Your clients now have access to six sustainable funds managed by Royal London Asset Management (RLAM).
The most recent addition is the RLP Global Sustainable Equity fund. Like the other sustainable funds in our range the global equity fund offers good value for money and allows your clients to express their values by investing in companies that make a positive contribution to our society and environment. The global equity fund can also be chosen as the equity fund within our Governed Range.
Listen to our Podcast with Lewis Daley, Investment Proposition Manager and George Crowdy, Sustainable Fund Manager at RLAM discuss our sustainable fund range going global.
LD – Hi I’m Lewis Daley and I am one of the Investment proposition managers here at Royal London. Today we are going to be discussing our sustainable fund range and we are going to be looking more specifically at the launch of the new global sustainable equity fund. This fund is going to be available to pension customers from the 9th November and it will have the same 1% charge as the rest of the sustainable fund range.
I am very pleased to be joined today by George Crowdy, Sustainable Fund Manager, who will be providing a bit more insight into the sustainable fund range and specifically looking under the bonnet of the Global Sustainable equity fund.
Welcome George, how are you?
GC – Hi Lewis, doing well thank you, particularly during these strange times but thank you for having me on and running this podcast.
LD – No problem at all. You joined RLAM (Mike Fox and the sustainable team) at the start of what’s been a pretty eventful year, would you be able to give a bit of background into where you worked before joining Royal London?
GC – Of course, I joined Royal London at the beginning of February this year having spent the past 10 years at Janus Henderson where I was part of the Global Sustainable equities team. And really I was having discussions about the opportunity for quite a long time with Mike and I was really brought in to help globalise the sustainable offering and co-manage this new Global Sustainable equity fund with Mike. Obviously as you can imagine joining this year has been particularly interesting both in terms of our roles as fund managers but also just starting a new role at a new company, but its all gone really smoothly and really happy to be a part of RLAM and really enjoying working with the rest of the team.
LD – Well it’s a very good time for you to join us. You mention your experience in global sustainable investing, but before we go into our sustainable fund and the sustainable fund range, for those that maybe aren’t familiar with the phrase, would you be able to give a quick summary of “what actually is sustainable investing?”.
GC – Sure, I always think its helpful to just take a step back and I guess define what sustainable development is. We think one of the best definitions we have come across is from the UN back in the late 80’s. The define this as “development which meets the needs of the present without compromising the ability of future generations to meet their own needs”. And that’s really what we are trying to do with sustainable investing. Its about finding those companies which have Environmental and social considerations right at the heart of their economic model. We are looking to invest in those companies which are supporting the transition to a cleaner, healthier, safer and more inclusive society. We look at companies through both their products and services, so “what they do”, and their operations, so “how they go about doing it”. Unlike ethical investing which you can think of as being based on negative exclusions, sustainable investing is very much about positive inclusion, and we think this is an investment approach which is really driven by making positive choices and we think can be hugely additive to investment performance.
We really do think those companies that are providing solutions to and are on the right side of these environmental and social trends will just be much more interesting and much less risky places to invest.
LD – That makes sense, and it’s an extremely important point as well and it’s something that is being spoke about in the wider market at the moment. If we look just at Royal London’s sustainable fund range – for pension customers we have 5 funds available, soon to be six, - is there anything that you would say sets apart our sustainable strategy from the rest?
GC – I think its fair to say there has been a lot of new sustainable funds being launched in the market and I think every time I look at various trade press it seems like there’s almost one every single week. But there a few things that I think set our range of sustainable funds apart from the competition. Firstly, I think the fact that we at RLAM have been managing sustainable funds since 2003, which is when Mike first started this sustainable investment approach. I think that’s really important because we do have a track record that spans a long time period over different economic, social and politically driven market environments. We think that this long-term track record does evidence that our sustainable investment approach does add value and can deliver attractive risk adjusted returns.
Secondly, I think it’s important to realise that Asset Management really is a people business and it’s the people behind the process really differentiate us. We are pretty unique in having a very flat team structure, and by that I mean every single person in the team has an equal say as to whether a company should be included within our sustainable investment universe. So an equal vote as to whether that company does have a net benefit to society. We have built up a diverse team which is made of a variety of different people with different views and perspectives and we absolutely encourage difference in opinion and that combined with the flat structure and very open culture we think does lead us to, as fund managers, make better investment decisions on which companies to invest in.
