If fund managers want their investment business to succeed in the future then they need to embrace ESG otherwise they’re just going to cash out now and ultimately won’t matter.
This was the message from Dean Cheeseman, portfolio manager of the UK-based multi-asset team at Janus Henderson Investors, to the current class of fund managers when talking ESG (environmental, sustainable and governance) practices.
According to Cheeseman, paying attention to ESG is essential if fund managers are to keep evolving with their client base.
“It’s about knowing your audience,” Cheeseman said. “I gave a presentation last year to your basic leadership. Most of that room are your classic 50-60 ‘pale, stale, male’.
“I stood up there and said: ‘Right, this is your problem - your client base is either your age or even older than you are. But they're sadly passing. And however loyal they are to you, when that money is passed on, it is largely going to a generation whose experience is in environmental issues. It’s about the millennials, as opposed to generation X or the baby boomers.’”
Moving down the generations towards the new investors and fund managers in the future, Cheeseman said: “[As a fund manager] you need to be far more cognizant of changing investment preferences because, unless you embrace ESG today, as your client base evolves it’s not going to be receptive to your presence.”
One important element of bringing these themes into fund management is considering the governance of companies. A case study offered by Cheeseman was Swiss pharmaceutical company Novartis, which appeared in court earlier this year on charges of bribing politicians for preferential drug pricing.
“I spoke to two fund managers about Novartis,” Cheeseman said. “The first fund manager I asked what they were doing to manage these governance issues and I got a wishy washy response. I'm was not wowed.”
Novartis’ stock market performance
Source: Google Finance
But the next manager he spoke to was Invesco’s Stephanie Butcher and, according to Cheeseman, she gave a more encouraging answer, explaining that a new chief executive was being brought in and “all of this will fall out when this data is refreshed in 12 months’ time”.
The governance data, Cheeseman said, “is only as good as how the fund manager utilises it, drills into it and understands it”. It’s at that point that it can be translated into returns and performance.
“There is academic evidence to support that ESG outperforms,” he said. “There are increasing bodies of studies coming out showing that companies on an improving governance trend outperform, because the risks have been reduced. Even if the return stays stable, it’s now lower risk.
“Going back to my Novartis example, when the market in general wakes up to Stephanie Butcher’s expectations that there's a new governance structure and all of the corruption and bribery scandals that have plagued it before have now been taken care of, that should be a more attractive proposition. They should see a better return profile. You extrapolate that across a portfolio and there's your second derivative, that's where the performance kick it comes in.
“So you can use ESG as a positive performance driver. It's a lot easier to use it as a risk tool. And have I done it before? Yes. I’ve been doing this for years. And I'm loving introducing it here.”
Cheeseman – who previously worked at Mercer and launched its global sustainable equity fund – has introduced ESG into his security selection on the £363.4m Janus Henderson Multi-Manager Managed fund.
“It's now a driver behind our multi-manager funds and our core multi-asset income funds,” he said.
“I also believe it's the right way to invest: at the end of the day, we are the stewards of our underlying client’s capital. It is the right way to invest.”
Incorporating ESG ideas into investments is now something institutional investors have the ability to do but the “challenge and the opportunity” for fund managers is layering these other definitions of stewardship onto their managerial role, according to Cheeseman.
“I look at the ESG world through a lens of different levels of implementation,” he said.
The first is the “old school, negative screening profile”. The next level for Cheeseman is what he applies to the core multi-asst and multi-manager funds at Janus Henderson.
“This is where the fund manager actually has to apply some thought to how he is integrating ESG into the process,” he said.
“I don't want to impose ESG most criteria on to clients who historically bought the solution for different reasons. I want them to embrace this as an additional level of scrutiny, another level of risk management.”
What this ESG integration means for Cheeseman is that if a fund manager wants to hold a tobacco stock then they have to have considered the negative social consequences of tobacco and built them into their justifications for it as a long-term holding for the future.
“Now I'm using ESG as an additional risk tool, so I'm not going to turn around and say: ‘No tobacco’. But I will expect an awareness of all the risks from my fund manager,” he explained.
“My proposal is to have every stock adhering to positive societal outcomes, that we can measure those societal outcomes that are aligned to SDGs [UN’s Sustainable Development Goals].”
Performance of fund vs sector & benchmark over the past 5yrs
Source: FE Analytics
Cheeseman co-manages the Janus Henderson Multi-Manager Managed fund along with Nick Watson and Paul O'Connor.
As seen in the graph above, the fund has made 38.79 per cent over the past five years, a slight underperformance compared with the IA Mixed Investment 40-85% Shares sector’s 39.38 per cent over the same time period.
The fund has an ongoing charge figure (OCF) of 1.50 per cent and is yielding 1 per cent.