The six funds including our new global equity sustainable fund offer good value for money, and your clients can express their values – by investing in companies that make a positive contribution to our society and environment.
We’re proud we’re helping your clients achieve their goals and make the world a better place.
*The basic charge is 1% p.a., which is built into the fund price. For all customers, a discount is applied and depends on the value of the investment.
Listen to Mike Fox, Head of Sustainable Investments at RLAM talk about what's changed and what's next for sustainable investing and how its been impacted by coronavirus and what impact this could
have on the next decade.
Adam Vaites: Good morning and welcome to the latest webinar from Royal London Asset Management. So this is part of the investment series taking place this week and it’s day 3 and we're talking about sustainable and responsible investing. So thank you if you joined us this morning for the Andrew Neil session.
To introduce myself I'm Adam Vaites, part of the wholesale team here. I'm here with my colleague Mike Fox, Head of Sustainable Investments. So Mike's been running the funds now for 17 years, very successful range.
The title of today's webinar is 30 Years and Counting. That is how old the Sustainable Leaders Fund is now so thank you for the support there. Sustainable and ESG investing has never been more topical. I think if we look over the past 18 months there's pretty much been an article every other day about ESG investing or sustainable investing and what that means for the market.
So what we’re going to talk about today is the impact of COVID. We’re going to talk about valuations and we’ll give you some stock examples and talk through some themes. We'll then move into a Q&A with Mike. So if you do have any questions, please do ask them through the usual BrightTALK portal on your screen throughout the webinar and we'll endeavour to answer all your questions at the end.
So I'm going to hand over to Mike and thank you to everyone for joining us.
Mike Fox: Thanks, Adam. So the title or the presentation very much refers to the fact that the first of our sustainable funds was launched 30 years ago now. So back in 1990 and it’s been a remarkable journey ever since. So on slide 2 the two presenters today.
Yeah, I think the purpose of this presentation really is to give an overview of the impact of COVID on the investment and the sustainable worlds. To explain why asset prices have actually gone up not down in the COVID world and then really what are the key trends that we see going forward.
So we start on this slide which is our little friend COVID. You know I guess what fascinates me about COVID is that really when we started coming into this year what we were all worried about, what clients were all worried about were trade wars. That trade wars were ultimately going to bring down the global economy and equities and investment markets would follow that.
In the end it turned out to be a little virus that took down the global economy. I think there's some really interesting points when you think about this from a risk perspective. So you know when you think about risk management of portfolios, the only risks that matter are the people - are the risks that people don’t know about.
So in my career the kind of big risks that have come along were 11 September terrorist attacks. They were the financial crisis of 2008 and now we’ve had COVID. Really from a risk perspective, what it teaches you is that the big risks you can’t actually forecast. When people start talking about something as a risk it’s usually already in the price or it’s usually something that people have already begun to hedge against.
So if you think about second waves at the moment or you think about why that's not influencing equity markets. It’s because we kind of all knew there was going to be a second wave and at that point we all realised it, it ceases to be a risk.
So I think when you a look at COVID through the lens of risk management you begin to release that the only way you can manage risk in your portfolios is how you conduct yourself in the good times. But really managing risk by forecasting what’s going to happen next is incredibly hard to do and the risks that are going to make the biggest difference to your portfolio today, you're probably not even comprehending.
So the first message about COVID is absolutely why ultimately managing portfolios in a kind of sensible way is always correct. Because ultimately excessive risk talking is vulnerable to risks that none of us can foresee. So that's a few words on COVID.
I think what we want to talk about next is what influence COVID has had on asset prices and in particular equities. So one of the questions I get asked most is why equity markets have not fallen further. In fact, equity markets have actually gone up since COVID started. So really, I want to kind of try and answer that point as to why equities seem to be worth more now than they were before COVID started.
I think to answer that question we’ve really got to into the world of valuations. We’ve really got to understand how an equity is actually valued. I think the first thing to say about valuation is that generally it’s an exercise in false precision. That valuing equities is incredibly subjective and very difficult to do.
Over the last 20 years it’s got much, much harder than it used to be. I'm going to give you a good reason for that. In the 90s and the 2000s really if you thought about the growth of the company which is one key variable into valuing an equity. Growth in the corporate world [tend to], you could bookend this, it’s something like zero to six per cent.
In the early 2000s if you were a poor business you were growing at zero sub GDP. If you were a great business, you’d be growing at six per cent, maybe seven per cent, something like that. I think what's changed in the world now is that because of disruption zero to six has become minus 15 to plus 30.
