Investors need to get their head around the fact that global GDP cannot continue to grow indefinitely and must adjust their portfolios to reflect this reality, according to Sarasin’s Megan Brennan.
Data from the World Bank shows low-income countries depend on ‘natural capital’ – defined as commodities, soil, air, water and all living beings – for 47% of their wealth. Yet this natural capital is often being depleted without any corresponding investment in human capital (such as education or health) or produced capital (such as infrastructure), leading to an overall decrease in wealth.
Brennan said this is clearly unsustainable, which is reflected in the strategy of the Sarasin Tomorrow’s World Multi Asset fund that she manages.
“We have to think about doing more with less if we're going to grow in this new paradigm,” she said.
“There are companies and business models that will be disrupted. But it's not all bad news: there are companies out there that will grow as they are either already disrupting industries or are able to adapt.”
Sarasin Tomorrow’s World Multi Asset is a multi-asset fund that aims to solve humanity's challenges “profitably and responsibly”.
It uses the same framework that Sarasin applies across all its equity funds, focusing on five core mega themes: digitalisation, automation, ageing, evolving consumption and climate change. However, this fund is more tilted towards climate change and the niches within this theme, such as resource efficiency and low-carbon power and transport.
“We think about what the real-world implications for each theme are and then we identify an investable universe around that theme,” Brennan continued.
“That's when the fundamental standard buy-side research comes in: we build models and the stock goes through a robust process where we write up a short note and the team will vote on whether they think it should go on the buy-list.
“If it gets through that phase, we try to meet management if we can, then it will go to a full investment-case presentation to the team.”
Suppressing risk is a major component of the process, with an analyst writing up a “pre-mortem” that identifies everything that could go wrong with this investment to stress-test the assumptions made by their peers.
Each stock is then given a target price and a fair value price, while a traffic-light system is used to rate it on environmental, social and governance (ESG) criteria.
“For Tomorrow’s World, we are very much focused on not having any red traffic lights in the E or the S, because we are proactively trying to find companies that are doing good,” Brennan continued.
“We also want to screen out the companies that we don't think are doing good, so while some of our other strategies have a tolerance for companies that are on the journey to being green and sustainable, this one does not do that: it has already arrived at being green and sustainable.”
Brennan noted that many of her ESG peers focus too heavily on avoiding or divesting from the heaviest polluters and the challenges associated with this approach, which she said can come across negatively. She prefers to focus on delivering a measurable positive impact through investing in “really exciting companies” that solve environmental problems.
For example, she pointed to Dassault Systèmes, “not to be confused with Dassault Aviation, a manufacturer of military aircraft”. The manager said that key to the efficient use of resources, which will be vital in combating climate change, is optimising production. Dassault Systèmes makes computer automated design [CAD] software for industries such as engineering, which Brennan said will have an important role to play in this regard.
“It basically means you can simulate efficiency gains, so it helps you make a digital twin of a product before you actually produce it. Then you can stress-test that,” she added.
“It may be infrastructure or some component of an electric vehicle. By stress-testing that digital twin, you obviously avoid any real-life errors and you don't need to go through production before realising that there's an issue with it.
“That's one industrial company which is really helping to improve production efficiency and combat climate change.”
Sarasin Tomorrow’s World Multi Asset has made 7.3% since launch in March, compared with gains of 5.5% from the IA Mixed Investment 40-85% Shares sector.
Performance of fund vs sector since launch
Source: FE Analytics
The £18m fund has ongoing charges of 0.96%.