And then thirdly, as you eluded to at the beginning, we are somewhat unique in offering a complete range of funds. A range that goes from 100% fixed income to 100% equity right across the risk spectrum. I think if we can get you on board with our philosophy and process, chances are there is a fund that would work for you.
LD – I think that’s a really key point as well when we look at the benefits of Royal London sustainable fund range, there is a lot that goes into the team’s processes. Taking a step back from our solution, in a very brief overview, for those that are just getting into exploring sustainable strategies, is there anything that you would say is a non-negotiable or a must have when it comes to a successful active sustainable approach.
GC – That’s a really good question, and I do think being active is key. We very much do have a high bar for inclusion within these funds and particularly with the global sustainable where we think there’s around 3000 companies where we can get reliable information on globally, we are only looking to invest in 30-50 of those, so the bar to be included within this portfolio is extremely high. Its really that high bar combined with the team resource that goes into that which hopefully steers us to making the best investment decisions.
In terms of non-negotiables, it’s about being very consistent with that high bar for what we are looking for in terms of companies that we might consider for an investment here.
LD – Very good point, and now moving onto the global sustainable equity fund, the fund you manage. Am I right in saying this is following the same or very similar process to the others we already have on the range?
GC – Yes, exactly right, so its exactly the same philosophy and process. The only difference really is that we are looking at a broader opportunity set being global. And the other difference is that this a 100% equity fund, so the same structure as sustainable leaders.
LD – For the benefit of those that maybe aren’t familiar with our sustainable fund range process, in an overview could you give a bit of detail in terms of what is that process – how do the sustainable team at Royal London identify the companies to invest in?
GC – There is 4 things that we are looking for which you can think of as the core principles which are behind our analysis and the way we look at companies. Two sustainable and two financial, so on the sustainable side we are looking for those companies which are contributing to a cleaner, healthier and more inclusive society and we are looking at that through the products and services of that company and its operations where we are looking for evidence that all stakeholders are being taken into account. By that we mean the environment, society, the companies’ employees, its customers and the community in which it operates.
Then on the financial side we are looking to invest in those companies which do create value, by that we mean companies which deliver returns above their cost of capital and ideally higher returns than their cost of capital, and consistently higher returns. Really by that we are looking for evidence for the sustainable competitive advantage within that company and an attractive industry structure. The fourth part is valuation where we are looking to pay a fair price for what we are investing in and it’s really an assessment of what we think the future growth and return assumptions that the share price today is implying. That’s really what we are looking for and those 4 key principles form the key basis for our consistent scorecard approach which we apply to every company we look at regardless of where its listed around the world.
LD – That’s a really important process as well that can be applied across the range, so for those that are looking at one sustainable fund it is consistent across the board. Now we are actually looking at the range itself which goes from fixed income up to equity, as you said we are now going to be having 2 equity funds in sustainable leaders and global sustainable. So for those that might be looking to combine these two equity funds within a portfolio, is there much duplication in the stocks held and how often are these positions reviewed, from an oversight perspective?
GC – The reality is whilst they are both 100% equity funds, they are both quite different funds. So Sustainable leaders fund has a minimum 80% invested in UK with the remainder invested overseas and there is currently around 40 holdings in our sustainable leaders fund and of the 40, we are invested in 11 of those within our global sustainable equity fund, so a pretty low overlap. Really the key difference is that Sustainable Leaders is a primarily UK equity fund, whereas the global sustainable equity fund is a true global fund.
LD – Speaking about the true global point, one point I find extremely interesting and probably worth noting is the benchmark that global sustainable equity uses, it uses the MSCI All Country World Index as opposed to just the MSCI World benchmark. Would you be able to give a bit of detail as to why that is the benchmark?
GC – Of course, its really one thing towards that “go anywhere” approach to global investing and on that basis the ACWI benchmark makes a lot of sense as it comprises both of developed and emerging markets. We felt that would give us the biggest global opportunity set and the opportunity to find the best sustainable ideas regardless of where they happen to be listed. What we have been noticing over time is just actually how the lines between emerging and developed markets are continuing to blur. That’s really as economies develop, and governments and disclosures improve. I guess we are seeing with the pandemic today how actually a lot of what we would consider to be emerging markets are actually dealing with the pandemic much better than developed markets. So I think the way that we would previously categorise countries and regions is perhaps becoming a bit different. Also what we see is that the worlds most significant environmental and social challenge are increasingly global in their nature. You can think of things such as trying to limit global temperature increases, the global war on plastics and the global pandemics. This all highlights the importance of global collaboration and global companies being well positioned to help address these issues. We think that by having a truly global fund is the best way to get exposure to these types of companies.