So if you’re a business on the wrong side of disruptive trends you’re basically seeing your revenues decline 15 per cent a year. Sometimes even more. If you're on the right side of disruptive trends, then your revenues are growing 30 per cent plus. So if you think zero to six per cent was your range of growth that you put into your valuation 20 years ago and that's going to minus 15 to plus 30. You know intuitively you can see the massive impact that that has had on equity valuations and the range of possibilities.
But having said that, some things haven't changed and the purpose of this slide here is to illustrate when you deconstruct an equity into what it is where all the value lies. So most equities are managed - are valued using discounted cash flow valuations. So each year has a certain amount of cash. You add it up over time and then it becomes the value of the total equity.
One thing that perhaps though isn’t appreciated is that year one, the next year's profits are only worth about five per cent of an equity's valuation. Years two to five tend to be worth about 20 per cent and year six and above are the vast majority of the valuation of any equity.
I think this is reflective of the fact that they're long duration assets. So by that I mean in theory a company could last for 30, 40, 50, 60 years. Companies like Unilever have been around for the best part of 100 years. So again, intuitively one year profit in the midst of all that is actually not worth a great deal. So if you completely wipe out profits of a company in one year it takes off about five per cent of the value. If you wipe out five years' profits of a company, it’s worth about 25 per cent of the value of an equity on average.
So when you were sat looking at your screens in mid-March and you saw the equity markets had fallen 30 per cent, depending on which market you looked at. That was effectively saying that the next five- or six-years' profits of corporations were wiped out and that's clearly been wrong. I think it’s an interesting point here as to why equity investors get every recession wrong. Because a recession comes along, equity markets fall 20 per cent to 30 per cent and actually it only takes off a small amount of the value of an equity.
So the first point here is that actually the correct impact of COVID on the value of an equity on average should have been somewhere we think between five per cent and 10 per cent. One to two years' profits is not a bad estimate to how much of a company’s profitability has been lost through COVID. So the first point is that equities should never have fallen as far as they did.
The second point is around - on the next slide - is around bond yields. So one defining influence on equity valuations is the returns that were available elsewhere. In the 1980s basically if you worked in private equity and you were selling your fund out of the door you had to deliver a 20 per cent return per annum. That was - the reason for that was that 10-year treasuries offered you about an 11 per cent return. So you could get 11 per cent by lending your money to the US Government.
So clearly 20 per cent return had to give you a lot of difference between what the Government - the US Government would offer you as a return and what the extra risk you were compensated for. So there was always a very heavy influence on the value of equities as to what are the alternatives? What else can you invest in? As people have been in markets for a long time will know, 10-year treasury yields have been on the declining trend for best part of 30 years now.
What you see on the chart in front of you rare the 10-year treasury yield going from September last year through to September this year. We came into the year with treasury yields at around two per cent. Then as soon as COVID hit - mainly because people were had just started to discount, more QE, more stimulus - you saw that very large decline in bond yields to around 60 basis point.
So if you think about 60 basis points as your 10 year return for lending to the US Government, what return do you need to invest in another asset class? This is where it gets interesting. So when I started out in this industry in the late 90s, treasury yields were yielding about six per cent. People wanted usually about eight to 10 per cent return for equities to compensate them for the extra risk.
Now if your 10-year treasury is 0.6 per cent then what equity return do you want? Is four per cent to six per cent enough? Is three per cent to five per cent enough? But clearly, you’re going to be willing to take a much lower equity return in a world where bond yields are low.
So the second point is simply that really. That as the returns available for other classes - asset classes - get reduced then the valuation on equities goes up. Because people are willing to pay more for the growth that they offer. Obviously for those people who say oh, well there's flaw in this, what happens if bond yields rise? I think that's a very fair point.
Just for the record though, in Japan, bond yields first went through 60 basis points in 2013 and they haven’t gone above since. So in Japan you've been waiting seven years from the point that we reached in March this year and you've still not seen that rise in bond yields. So to the extent that that's a lead indicator for us, time will tell.
But I think what I'm trying to say with slides 4 and 5 is that basically that the amount of equity valuation that was destroyed by COVID was much more offset by the reduction in returns available in other asset classes. So even though it seems a bit strange, actually equity valuations should have gone up as a result of COVID.
