Guinness
Sustainable Global Equity Fund

• Why invest in the Guinness Sustainable Global Equity Fund?
• Fund managers
• How do we run the Fund
• How do we construct the portfolio

Why invest in the Guinness Sustainable Global Equity Fund?

The Fund is designed to provide investors with exposure to quality growth equities exposed to the transition to a more sustainable economy through a high conviction, low turnover portfolio of companies.

We believe sustainable companies outperform

Companies whose products and services are enabling the transition to a more sustainable economy are likely to experience persistent top line growth as nations and consumers continue to change preferences. Businesses with strong and improving ESG practices are likely to reduce their operational risk whilst better aligning management remuneration to sustainable long-term value creation. Ultimately, we believe these sustainable companies are likely to be strategically placed for long-term value creation with more forward-thinking management teams able to better capitalise on future opportunities. We use exclusionary screens, sustainability themes and a combination of proprietary and third-party EGS research to help identify these businesses.

High conviction

The Fund typically invests in just 30 companies, with each company having an equal weighting. This provides a good balance between the benefits of diversification while also allowing each company to add meaningfully to performance. We do not have a long tail of small positions and by definition we can never just ‘hug’ the benchmark index.

Fundamentally driven

We focus on ‘bottom-up’ stock selection rather than trying to make decisions based on an expected outlook for the world economy. We like to invest in sustainable companies which have been able to generate persistently high returns on capital and can continue to do so into the future. Sentiment and hype can often drive-up valuations of some sustainable companies; we maintain a strong value discipline to make sure we do not overpay for future growth.

Low turnover

We prefer to invest over the long term. We also recognise the increased costs of trading in and out of companies unnecessarily. Typically, we will hold a company in the portfolio for between 3 and 5 years.

Repeatable and independent

The process is clear, robust, transparent, and scalable. It filters out much of the noise and hype that surrounds companies to focus on the true signals that drive company valuations. By performing their own company research and analysis, using their own proprietary modelling systems, the managers try to avoid some of the behavioural biases associated with being unduly influenced by market sentiment.

Fund managers

How do we run the Fund?

Quality Screen

Although the fund is designed to invest in sustainable companies, our starting point in selecting our investment universe is to identify companies with persistently high and/or improving return on capital. Specifically, we look for two separate – but not distinct – groups of companies:

• Established compounders that have a return on capital of greater than 10% in each of the previous ten years.
• Emerging compounders that have a return on capital of greater than 10% in each of the previous 5 years with that return on capital growing across the previous 5-year period.

Our analysis shows that established and emerging compounders are highly likely to continue generating persistently high return on capital in the future. Consequently, it shows emerging compounders are highly likely to turn into established compounders in the future. Together, they show that these businesses will continue to create shareholder value.

“It's a rare achievement for a company to meet our investment criteria and we think it shows a mark of genuine quality. And this is where our portfolio starts – consistent high return on capital.”

On average, only 5% of global listed companies achieve our threshold. We then exclude highly leveraged businesses (net debt/EBITDA > 3), leaving a pool of around 650 companies.

Identifying sustainable companies

We find that companies exhibiting quality characteristics, as described above, positively correlate with better ESG scores, using MSCI ESG research methodology. Hence, we find that by first screening for high quality businesses, we indirectly exclude many businesses that have been deemed to have below average or inadequate management of ESG issues.

Intuitively, in seeking to invest in sustainable businesses that can create value over the long-term, filtering for quality businesses who have already demonstrated an ability to create above-average economic value without taking on excessive debt, makes sense.

However, this alone does not mean we end up with a pool of companies automatically deemed sustainable. In order to further increase our chances of finding these companies, we apply exclusionary screens to filter out companies whose products or services are harmful, and whose ESG practices are sub-standard. Namely we exclude companies which derive material revenue from:

• Alcohol
• Coal
• Fossil fuels
• Gambling
• Nuclear energy
• Palm oil
• Tobacco
• Weapons

We also exclude those companies which have been scored as a laggard (B or CCC rating) by MSCI and those on the Norwegian Council of Ethics exclusion list. Such businesses tend to display inadequate or worsening management of ESG issues and are vulnerable to ESG related disruptions and controversies.

Identifying growth

Finally, the portfolio seeks to invest in high growth business. With no one metric able to identify companies which will exhibit high future growth, we believe that looking in the midcap space is an attractive place to start. Midcaps have outperformed both their large and small cap counterparts over the long-term by growing their earnings and revenues faster – and what is more, doing so with a better return/risk ratio. We also find that many of the pure-play sustainable businesses that we seek tend to be smaller in size.

Sustainable and market cap exclusions leave the investible universe with around 450 companies.

Further research and stock selection

From this universe, we then seek to identify which companies are the most attractive long-term investment propositions. We apply screening and utilise scorecards based on quality, sustainability, growth, and valuation to prioritise candidates for extended due diligence.