LD – That global lens that you refer to there with the global sustainable fund, when we look at this and translate it into investment opportunities and potential watch outs, for you as a sustainable investor could you pull out some of those key opportunities and watch outs when you apply sustainable investing on a global scale.
GC – Whilst the disclosures and ESG data quality does continue to improve, when you start going global you do come across areas of the world where it is less good. That’s why we always start with corporate governance as the first thing we look at when we start company analysis. We are looking at things such as how the companies board is composed, the experience and independence of that board, how the management team are remunerated and whether that aligns with our interest as shareholders. We think that investing in companies with good governance is particularly important when investing globally and see this as a key way to minimise the risks. Once we are comfortable with that its really where we move onto that consistent scorecard approach which we apply to any company we analyse regardless of where it happens to be listed in the world. That equal weighting to both sustainable and financial factors that leads us to invest in those companies which really are there to provide solutions to the worlds environmental and social issues and are managed in a very responsible way. On the financial side, those companies which do create value, have sustainable competitive advantages and attractive valuations. Its very much the same things we are looking for when we are looking for opportunities globally as it is in the UK. I would say that it is the corporate governance part that is particularly important as the first hurdle that a company has got to overcome when investing globally.
LD – You mentioned the UK fund there, one of the areas that the sustainable fund range has done so well in is just the performance, the fund range has performed extremely well since launch. Whilst I know the fund was launched just in February this year - and it’s not necessarily been the most straightforward few months for markets to say the least – also aware the fund is looking to invest in companies over a longer time horizon than just a couple of months - would you be able to give an overview on how the strategy has performed and maybe just pull out one or two key highlights on how the fund is positioned going forward.
GC – Course, there were certainly times where it felt like launching a fund in February of 2020 would be the worst possible time to launch new fund, but actually thankfully that really hasn’t been the case and we have been really pleased with how the fund has performed since then. And really that is a function both of what we have been invested in but also what we haven’t been invested in. In terms of sectors we have been overweight and continue to like it’s really both technology and healthcare that has been at the heart of this fund and many of the companies in these sectors prove to be not only be more resilient in the market downturn but have also outperformed as the markets recovered. The difference with this crisis versus others that typically in a crisis you see the things that have been hit that hardest rebound the most but its actually quite interesting that that hasn’t been the case this year. Actually many of our holdings are at share price highs. Within healthcare we have been invested in a few pharmaceutical companies which have been right at the forefront of developing the COVID 19 vaccine, companies such as AstraZeneca with their partnership with Oxford University. Also, diagnostics companies such as Thermofisher in the US and Roche in Switzerland which have been providing tests for the virus and they have all seen strong demand this year.
And then on the technology side, we are just seeing such a huge acceleration of digitalisation across every single industry and our exposure to themes such as software have particularly benefited us as the worlds pivoted to working from home. We have benefited from the shift to ecommerce and the shift to more digital payments just to name a few. Our technology exposure is pretty broad based, and a lot of our companies have seen accelerating demand there.
Its not just our technology and healthcare holdings which has done well this year, it’s really our preference for those well managed companies with strong balance sheets and more predictable growth which has really helped. But I do think that at our time in the crisis, our philosophy of investing in companies which really are providing solutions to the worlds challenges has helped our portfolios do well versus peers and the market.
Also as I said, its also what we haven’t owned which has particularly helped our relative performance. Generally having no exposure to the weakest parts of the markets such as energy, travel and leisure which just don’t fit our sustainable process has also helped our performance on a relative basis.
In terms of how the funds continue to be positioned, we haven’t really made too many major changes. We still have two key themes that we are particularly focussed on, and that is really companies which are facilitating and enabling the digitalisation of the economy, and those companies that are directly providing solutions to the global healthcare crisis and supporting the need for more resilient healthcare systems.
LD – You mentioned there in terms of themes you are focussing on, and I feel like sustainable and technology go hand in hand particularly in the media. Technology is a sector, as you said, that has contributed significantly to the growth of the sustainable funds, but what would you say to someone that believes technology is overvalued and its actually reached its high water mark?
