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?
The fund is a high-conviction equity portfolio consisting of 30-50 truly sustainable companies which we aim to hold for a minimum of 3-5yrs. We believe that only companies demonstrating positive sustainability characteristics, defined as managing the business for the long-term and recognising their responsibilities to a broad group of stakeholders, will be able to maintain their growth and returns over the long-term. In addition, the manager believes that, when aligned with strong underlying fundamentals, this can result in higher and more durable earnings growth, which is often under appreciated by the market.
The strategy represents a close collaboration between Schroders' Global & International Equity and Sustainability teams. Collectively, senior representatives from each team are brought together within the Sustainable Growth Investor Group; a group that provides additional scrutiny and oversight of the sustainability characteristics of the fund's constituents, company interactions and engagement activities.
Our primary focus is to generate capital growth but we also expect to achieve positive societal impact through our capital allocation decisions and engagement activity.
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 fund delivered consistently strong performance in 2020 due to strong stock selection. Our holdings of high quality and well-managed companies showed impressive resilience during the initial drawdown, consistent with our thesis that sustainable companies should see lower downside risk. Over the year, our flexible investment approach allowed us to adjust the level of risk and cyclical exposure in the portfolio depending on the market environment.
We believe COVID19 has underlined the importance of strong stakeholder relationships and ushered in a ‘new social contract' between companies and societies. Companies' treatment of their customers, employees and suppliers has been under greater scrutiny than ever before, and we expect those that were considered ‘good actors' to be rewarded by customer and employee loyalty beyond the crisis.
The resilience of sustainable investments during 2020 has also attracted flows to the space and demonstrated there need be no trade-off between sustainability and alpha. This has helped bring sustainable investing firmly into the mainstream.
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.
We are broadly optimistic about recovery prospects in 2021. There is evidence of huge pent-up demand and strong balance sheets especially in the household sector. Significant optimism is already discounted in parts of the equity market, but we still see pockets of opportunity for stock-pickers, and overall markets remain well-supported by the liquidity being provided by governments and central banks.
Given the nature of our approach, we remain tilted towards quality and (less so) growth, but have tilted slightly towards more cyclical names since the fourth quarter and remain disciplined on valuation, trimming or exiting some of our 2020 winners. For example, we have reduced our exposure to areas like life science in light of tough compares as we exit COVID, and increased our exposure to areas such as travel, industrials and banks where valuations are more attractive and there is greater leverage to an economic recovery.