Elaine Prior, the highly regarded former ESG analyst with Citigroup, and Mark Lyster, who has also forged a well-regarded track record in sustainability, have been appointed advisers to a new Australian-based investment fund that will aim to abide by the principles of the UN Sustainable Development Goals.
The Alphinity Sustainable Share Fund fund will be small to start – around $25 million to date – but its managers hope it will reach greater heights.
Lonsec has given the fund a “highly recommended” rating because of its “boutique” ownership structure and combination of quantitative and fundamental analysis in its investment philosophy, a statement from Alphinity said.
Its portfolio selection pool will be just 35 to 55 of the ASX top 300. The variation around 20 of the companies is to provide for slippage in sustainable performance that might follow an accident, at a mine for instance (the company includes investment in some miners).
“Sustainability is not just an add-on or a ‘bumper sticker’,” the fund said in a media statement, and was “at the core of this fund”.
“For example, we will not support companies which generate more than 10 per cent of their revenues from producing or operating high impact fuels such as uranium, thermal coal, coal seam gas, oil sands and arctic drilling, which are considered environmentally unfriendly and for which sustainable alternatives exist.”
According to principal and fund manager Bruce Smith the 10 per cent or less income from these sectors is cumulative.
Asked why any exposure was acceptable in such a sustainable fund Mr Smith told The Fifth Estateon Thursday that a target of 10 per cent maximum threshold would allow incidental exposure, maybe through secondary investments and would prevent an otherwise strong performing sustainable company from being excluded.
“You need some threshold. If you had zero you’d end up with funny consequences, and knocking out potential companies that are quite positive but have incidental exposure to those things. It constrains your universe.”
An example was a mining company that had a small exposure to thermal coal. You need some sort of threshold and then it’s an argument about how much you think is modest.”
Principal and portfolio manager Stephane Andre said the fund would
excludes companies involved in gold mining, animal mistreatment, old growth forest logging, predatory lending and hostile debt collection, and pornography.
“It will however invest in some companies in extractive industries, as the provision of certain commodities are vital if you want to achieve sustainable development,” Mr Andre said.
Mr Smith said the fund would perform as if it were a $750 million fund purely to focus its investments in bigger companies that provided liquidity.
“We never really want to put a number (for fund size) out there but we’re taking running the fund running as if it’s a $750 million fund, presuming it’s bigger than it is, which means the stocks we look at investing in are liquid and can be able to get in and out of.”
Demand for sustainable ethical investment was strong, he said. Alphinity previously had a socially responsible share fund for seven-and-a-half years, which had performed reasonably well – two-plus per cent above the ASX average before fees of 0.95 percentage points, but the fund was more of a negative screen.
The new fund would encompass a positive screen methodology to stock picking.
“We felt there is space in the market for a fund that has more positivity, that was contributing to society and with the launch of the Sustainable Development Goals it was really a way to do that and set up a framework for companies that are good.”
A big difficulty, he said, was to strike a balance between good market performance and sustainability performance. Gaming technology company Aristocrat, for instance, had performed very well but could not be included in such a fund.
Not everyone wants to sacrifice financial performance, he said.
Mr Smith said the fund was “certainly getting a lot of interest”.
“It’s the first we know of that addresses the SDGs in a tangible way and it’s piquing a lot of interest.”
There was not a lot of competition in the space.
“The Mercer table is 100 equities funds and maybe 8-10 ethical sustainable funds.”
There was also a geographical distinction.
The funds run by Morphic Asset Management were global for instance, while Alphinity was purely Australian focused.
The Alphinity SSF was recently awarded the Lonsec/Money Management Fund Manager of the Year award in the Responsible Investment category.
A media briefing early this year revealed that the growth of ethical investing, locally and globally, showed no signs of slowing down as the knowledge that there is no financial penalty – rather benefits – became well understood.
The briefing by BetaShares revealed that the ethical investment industry had hit a critical mass and was rapidly gaining market share.
Morgan Stanley head of wealth management research Nathan Lim (formerly of Australian Ethical) said in Australia “core” responsibly invested assets (including deep green investments that apply screening, sustainability-themed investment and impact/community investing) hit $64.9 billion in 2016, and were rapidly gaining market share (currently at five per cent), growing by 26 per cent in just one year.
Between 2006-12, the growth rate had been on average three per cent, but since then “something has clicked”.
- Read our article Ethical investing hits “inflexion point”