GC – I think its certainly possible to find some areas of technology which you could argue are now pricing in unrealistic expectations and I think that’s particularly the case in some of the recent technology IPOs we have seen. But actually when I look at the broader technology sector, I really do think the valuations of many companies do remain very compelling. There is just so much innovation occurring and the covid crisis of this year has just so materially accelerated technology adoption in virtually every single part of the economy. Just last night when Microsoft reported their earning their CEO Satya Nadella was saying he thinks that technology spend as a percentage of global GDP today is about 5% and he sees that doubling over the next decade. That kind of makes sense when we look at all these different companies and industries, its almost impossible to find an area that isn’t going to spending more on technology and doesn’t have to think more about their digital strategy. I think pre-covid companies having a digital strategy was almost a nice to have and what we have seen now is the absolute need to have, and really the only way these companies can keep operating and remain competitive. When we think about the types of technology businesses we want exposure to, we do have a preference for those more established business models and those companies which can show that they do create value, so returns above their cost of capital, and are able to generate consistent free cash flow. We do tend to avoid those more unproven business models such as some of those more recent IPOs as we just consider those types of companies as a bit too risky for us.
As I would say with investing in any sector, I think active management does make most sense and we think that we are still able to invest in technology companies which we think are very attractively valued, particularly over the longer term.
LD – I think that’s a really good point there, and there’s benefits of being able to actually actively analyse and scrutinise the company and not just blindly buying the sector.
To wrap up, we have had an extremely turbulent year and we still have lots on the horizon in the US election and Brexit in the coming months. To try and finish on a positive note, what would you say is the most exciting area you are exploring as part of the global sustainable equity strategy?
GC – First thing I would say is that actually so many of the trends the sustainable funds are exposed to are really so much more powerful than any political noise, and I would include the US elections and Brexit there. We really are looking at decade, and in some cases generational trends, and really there is so much to be excited about as a sustainable investor today. The amount of innovation that’s happening in the companies that we are invested in is just so ginormous and that makes us hugely excited. We really do think that over the next decade we will see huge breakthroughs in the way the world is able to decarbonise and that’s going to be supported by the continued decline in the cost of renewable energy and things such as the electrification of transport. We expect the continued breakthroughs in healthcare and a real move to a more connected and virtual healthcare – expect to see widely adopted over the next decade. Also huge breakthroughs in the way that diseases such as cancer are treated.
There’s also a real keenness for governments to use this crisis to build back better, and we think that many of the companies that we are invested in are really well placed to benefit from that. So when we look around us, yes we fully acknowledge that we expect markets to remain volatile in the near term, but over the long term we do remain very confident about the tail wind to the companies we are invested in.
LD – I think that build back better phrase is a very good way to wrap this up. Thanks George, really appreciate your time today. We do have a suite of material available which goes into more detail on our sustainable fund range and we will be constantly adding to this. Should you have any questions please don’t hesitate to get in touch with your Royal London Business development manager.
So that’s all from me, so thanks very much, thanks George
GC – Thanks Lewis.
LD – And thanks everyone for listening, stay safe and thanks very much.
Watch our webinar with George Crowdy, Sustainable Fund Manager at RLAM talk about a global approach to sustainable investing.
Russ Evans: Good afternoon, and welcome to this global sustainable equity presentation. My name is Russ Evans, Business Development Manager, and your main presenter is George Crowdy. George is the Co-fund Manager of our Global Sustainable Equity Fund alongside Mike Fox, who many of you will know. George joined us back in February 2020 from the Global Sustainable Equity team at Janus Henderson, and that's where he started his career as a graduate in 2010. He's bringing in plenty of knowledge in global equities and has been an excellent addition to Mike's growing team.
The title of the presentation is How to Go Global. It will last around 20 minutes, and then we'll have time for a 10 minute Q&A at the end. Please submit your questions in the usual way, and we'll answer them at the end of the presentation. Let's get things started. Over to you, George.
George Crowdy: Thanks, Russ. There are multiple environmental and social challenges that are pressuring the world today, and although COVID 19 is currently dominating the world's media, this time last year it was Greta Thunberg, Extinction Rebellion and David Attenborough, who were each highlighting the destruction to our natural world. While COVID has shown the fragility of our global healthcare system and has forced us all to adjust the way we live our lives, these other challenges have not gone away.
