Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
Put simply, our mission is to generate excess returns for our clients by investing in sustainable growth companies that have a positive impact.
We take a highly active, benchmark agnostic approach to sustainable investing and we do so with a long term lens. Many of the sustainability challenges society faces will take years or even decades to address, so as investors we must look beyond a company's next quarterly results.
Our well-established and repeatable investment process consists of three key stages: screening to exclude companies with negative impact products and then to quantitatively rank the remaining universe; fundamental analysis on stocks that we think offer sustainable growth and positive impact characteristics; and portfolio construction to bring this together into an optimised portfolio.
We have a team-based approach and whilst the three named managers have final decision making responsibility, we very much depend on the idea generation and fundamental research expertise of our broader 27-person Equities team, where analysts are specialists in specific regions.
A further vital component of our strategy is Aegon AM's independent 14-person Responsible Investment team, three of whom are dedicated to our equities strategies. Each idea proposed for the strategy must be analysed in detail by the RI team and they have the power to veto any proposed stock if its sustainability credentials don't stack up, or to force the sale of an existing holding if it deteriorates and becomes a sustainability ‘laggard'. We think this strong independent oversight is important for the integrity of our approach.
How have you been trying to weather the storm caused by the Covid-19 pandemic and what could be the longer-term implications for your strategy?
The strategy was actually well set up to benefit from many of the structural trends that accelerated as a result of the pandemic. As such, there were no major changes to the portfolio, although we did exit a small number of holdings where we believed their long term fundamentals would suffer damaging and lasting effects. We also used the initial market volatility to add to existing holdings where we thought share price weakness unfairly reflected the impact the pandemic would have.
Whilst not wanting to play down the tragic nature of the pandemic, we think that its impact on several sustainability trends could be favourable in the long term. It has effectively offered us a pause to think about how we want to rebuild and we see strong signs that this will be done in a more sustainable way. For example, commitments to green energy generation have increased, electric vehicle sales have inflected higher at a time when petrol and diesel sales have crashed and we have noticed businesses paying much greater attention to social factors rather than thinking solely about the bottom line. If these trends persist then they will undoubtedly benefit sustainable investors and our strategy.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
The first theme we would highlight is one that has been a key feature of the strategy since launch in 2016: ESG improvement. Academic studies have shown that companies that are improving their ESG credentials can outperform both the market and companies that already posses strong credentials. To us, this makes sense, as an improvement in financial metrics is typically rewarded with share price re-rating, so why would this not be the case when a company is improving how it deals with the opportunities and risks presented by material ESG factors? Typically around 60% of the portfolio is allocated to these ESG ‘improvers'.
We are also hugely excited by the pace of innovation in the field of precision medicine. Advances in gene sequencing and antibody development are heralding a new age where medical treatments are more tailored to individual patients, meaning greater efficacy and fewer side effects. Applications include immuno-oncology where the likes of Genmab, Illumina and Veracyte (all held in the fund as at 28/2/21) are contributing to a paradigm shift in the way we can detect and treat cancer.
