The Guinness Sustainable Global Equity Fund is designed to provide investors with exposure to companies benefiting from the transition to a more sustainable economy. The Fund is managed for capital growth, and holds a concentrated portfolio of quality growth businesses, biased towards midcap companies in any industry and in any developed region.
We believe that over the next twenty years economies will continue to shift towards more sustainable products and services, and there will be a greater emphasis on good corporate practices. Businesses which are part of this transition are likely to benefit from a sustained growth in demand, be it in energy efficient products, medical equipment or semiconductors used in robotics & automation, while companies improving their environmental, social and governance (ESG) practices are likely to reduce their operational risks. We believe that sustainable businesses which have generated a persistently high return on capital, and where management has a strong and improving ESG focus, are able to produce superior shareholder returns through:
- Persistent earnings growth in the future; and
- Forward thinking management able to capitalise on secular opportunities and generate future economic value
We maintain a high conviction portfolio of around 30 equally-weighted stocks, with low turnover and no benchmark-driven constraints on sector or regional weightings.
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.
Joseph is an investment analyst for the Global Equity team having joined in July 2018. He graduated with a Master’s degree in Mathematics from the University of Bath before graduating with a Master’s degree in Investment Management from the Henley Business School. Joseph has also passed the CFA level 3 examination.
Sagar joined Guinness Asset Management in February 2017, and is an investment analyst in the Global Equity team.
Prior to joining Guinness, he worked at Bloomberg as an equity specialist, within Financial Analytics and Sales. Sagar graduated from Selwyn College, University of Cambridge, with a Master’s degree in Economics, and has since completed Level II of the CFA Program.
How do we run the Fund?
- 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.
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:
- Fossil fuels
- Nuclear energy
- Palm oil
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 business tend to display inadequate or worsening management of ESG issues and are vulnerable to ESG related disruptions and controversies.
Sustainable and market cap exclusions leave the investible universe with around 450 companies.
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:
- Health & Wellbeing
- Productivity & Connectivity
- Resource Efficiency
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.
- The company no longer qualifies as sustainable - The company now derives a material portion of revenue from harmful products
- The balance sheet becomes stretched
- The valuation becomes too rich, or no longer offers compelling upside
- There is a change in a company’s capital budgeting approach
- Our original investment thesis no longer holds
- We find a more compelling investment idea
- The company’s ESG practices have deteriorated materially
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:
- It reduces stock-specific risk, as we will not be overweight in a small number of favourite companies.
- We will not have a long tail of small holdings in the portfolio, which can be a distraction and a potential drag on performance.
- 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.
- 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.
|For information on the Fund’s current investments, please see the latest fact sheet:||English|
|Fund managers (start date)||Sagar Thanki (15/12/2020)
Joseph Stephens (15/12/2020)
|Benchmark||MSCI World Index|
|IA sector||IA Global|
|Underlying currency||US Dollar|
|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|
|Class||OCF current||Max. Initial Charge||Min. Investment||ISIN||SEDOL||Bloomberg|
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