Fund managers are often accused by investors of generating “hot air” when talking up their track record or the prospects for their fund and asset class.
However, Mark Whitehead, manager of the Securities Trust of Scotland, is hoping to reduce it – through investing in a company that aims to cut methane emissions.
Securities Trust of Scotland targets an income that rises above inflation every year to maintain investors’ spending power.
Source: Securities Trust of Scotland
To achieve this, Whitehead’s team applies a nine-step checklist to gauge the sustainability of every potential holding’s dividend, which has led him towards stocks hoping to make a positive impact on the environment
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“There’s a lot being taught at the moment about health and wellness and how much environmental damage we’re doing because we’re eating more and more animal protein, particularly in Asia,” he said.
“There is this surge in middle class incomes and in China alone, the amount of people that are now able to eat meat and can afford white goods – the numbers are pretty mind boggling.
“There’s no doubt that it’s pretty bad for the environment, it is very high in terms of water intensity and animal husbandry produces about 14 per cent of global emissions.”
This is one of the reasons why Whitehead (pictured) decided to invest in DSM Nutritional Products, a company he said should benefit from the trend towards eating more plant-based protein due to its production of vitamins that go into these products.
However, the manager said that what excites him most about the company is its “Clean Cow” project.
“This is basically a food additive that it is trying in New Zealand that goes into concentrates that you feed cattle and pigs,” he explained. “It thinks this additive will reduce methane production by up to 30 or 40 per cent per cow and pig, which is obviously significant as methane is a great driver of carbon emissions.
“That could be a very big total addressable market which it is innovatively producing for itself. But that’s just one part of the business: the planet and sustainability are absolutely at the forefront of how it runs. It is able to think about the planet first and then obviously produce pretty strong profit growth from a lot of the other stuff it is doing.
“It’s a really fascinating company, it has produced really strong dividend growth for us, and was one of the better performers in the portfolio last year. We really believe that structurally it is going to win out.”
This is not the only company in Whitehead’s portfolio that represents a play on the theme of sustainability. However, while DSM aims to reduce the amount of methane produced by cows and pigs, another one of his holdings is attempting to help the environment by making even more smells.
“International Flavors & Fragrances is a US company which, as the name would suggest, is innovating in using botanicals and this type of thing to try and drive different flavours and fragrances in plant-based protein,” he continued.
“There’s a lot of innovation going into plants and making sure that they taste good, because obviously, a lot of them don’t.”
Whitehead said the business is performing an important role in the uptake of non-meat protein, as despite consumers’ willingness to swap meat for a substitute, in the past they have been left disappointed with the alternatives available. However, he said International Flavors & Fragrances is helping to change this, particularly in the ready meal market.
“If you eat a ready meal, a lot of them when they are sitting on the supermarket shelves taste pretty bloody revolting,” he explained. “International Flavors & Fragrances uses enzymes and molecules which start to react when the temperature gets to a certain level when you put a ready meal into the microwave, which releases the taste and smell.
“There’s a lot of innovation and again, we think that’s a real long-term structural trend: we need to be eating more plants, and it is able to make them a lot more palatable for us through its business model.”
Data from FE Analytics shows Securities Trust of Scotland has made 78.79 per cent since Whitehead took over in May 2016, compared with gains of 73.65 per cent from the MSCI AC World index and 63.95 per cent from its IT Global Equity Income sector.
Performance of trust vs sector and index under manager tenure
Source: FE Analytics
The trust is trading on a premium of 1.54 per cent to net asset value (NAV) compared with average discounts of 3.81 and 5.63 per cent over the past one and three years.
It has ongoing charges of 0.9 per cent, is yielding 2.96 per cent and is 8 per cent geared.