Amid global sustainability challenges, fund seeks to identify quality businesses that address these issues
The world is facing ever-pressing sustainability challenges and one fund is utilising its robust research process to identify quality businesses that address these issues.
The BMO Sustainable Opportunities Global Equity Fund takes long-term positions in these companies. A focused 30-50 stock portfolio, about 40% of the strategy has been owned for more than seven years, while 35% for more than 10 years.
BMO GAM is partnering with Wealth Professional for WP Invest ESG 2020 on March 25 at Arcadian Court, which will feature debate and panels around ESG issues facing advisors.
Portfolio manager Nick Henderson oversees the BMO Sustainable Opportunities Global Equity Fund and told WP there are implicit areas it simply won’t invest in, such as tobacco and alcohol, which clearly run against the grain from a sustainability perspective. Hard exclusions include companies where the majority of revenues are derived from fossil fuel-related activities.
Previously called the BMO Fossil Fuel Free Fund, the fund is now managed out of London and backed up by an 8-person investment research team, supplemented by an in-house 17-strong dedicated ESG research team. It’s enjoying good inflows with an AUM of C$ 52.9 million and Henderson said this reflects people’s changing attitudes.
“This is an area of investing that for a long time people thought was nice to have but there were continual conversations that it was at the expense of returns,” he said. “But that has really flipped on its head and people now see that ESG issues are fundamentally business risks and opportunities that we need to be factoring into our valuation. Equally, if we can harness these structural tailwinds, then that offers the potential for a superior risk-reward trade-off.”
Two successful firms in the fund shine a light on its investment strategy. One holding is a Danish company called Ørsted, which is a market leader in the building and maintenance of offshore wind farms. Henderson said he is seeing a rapid increase of capacity into these farms.
It serves as a useful comparison, strategy wise, with the solar industry, which the fund does not invest in despite foreseeing major deployment. Henderson told WP the quality of the investment case in these underlying businesses is not strong enough to support our investment because the barriers to entry are simply too low.
With wind farms, the development and maintenance are structurally and technologically a much harder operation, requiring relationships with local authorities and regulators. The barriers to entry, therefore, are much higher.
Henderson said: “We believe that the runway to continued returns within this industry is much higher and therefore much more attractive. Ørsted has been deploying capacity and winning new contracts for wind farms, so the outlook remains very good and that's been reflected in the share price.”
From this environmental piece to an example of the fund’s societal perspective, it also holds a position in HDFC Bank in India, which is strong within the retail market and in rural areas where millions of people remain “unbanked” and don’t have the financial security that comes with having a bank account.
The bank is, therefore, educating individuals and seeing an increase in deposit flows that can spark decent loan growth.
“It is a strongly growing profitable bank that is helping the local population but that tailwind is providing them with the opportunity to grow. It is a business that we own within the strategy and like very much.”
The fund is closely aligned with BMO’s engagement philosophy of “Invest and Improve”. As well as investing in a company to make a positive contribution to ESG issues, BMO then works with companies to improve how they are taking into account these risks and opportunities. This involves conversations with management teams and boards of directors of the invested companies to drive that improvement.
“I think investors are increasingly wanting to not only align their investments with their values, but also to know that their investments are having a voice and are having some sort of an impact into how businesses are run for the better,” Henderson said.
“This strategy does that. We report on the level to which we engage and where we have success stories, we highlight those.”
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