An ESG Manager that Competes Globally

Key Takeaways

• 24% returns in 2020¹ driven by IT sector and U.S. focus
• Energy exclusions have been a tailwind to performance
• Reduced turnover expected to be between 20-30%

Although you run an ESG-focused strategy, your performance is measured against a regular global equity benchmark. Why is that?

NH: Ultimately, we think this is a high-quality, high-conviction, global equity fund. Period. It is certainly backed by long-term sustainability themes and drivers, and we believe those are additive to long-term performance. But our end goal is to manage a diversified portfolio of stocks that investors can stack against all global equity peers – whether they have an Environmental, Social and Corporate Governance (ESG) lens or not. So, with that in mind, investors can feel free to compare our track record with any true competitors.

The portfolio excludes companies that deal in fossil fuels. What impact does that have on risk and return, if any?

NH: Avoiding the energy sector has been a tailwind for performance in the past year – and beyond. The industry has been beset by lower commodity prices for several years, and a drastic reduction in demand in 2020 only continued to hurt returns. We appreciate that this may not always be the case. There may be short-term periods where energy is a headwind to performance, yet over the long term we are confident in positioning away from extractive industries, and toward more attractive areas such as renewables.

Your fund returned 24% in 2020¹, led by an overweight exposure to Information Technology and a U.S. tilt to the portfolio. Will those positions change this year?

NH: Going forward, we will maintain an overweight position to IT, though not perhaps to the same degree. It makes sense to take profits in “stay-at-home stocks” that outperformed because of the economic shutdowns. However, we want to continue betting on innovation, and the fact is Information Technology remains at the forefront of addressing many long-term sustainability challenges. In fact, we currently maintain a diversified exposure to IT, from Microsoft Corp., (which enhances productivity through workplace software tools and cloud computing) to Canada-based Descartes Systems Group (a logistics company that enables Amazon.com and other clients to save time, reduce costs, and shrink their carbon footprint).

As for our U.S. bias, we believe North America has some of the best businesses in the world, many of which are laser-focused on sustainability issues. We want to maintain a strong weight in absolute terms, meaning our allocation will be high but not perhaps as high as the benchmark itself. Investors may be surprised to know that the MSCI World Index allocates 66%² to the United States. We will at times underweight this target given the sheer number of long-term sustainability solution providers to be found in overseas markets.

Of the 30 to 50 names you carry, there were fewer changes in 2020 than previous years. Are you holding companies for longer than usual?

NH: When we took over the mutual fund from the previous managers in 2018, there was necessary turnover to bring the portfolio’s allocation in line with our view of the world. We had to adjust the positions to reach our desired sector allocations, and avoid industries that we have implicit biases against, such as tobacco, alcohol and weapons manufacturing. After that initial tailoring, the portfolio settled down and that’s why you see reduced turnover. In fact, if you look back through similar funds that we manage in the ESG space, you will see that we typically hold 40% of the portfolio for more than 10 years, because we hunt for great companies that will compound our returns year after year.

Nick, one last question. We like to end by asking for a book recommendation that’s shaped the way you think. What would you suggest for our Advisor audience?

NH: I have two, actually. First there’s Black Box Thinking: The Surprising Truth About Success by Matthew Syed, which challenged all my assumptions about the world – and business. He looks at and how we can embrace challenges and failure to develop ideas and find solutions. The other is The Omnivore’s Dilemma by Michael Pollan, a big picture book that really opened my eyes to what goes on within the food industry and its on the world around us. Both are highly recommended.