Global lockdowns over recent months have given us a glimpse of what a low-carbon world could look like as travel and industry was forced to a halt, but this carbon reduction has proven to be short lived as economies have continued to reopen. Additionally, COVID has also greatly increased the amount of single-use plastics being used, as we are now all carrying an often single use face mask and small bottle hand gel wherever we go. The war on plastics is far from over.
How we manage the world's natural resources must change, and the current linear economic model of extraction, use and then disposal simply isn’t sustainable. Greater recycling and promotion of the circular economy are key to us being able to use the resources more effectively and to minimise the negative environmental externalities associated with production and consumption. Quite simply, the world's population is not living in balance with the environmental capacity of the planet, and we're using up resources quicker than they can be replaced.
There's a concept which some of you may be familiar with called Earth Overshoot Day which highlights this. This year that day was on 22 August, which means that from 23 August the world has been borrowing from the future. Although this year's Overshoot Day showed an improvement versus 2019, it has been getting earlier every year, and our fear is that the lockdown-led shutdowns will just be seen as a blip in the trend until major changes occur.
We continue to see the climate crisis as the greatest challenge we will see in our lifetimes and one which will require huge changes to the way that industries and individuals function if we're to have a chance of keeping global temperature rises under 1.5 degrees. While I could easily spend the whole presentation talking about the importance of these trends and how the way the world is currently functioning is unsustainable, the key point is that nearly all of the world's major environmental and social issues are now global issues, and addressing these issues increasingly requires a global approach.
We think that in particular alongside government large global corporations have a real part to play in addressing these challenges. We think that we as investors can have a positive part to play on how these trends evolve, both in choosing who we allocate capital to and how we engage with the management teams and boards of those companies. We want to invest in companies which are positively contributing to the development of sustainable global economy, companies which are providing solutions to global environmental and social challenges rather than contributing to them. We think that companies on the right side of these trends will be more interesting places to invest.
While there's a way to address these challenges on a regional basis, we think the easiest way to address these global challenges is by taking a global investment approach. To state the obvious, a global approach gives you access to more countries. The MSCI ACWI Index, which our new global sustainable fund is benchmarked against, encompasses 49 countries. This gives access to around 3000 companies with an average market capital of around £13 billion and generally of decent liquidity. A retail index such as the FTSE All Share gives you a much smaller pond to fish in, and the average company size and average liquidity is generally much lower.
While it's possible to construct a sustainable fund using a regional index, and our Sustainable Leaders Fund is a great example of this with at least 80 per cent of the assets invested in the UK, it is much easier to access the kind of growth and innovation found in sectors such as technology and healthcare that is often most of interest to sustainable investors when taking a global approach. Taking healthcare and technology as examples which have both shown their importance over prior months, a UK-focused approach would give you access to around 40 companies, whereas a global approach would give you access to around 600.
Many regional indices also comprise a large number of companies which we would consider to be contributing to the world's environmental and social challenges, and are therefore of no interest to us as sustainable investors. The materials and energy sector is almost 20 per cent of the All Share index, and as investors wanting to allocate capital to those companies on the right side of the low-carbon energy transition these sectors are of little to no interest.
Investment trusts are another area which we would have little interest in due to the opaque nature of them. In both the regional and global approach, we think active stock picking is key, and there are many companies in both of these indices which are on the wrong side of sustainability trends and we think would make poor investments. In order to invest in large, innovative, growing companies in the sectors that are most of interest to sustainable investors, taking a global approach can make a lot of sense.
As a result of different regional cultures, demographics and paths, we have also found that different regions often provide different and complementary specialisms. Starting on the left of the map, we see the US, primarily Silicon Valley, as the tech innovation capital of the world. US companies are almost solely at the heart of driving things such as cloud computing, with the three leading providers of Amazon Web Services, Microsoft Azure and Google Cloud all based there.
The US is also home to many of the world's leading medical technology companies which are helping to advance healthcare. Europe has a real specialism in pharmaceuticals with leading companies such as AstraZeneca, Roche and Novo Nordisk all based here. AstraZeneca based in Cambridge, with its partnership with Oxford University, seems to be one of the frontrunners in developing a successful COVID-19 vaccine.
