, and one way to measure that is with environmental, social & governance (ESG) criteria, according to CRUX Asset Management’s Jamie Ward.
Ward – who manages the £69.5m, four FE Crown-rated FP CRUX UK fund – said one challenge for investors with a long-term investment horizon is judging the potential risks of a holding over the next 10 to 20 years.
As such, there is a greater need to consider companies’ implementation of ESG principles.
He said while his fund has no specific ESG overlay incorporated into its stockpicking process, it does form part of the risk management process.
“Part of risk management is identifying threats to existing businesses, to make sure we try and avoid being in things that are threatened by future trends,” said Ward.
“You’re naturally predisposed to go away from things that would fall foul of ESG simply because regulation actually becomes a threat anyway.”
He added that the incorporation of ESG went beyond just a test of risk management and into more personal opinions.
“I often think that ESG from an investor’s point of view should actually be a sort of a personal thing,” the manager explained. “It’s ‘what do you believe are your morals?’”
Despite believing companies with low ESG scores are more risky, one of his top holdings is British American Tobacco at 4.9 per cent of the portfolio.
Performance of stock YTD
Source: FE Analytics
However, Ward said it is the only holding that “ever seems to fall foul of ESG”, adding that it depends on the interpretation of ESG by the end investor.
Notwithstanding the current rise in popularity of ESG strategies, Ward (pictured) said it is his job as a manager to ensure the companies he invests in are acting with integrity across the business. 
“It feels like a bit of a fashion thing sometimes, whereas I think it’s actually quite important to a lot of investors and it’s something that should be taken seriously,” the manager said. “You feel sometimes that a lot of people [asset managers] treat ESG as if it’s just a tick box, or ‘this is good for our brand’.”
Ward focuses heavily on the governance element, explaining that his stock-selection process aims to identify resilient companies with strong leadership.
The process aims to “exploit market inefficiencies”, which Ward said arise from other investors’ inability to hold a long-term view.
“‘Market inefficiencies’ effectively refers to the myopia of market participants,” he said. “So even at very good times in the market, participants tend not to look beyond two or three years.
“So if I’m willing to take a view that I’m investing in something, because of what I think it could be in 10 or 20 years’ time, the path to those 10 or 20 years should be quite profitable.
“Because people are looking at it and valuing it basically on two or three years, [but] I can see a lot more value coming further on than that.”
The key to investing in such a ‘buy & hold’ way, according to Ward, is being able to recognise a quality company, meaning one with the ability to create value rather than just produce earnings.
Buy-&-hold quality has been a successful strategy in the current bull run, but can tilt portfolios towards certain types of companies that may not be best placed to cope if the market turns.
However, Ward defends his strategy, saying that while he looks at stocks with a 20-year outlook, he is not tied in to a holding if one of his ‘three pillars’ should crumble.
“I’d immediately sell it,” Ward added. “I’m not going to hold it just because I’ve already bought it. So yes, I’m a long-term investor, [but] you have to continue reassessing.”
As an example, Ward recently shifted his portfolio allocation away from the holdings that enabled him to limit losses during the 2018 fourth quarter sell-off.
“It’s been weird to be honest with you, I’ve had two fantastic years,” he concluded. “Last year, I plodded along through the first three quarters of 2018. And then I absolutely smashed it in the last quarter. The market fell loads and I barely felt it.”
The FP CRUX UK fund targets long term growth through a concentrated portfolio of 20 to 40 stocks over a minimum investment horizon of five years.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The fund has made a return of 48.29 per cent over the past five years, compared with a 32.22 per cent return for the average IA UK All Companies peer. It has an ongoing charges figure (OCF) of 1.01 per cent.