So on that we’ll move on to the more sustainable side of the presentation and just talk a little bit about what’s happened in sustainable sense. I think there's three quotes on here which I think sum up our views on the world quite nicely. The first one is from a French author Alphonse Karrs who said somewhere in the 1870s, the more things change, the more they stay the same. Which is a great little summary of what is happening at the moment.
When we get asked what are the key trends coming out of COVID? We basically say the same ones that were coming in, at warp speed. So the more the world has changed, the more it’s stayed the same. The more COVID has impacted on the world, the more digitally it’s become, the more online it’s become and a bunch of other trends which we’ll talk about in a minute which we think are very relevant.
I think two other comments, two other quotes I think are really useful. One is from Marc Andreessen who’s a private equity specialist working in the technology space. Where he has this fantastic little line, software is eating the world. I mean it’s true, the world is becoming less physical and more digital and really software is the key to more and more things that we do.
That dovetails nicely to a quote from Andy Grove who was the Intel Chief Executive for some time. Who basically said yeah, I've been quoted in saying that in the future all companies will be internet companies. I still believe that more than ever, really. So and I guess what he was saying in the end, every company will be an internet business. They're all the bricks and mortar play in the world has to be defined.
So our point is this really. There what has changed - not much actually, surprisingly not much. I mean that seems a bit odd when we’re all working from homes and our lives have been changed very fundamentally by this. But from an investment perspective, really what you want today is what you had before COVID but more.
Just to illustrate this point in the next slide, just think about the physical versus the digital world. Café Rouge, a brand that many will be aware of. Café Rouge unfortunately went bust during this crisis, as did Oasis which is a high street clothing brand.
Then you've got WeWork which obviously made a huge amount of publicity and signed a load of leases. Arguably it’s a time when people's perceptions about the role of an office was very different to how they are today. Their competitors are basically the online version. So Deliveroo, order your food online and get it delivered to you. Amazon and then obviously you can see the picture on the bottom right which might be a reality for a lot of people now in terms of working from home.
But you know the big trend that's been accelerated is this shift from the physical to the digital world. We’ve seen a lot of stranded assets, a lot of stranded companies that you really need to think long and hard about investing in. Then there are some very clear winners on the other side.
Next trend really is this idea of shareholders versus stakeholders. So this is an idea that's been bubbling around for a while. When I came into the industry, the handbook I was given basically said that companies should enact in the best interests of shareholders and that is it. I think over time that's very much softened and there's been an understanding that companies have a broader role to play in society. They have a role towards their employees, the environment, the community and things like that.
Actually, if they enacted that better, if actually they became for all stakeholders rather than just for shareholders. That actually that would be a very positive thing and that would probably result in better shareholder returns anyway. We’ve definitely seen through this crisis a real shift in corporate mentality to being responsible citizens as well as trying to deliver good returns to shareholders.
So another change that we see is this more structural shift towards stakeholders being considered first, of which shareholders are one. But shareholders do not get disproportionately recognised in the mantra and the reasons for a company existing. We think in the end that will be very good for investment returns as well as actually very good for society as well.
Then the other trend that's definitely accelerated, we think, is this value versus growth debate. So this is another thing that we get asked a lot about. Which is value stocks are very cheap and growth stocks are very expensive. As I said at the beginning of this conversation, valuation is an exercise in false precision many times. So you've got to be very careful when you say anything with certainty when you think about valuing a business.
But what we observe is industries like tobacco, offline retail and oil - which you can see on the left-hand side - are getting fundamentally disrupted. So if you think about this idea that 75 per cent of an equity is in years six plus, so what happens in 2026 and beyond. You start thinking about how many people are going to be smoking then. How many people are going to be shopping in malls and how many people are going to be using oil to the extent they are today, you can get a sense as to why value investing is really struggling to work at the moment.
Because there is so much disruption going on that when you think about it, you know there's whole chunks of valuation that is just disappearing. So a lot of companies that are badged as value today are value for a reason. Value investing 20 years ago which was based on reversion to the mean just doesn’t seem to be working in the way it used to.
Equally growth stocks on the other side, if you invest in companies that are curing cancer and if you invest in companies that are leading the charge to digitising the global economy. If you’re investing in companies that are decarbonising energy, they're seeing huge structural expansions in their total addressable markets. So the growth companies are growing even faster and the value companies are being disrupted even faster.
So our take really on value versus growth is that we’re not in Kansas anymore, the world has changed. Value investing might still work in certain iterations of it. But it is much, much harder because a lot of value sectors have just been fundamentally disrupted.