Europe also leads the way in ESG standards and reporting, and it's perhaps no surprise that many of the world's leading renewable energy technologies are developed here as many countries and companies have been using renewable energy for a number of years. Amazingly, it's estimated that around 70 per cent of the world's semiconductors pass through Taiwan, and it's home to the world's leading semiconductor manufacturers, something we'll go into in a bit more depth later in the presentation.
With the oldest population in the world, it's perhaps no surprise that Japan has become a leader in robotics with the hope that it will help maintain productivity as the country's demographics become increasingly challenging. In fact, by 2050 it's estimated that one in six people globally will be over the age of 65 versus one in 11 people today. Supporting an aging population is becoming a growing challenge for much of the developed world. Less relevant to us as sustainable investors due to the environmental impact of mining, Australia is the undisputed global leader in commodities.
One of the challenges of global investing is accessing reliable and high-quality data, but thankfully this is something that continues to improve as standards of corporate rise and more ESG-related data is given. This chart shows the total number of global ESG regulations and how it has continued to increase. The majority of these new regulations have been focused on helping companies and investors better understand and meet the challenges created by the climate crisis, to promote and incorporate more alternative energy and to enhance transparency around corporate governance.
Recent examples include things such as compulsory stress testing on climate change risks by insurers, initiatives around clean and energy efficient vehicle, and compulsory disclosure of worker salaries by both gender and race. While a large part of the improvement in standards is government-led, many companies are also waking up to the fact that environmental and social issues can have a material impact on their businesses.
One example of this is in the US where now around 70 per cent of companies in S&P 500 mention climate risks and management in their annual reports, which is up from just 50 per cent two years ago. The continued improvement in disclosure, standards and corporate acknowledgement of ESG issues is allowing us to widen our investment universe even further, and we think that emerging markets are becoming increasingly relevant and important when thinking about global sustainable investing.
That's a bit of background on why we think it can make sense to take a global approach to sustainable investing. I will now go on to explain how we go about doing it. At the heart of our investment philosophy is the belief that capital can and should be used to support and encourage both positive and environmental and social change. We do this by determining who we provide capital to and then being active and engaged shareholders.
The part of our investment philosophy which was long met with scepticism was whether this approach of allocating capital to those companies which make the world a better place was at the expense of shareholder returns. We've long believed that companies which are providing solutions which help address environmental and social issues, and which take all stakeholders into account, will make much better investments than those which are contributing to these issues. We think our long-term performance track record across different economic, political and social cycles supports this.
These are the four things we think matter most when considering a company for investment, and which form the basis of our investment research. There are two sustainable and two financial. On the sustainable side, we analyse both the products of a company, what it does, and the operations, how it does it. We're looking for evidence that that company's products contribute to a cleaner, healthier and more inclusive society, and that the company is being managed and governed in a responsible way with all stakeholders being taken into account. We ask ourselves the question: is the world a better place because of this company?
On the financial side, we want to invest in value-creating companies with returns consistently ahead of their cost of capital, and we want to pay a fair price for the shares. Our four principles lead us to invest in innovative growing businesses which are providing solutions to global issues. These four principles form the basis of our consistent scorecard approach which we apply to every company which we analyse. One of the things we think differentiates us is that we give complete equality to both sustainable and financial characteristics, and that for all our sustainable financial research is conducted in-house, meaning that we're not reliant on any third party ESG ratings.
To talk you through a bit of an example, Taiwan Semiconductor Manufacturing Company, or TSMC as it's better known, a $450 billion company based in Taiwan and the world's largest semiconductor foundry which manufactures chips for customers all around the world. The company is somewhat unique in focusing only on manufacturing its customers' products and not selling any products in its own name. It produces over 10,000 different products which are manufactured over 260 different manufacturing processes, and its products are used in a wide variety of end markets which include high-performance computing, smartphones and autos. Although the company is headquartered and does the vast majority of its manufacturing in Taiwan, around 60 per cent of its revenues come from the US, so it's a truly global business.
To talk you through how we analyse the scorecard, corporate governance is always the starting point with our analysis, and we'll only ever invest in companies with above-average governance. We assess corporate governance both against local standards but also against what we consider to be global best practice. Here TSMC got a score of 15 out of 25.
On the positive side, TSMC has a board with over 50 per cent independent directors and fully independent audit and remuneration committees, and over 20 per cent of the board members are female. On the negative side, the chairman of the board is an executive of the company, and some of the board members have an over 10-year tenure on the board, which while not at all uncommon, raised some concerns on entrenchment.