We then subject all potential investments to detailed fundamental analysis and use sustainability themes and associated sub-themes to initially identify whether a business’ products and services can be deemed sustainable – and to what extent. The 3 broad sustainable themes currently employed are:

1. Health & Wellbeing
2. Productivity & Connectivity
3. Resource Efficiency

Above all, we want to understand what competitive advantages or barriers to entry are sustaining a company’s return on investment to determine whether the returns will persist. We also recognise that sentiment and hype can sometimes drive up the valuations of sustainable companies and so we try to maintain a strict value discipline. We want to avoid paying up for high levels of expected growth in the future, and therefore use a variety of valuation tools including looking at valuations vs sectors, peers and the company’s history, as well as looking at the quality and growth metrics baked into a company’s valuation relative to alternatives.

Sell discipline

It is often easier to find companies to buy that look cheap than it is to identify those companies you own which should be sold. We consider sell discipline as important as selecting companies for purchase and continuously monitor the companies we hold in the Fund. The six core reasons we may sell a company are outlined below.

1. The company no longer qualifies as sustainable
- The company now derives a material portion of revenue from harmful products
- The company’s ESG practices have deteriorated materially
2. The balance sheet becomes stretched
3. The valuation becomes too rich, or no longer offers compelling upside
4. There is a change in a company’s capital budgeting approach
5. Our original investment thesis no longer holds
6. We find a more compelling investment idea

How do we construct the portfolio?

The Guinness Sustainable Global Equity Fund is a concentrated portfolio of around 30 equally weighted stocks. This provides a number of useful attributes:

1. It reduces stock-specific risk, as we will not be overweight in a small number of favourite companies.
2. We will not have a long tail of small holdings in the portfolio, which can be a distraction and a potential drag on performance.
3. It instils a strong sell discipline as we must typically sell a position in order to make way for a new one; and we must constantly assess the companies we own in the portfolio in comparison to the rest of the universe available to us.
4. We are truly index independent. All companies held are weighted equally without regard to their weighting in the benchmark index, so our portfolio has a high active share.

Fact sheets
For information on the Fund’s current investments, please see the latest fact sheet:	English

Key facts
Launch date	15/12/2020
Fund managers (start date)	Sagar Thanki (15/12/2020) Joseph Stephens (15/12/2020)
Benchmark	MSCI World Index
IA sector	IA Global
Structure	OEIC (UCITS)
Domicile	Ireland

Underlying currency	US Dollar
Pricing	Daily, forwards
Valuation	2300 Dublin time
Deal cut off time	1500 Dublin time
Administrator	Link Fund Administrators (Ireland) Ltd
Custodian	Brown Brothers Harriman
UK Reporting Fund status	Yes
ISA Eligible	Yes

Share classes

Class	OCF current	Max. Initial Charge	Min. Investment	ISIN	SEDOL	Bloomberg
Guinness Sustainable Global Equity Fund C EUR Acc	1.99%	5%	0	IE00BN0W2V16	BN0W2V1	GUSGECE ID
Guinness Sustainable Global Equity Fund C GBP Acc	1.99%	5%	0	IE00BN0W2T93	BN0W2T9	GUSGECG ID
Guinness Sustainable Global Equity Fund C USD Acc	1.99%	5%	0	IE00BN0W2W23	BN0W2W2	GUSGECU ID
Guinness Sustainable Global Equity Fund I EUR Acc	0.99%	0%	10000000	IE00BN0W2Y47	BN0W2Y4	GUSGEIE ID
Guinness Sustainable Global Equity Fund I GBP Acc	0.99%	0%	10000000	IE00BN0W2X30	BN0W2X3	GUSGEIG ID
Guinness Sustainable Global Equity Fund I USD Acc	0.99%	0%	10000000	IE00BN0W2Z53	BN0W2Z5	GUSGEIU ID
Guinness Sustainable Global Equity Fund Y EUR Acc	0.99%	5%	0	IE00BN0W3180	BN0W318	GUSGEYE ID
Guinness Sustainable Global Equity Fund Y GBP Acc	0.99%	5%	0	IE00BN0W3073	BN0W307	GUSGEYG ID
Guinness Sustainable Global Equity Fund Y USD Acc	0.99%	5%	0	IE00BN0W3297	BN0W329	GUSGEYU ID
Guinness Sustainable Global Equity Fund Z EUR Acc	0.74%	0%	0	IE00BN0W3412	BN0W341	GUSGEZE ID
Guinness Sustainable Global Equity Fund Z GBP Acc	0.74%	0%	0	IE00BN0W3305	BN0W330	GUSGEZG ID
Guinness Sustainable Global Equity Fund Z USD Acc	0.74%	0%	0	IE00BN0W3529	BN0W352	GUSGEZU ID