So we'll just end the presentation with just a little bit of a reminder about what we do. It just reminds you about the core principles that sit behind our sustainable funds. So we have two sustainable ones and then four equity and fixed income which we work across. Two of each there. So from a sustainable perspective, as a reminder we will always target our investments on companies whose products and services that help the transition to a more sustainable society. So cleaner, healthier, safer, more inclusive.
We will also target out investments more towards companies with high ESG standards. So high environmental, social and corporate governance standards. We think in doing that we'll get on the right side of a lot of these disruptive trends that we talked about earlier.
The right side of companies whose valuations are being positively influenced by what is going on in the world at the moment and will avoid some of the areas that are struggling. We work across equity in there. In equities we simply look for value creating companies and we want to pay a pay a fair price for them. Within fixed income we’re very focused on bondholder protection and diversification. Just reflecting the fact that our upside in fixed income is ultimately we get our money back.
But those six principles, two sustainable, two equity, two fixed income are the bedrock of what we do. So we basically have six funds now that go from 100 per cent fixed income on the left hand side to 100 per cent equity on the right hand side. We have two equity funds, one which is - sits in the UK All Companies sector which is leaders and one which sits in the IA Global Sector as a true global equity fund.
The idea is that if you can get your head round our definition of sustainability and how we enact it, that we should be able to find a fund to meet your requirements. Whether they be income, whether they be growth, high risk, low risk, medium risk. Over time you can lifestyle and you can move up and down the product range and people do.
Finally, you can see on the next slide is the performance track record. I won't dwell on that too much but just to note on the global sustainable fund there, that was obviously February this year so it’s now got its six months' track record. But as you can see from the rest of the funds, they have very good long term investment performance.
So as a final summary from me is simply to say that remarkably COVID has had a positive impact on asset prices. Actually, when you unpick it you can begin to understand why. There's been unprecedented capital destruction and creation as trends accelerate that were already there. Certainly, we think value versus growth as a debate has fundamentally changed.
Sustainable funds are very, very well positioned to benefit from this. There's a reason why sustainable funds have done well through this crisis. They had what was needed coming into it in terms of the right type of companies offering the right types of products and services. That's been very beneficial.
The final thing is to say the more things change, the more they stay the same. So overall what I would say is that rather than looking for necessarily new trends and new themes that have come out. That we might find the answers in the existing trends and themes that we saw before. They've just been moved to warp speed.
So with that we’ll move to Q&A.
Adam Vaites: Thanks Mike, great stuff. Got quite a few questions come in here. So I'm just going to filter through them. We’ve got one on UK equities within the portfolios and the asset allocation, given concerns over Brexit and political risk. So just a question around that.
Mike Fox: Yeah, I mean interestingly for our funds a no deal Brexit would probably be a good thing. So I know it sounds a bit inverted, that. But I mean for us first of all the UK stock market is not the UK economy. It’s an incredibly international market and the companies we invest in make the vast majority of their money overseas. So on the day, if there is a no deal Brexit, it's a reasonable assumption that sterling will devalue. That will increase the profits of the companies we invest in.
If you want to evidence it, have a look at the performance of the UK stock market after the Brexit vote which was a surprise. The market sold off for about half an hour and then everybody started upgrading the profit forecasts on weaker sterling. So the UK equity market did very well after the Brexit vote and we’d expect that to be the same. So it’s probably more of a risk for us that there is a soft Brexit, that there's a deal done.
Sterling we think would appreciate very rapidly under that scenario and for all UK investors it would create more of a headwind.
Adam Vaites: Great, thanks Mike. Just talking about technology companies in general and how do they score from an ESG perspective? Is one of the questions.
Mike Fox: It's mixed. I mean technology's a broad term which encompasses a lot of business models. So you can have semiconductor companies, you can have software companies and you can have the Big Tech companies as they're called. Amazon, Google, Facebook, Microsoft et cetera. You do have to look at them all individually.
So our view would be something like Facebook isn’t suitable. Because we think social media has many issues attached to it which I think are unsolved. But then we would say knowledge search is socially positive. We do think the influence knowledge search has had on society it’s very positive. So you have to go case by case.
Like everything there is - whenever there's generalisations about an area or a sector we get very interested because the world's not that straightforward. We think we can go and look at companies individually and then differentiate between those that are on the right or wrong side of social trends and invest accordingly.
Adam Vaites: Thanks Mike. Talking about the US election here actually. So asking what impact, if any, will the US election have on our suite of funds?