From an environmental, social and product and services perspective, TSMC got a score of 18 out of 25. We view TSMC's technology and manufacturing leadership as a key enabler of future innovation in multiple end markets which include healthcare, technology, communications and mobility in addition to supporting the transition to a safer and more connected world. While semiconductor manufacturing is a resource and energy intensive industry, our analysis showed us that TSMC is a leader in green manufacturing. We've been impressed by the way that the company has initiatives around water conservation, recycling and reducing GHG emissions. The company has also recently signed the world's largest renewables corporate power purchase agreement with Ørsted, which is another company we're invested in, to take all their energy supply from Ørsted's new 920 watt offshore windfarm which is due to be located in the Taiwan Strait.
From a social perspective, we were impressed with TSMC's strong culture of innovation which resulted in high employee satisfaction and much lower than average employee turnover. Forty per cent of employees are women and gender diversity is one of the company's top priorities. The company is also a leader in promoting a healthy and safe working environment.
From a financial perspective, TSMC got a score of 36 out of 50. It's the dominant player with over 50 per cent market share in the global foundry market and is increasingly being seen as the technological leader and one of very few players who are able to successfully manufacture at the most advanced [nodes]. There are significant barriers to entry in semiconductor manufacturing both in terms of scale and technological knowhow, and we believe TSMC will be able to generate attractive growth and returns for many years to come as its products are used in an increasing wide range of applications.
We gave TSMC a valuation score of 16 out of 25 as we consider the valuation reasonably attractive given the future growth and returns we expect. We concluded that it was eligible for inclusion within our sustainable investment universe, and we have now put over 700 global companies through our scorecard approach, and our portfolios are invested in those names which score the highest both on a sustainable and financial basis.
This is what global sustainable investing looks like. It's all about investing in a diverse set of world-leading companies each of which is helping to address the world's environmental and social challenges. Other examples include: Microsoft, the leader in cloud computing and business productivity software; Bull, a leader in aluminium packaging products which are helping support the transition away from plastics; Thermo Fisher, a leading medical technology company which is providing tools focused on medical research and diagnostics; Aptiv, an automated technology company which is supporting the transition to electric and autonomous vehicles; Mercado Libre, a leading Latin American digital payment and ecommerce platform.
AstraZeneca, one of the world's most innovative pharmaceutical companies; Adidas, a global sportswear company and leader in sustainable manufacturing; Ørsted, the world leader in offshore wind; AIA, Asia's leading life insurance company which has various programmes to encourage healthy lifestyles; Sysmex, a Japanese based global leader in haematology; and CSL, a global leader in blood-plasma-derived therapeutics and vaccines.
Hopefully, that has given you a bit of an idea as to why we think it can make sense to take a global approach to sustainable investing. We see it as the best way to access the world's leading and most innovative companies which are helping to address a broad range of sustainability challenges. As you can see in the chart on the slide in front of you, we have a range of six funds which go from 100 per cent equity to 100 per cent fixed income. What you'll notice is that every one of our equity and mixed asset funds has an element of global equities within it.
While we were very excited to have launched the new Global Sustainable Equity Fund earlier this year, we've actually been investing in global equities for over 10 years in some cases, and it's been a key driver of our performance. We're excite about how our global investment universe continues to evolve. We believe our focused approach, led by our philosophy and consistent scorecard approach, will lead us to invest in the best global sustainability ideas regardless of where they happen to [listed].
With that, I'll hand it back to Russ to see if you have any questions.
Russ Evans: Thank you, George. The more observant of you out there may well have noticed that was pre-recorded. George is currently on holiday out in the British Isles somewhere. I'm not quite sure where but the forecast isn’t too good for him, so hopefully he'll have a good time. We are joined by Mike Fox, who many of you know. Mike is Head of Sustainable Investing at Royal London Asset Management. He's got slightly less hair than George but has 30 years of experience and is the quality person to have along. He's the co-manager of the Global Sustainable Equity Fund.
We have plenty of questions to get through. Let me start with the first one. We've been asked about the process, I guess. While you give equal weight to sustainable and financial scores, why do you give a higher weighting to G, which is governance, over E, which is environmental, and S, which is social when calculating the total sustainable score?