Mike Fox: Yeah, I mean it’s a general point. 2016 was a bad day for macro - a bad year for macro forecasters. Because nobody thought Brexit would get voted for and thought if it is it would be terrible for markets and markets went up. Then nobody thought Trump would get elected, he did and most people thought that would be terrible, the markets went up.
So it kind of teaches you that any assumptions about what could happen in the next four or five weeks and their implications for markets - handle with care basically. I think from my perspective my observation is that the US economy is successful despite politics, not because of it. That really the most favourable outcome in the election would be a split Congress and Senate basically - deadlock. The less ability there is to get through political systems, the better really from the perspective of just letting capitalism get on with it.
So it’s something we need to think about. I mean it will be noisy for the next six weeks. But again, most people thought Trump getting elected would be terrible for markets and pre-COVID and actually very recently the S&P was at an all-time high. So treat with caution any assumptions about that.
Adam Vaites: Great, thank you. Bit of an outlook question here. Where do you see the market going in the next six to 12 months? Particularly in the retail industry.
Mike Fox: So I mean I think in terms of markets generally I think you can probably forecast markets with certainty about once every 10 years. So I think you had one of those events in March this year where there was just simple panic. There was forced liquidation of assets and prices had just become massively disconnected from reality.
But it was kind of behavioural really, you weren't making an economic judgement. You weren't making a judgement even about COVID. You were just saying there is just blind panic in markets. There was in the financial crisis and there was after 11 September. So I think about once every decade you can say with certainty you think markets are going to go up.
The rest of the time it is very hard to predict. But what I would say about equity markets is they go up. It’s like pull up a chart of equity markets going back to the 1920s and see if you can find the depression, two world wars, pandemics, recessions on and on. You'll find them with a magnifying glass for sure. But generally speaking, companies get more profitable and equities go up.
So I think there's this old saying, if you want to be successful, investor to be an optimist. If you want to be successful journalist be a pessimist. The problem is when you read the press it’s very pessimistic because that's what gets people hooked and gets people reading. But if you want to be a successful investor be an optimist. That's definitely the right way to be and that's how I would think about markets going forward.
Adam Vaites: Great, Thanks, Mike. I suppose very relevant from earlier this year and what was happening. Question here about what is your sell discipline?
Mike Fox: Yeah, so I mean we like to buy things that are one trade stocks basically that we buy them and don’t have to worry about selling them. I think sell discipline is quite interesting because it looks good on a PowerPoint slide. Where you say oh well thesis disproven, share price meets price target, better ideas elsewhere. But when you actually come to do it it’s purely behavioural.
You’re selling something for two reasons. (1) It’s done really well so you want to take some profits and secondly, it’s done really badly. When you've got a stock that's done really well or really badly, psychologically you don’t want to sell it. So whenever you come to sell something there's a lot of behavioural aspects that work against you. Which is why most fund managers are very good at buying stock but very poor at selling them.
So I think from our perspective it just comes down to a simple judgement as to whether we think a company is doing what it said it would do when we bought it. I think if companies starts to deviate from that, maybe management changes or maybe their own markets change, we tend to sell first and ask questions later. We're basically saying the original investment idea is incorrect.
It does happen. Every year we expect to get two or three things wrong and we need to sell them. But we start off with this idea that we’d rather buy things and then let them do the hard work for the next 10, 20 years. But occasionally circumstances do get in the way.
Adam Vaites: Thanks Mike. Yeah, there's a few more questions but we’re pretty much out of time. So appreciate your time and just want to say thank you, everyone, for tuning in today, we appreciate that. If you do have any further questions, please do get in touch with your usual RLAM contact or there will be a contact slide on the presentation shortly where we’ve got our contact details there. This presentation will be available on the BrightTALK portal very shortly and we will be issuing CPD certificates to everyone that's registered.
So just finally to say thanks very much for all your time and support with the funds, it’s hugely appreciated by Royal London Asset Management and the team. Enjoy the rest of your day. Thank you.
END OF TRANSCRIPT
Our Sustainable Funds have been risk rated by Distribution Technology and risk profiles have been assigned as follows:
|Fund||Assigned risk profile|
RLP Sustainable Managed Income Trust
RLP Sustainable Managed Growth Trust
RLP Sustainable Diversified Trust
RLP Sustainable World Trust
RLP Sustainable Leaders Trust
RLP Global Sustainable Equity
Rating not yet available