Mike Fox: It's definitely something that different people will weight different ways. Why we do it is ultimately because we think good corporate governance is really a founding principle. We do not have management teams that are incentivised in line with all their stakeholders not just shareholders. If companies have not got appropriate oversight in terms of board construct then it's a bit of a no no for us really. It's an observation that most corporate disasters have their origins in bad corporate governance, so over time we've found giving it that weighting really does protect the funds, but also definitely reflects the importance of it when we talk to management teams.
Russ Evans: Thank you, Mike. We've had a question here about Scope 3. How do you account for Scope 3 emissions in the investment process?
Mike Fox: Scope 3, for anybody listening who doesn’t know what that is, it's effectively your environmental impact and your supply chain things that you don’t directly control and yet your organisation contributes to. When we look at any company, we do an environmental assessment of that business, looking at the totality of their impact including supply chains. In a sense there, we are very dependent on what exposures companies will give us. We reward better disclosure where a company actually tells about their Scope 3 impacts. Then we take it from there. Over time, it's a good illustration of one variable that is getting better disclosed and that we can analyse and ultimately choose companies that perform better on that metric.
Russ Evans: We know that the Global Equity Sustainable Fund is predominantly bottom up, but we've had a question here about how we treat currency within the fund. Can you go into a little bit of detail about that, please, Mike?
Mike Fox: We don’t hedge currency, is the simple answer, the reason being we invest in global companies. They're listed in different places around the world. The point of this fund is we can access them wherever they're listed. But they will make their profits all around the world. We're not owning UK domestic companies or US homebuilders, things that if the currency of the country devalues there won't be some offset. Global companies, their profits will offset any changes in their base currencies. Over time, we don’t think it will have a material influence on the performance of the fund. We'd rather keep it simple by remaining unhedged.
Russ Evans: Leading on to that, we also have been asked about country specific risk. Is that something that we take into account.
Mike Fox: Over time, we would expect the fund to broadly mirror a country composition of the index. At the moment, we're a little bit underweight in emerging markets because we're still finding our way there from a sustainable perspective, but very much over time we want to take our positions at the industry and at the company level rather than the country level. You should expect over time the country composition of the fund to broadly match the index.
Russ Evans: Just on the index, we use the MSCI All Country World Index. We've had a question about when we took that index whether it was there to I guess broaden the reach of some of the other global funds which exist at the moment.
Mike Fox: Yeah, [unclear] two or three years ago I think we would have gone with the MSCI World Index. I think we would have looked at what was going on in emerging markets and viewed that as a separate skillset. Information flows, corporate disclosures and so on meant that it would have been not impossible for us to be credible there but more difficult. I think the last few years has changed that. I think the level of corporate disclosing in emerging markets is improving. Governance standards are improving. I think it gives us a base from which we can do valuable work.
We're certainly not saying from day one we're going to be overweight in emerging markets or phrases like that, but we've already put things like Mercado Libre in which was in the presentation in terms of being a leader in Latin American internet type businesses. We think over time we can find investments in that area, and it will benefit the fund having an ACWI benchmark. It basically means you can buy one fund and that's it, and it gives you true global exposure.
Russ Evans: Following in from that, the question we've got here is going on about that point. Does the team have the experience and the capacity to invest globally? The Sustainable Leaders Fund was maxed 20 per cent in global so only needs to pick a handful of stocks. Can you go on a little bit more than that?
Mike Fox: Fair question. We have six funds in the range - the Global Equity Fund the most recent one - but we also have three mixed asset funds which are invested globally since 2009. Pre-2009, guilty as charged, we were UK fund managers but realised back then that over time we needed to be credible not only in global equities but in credit as well. That's why we evolved the process and the team to do that.
It's been 11 years of retraining. I think you're always learning about new markets and new opportunities, but when we sit down and manage the collective funds, the six funds, we're running a truly global process which we pick the best ideas from relative to the fund requirements.
Russ Evans: Thanks, Mike. Another one here: do you align portfolios to the Paris Climate Agreement or SDG agenda of 2030?
Mike Fox: It's a very relevant topic, this. For us, this franchise started in 1990. We've seen a lot of things come and go over the time. Millennial goals were the forerunner to the SDGs, and climate targets didn’t exist 15, 20 years ago. I guess we've just ploughed our own furrow in some respects. We have an established process, an established way of looking at things which we do think aligns ourselves to both the SDGs and the Paris Climate goals, but we don’t start with those and work back; we start with how we think we can add value and then associate ourselves with them.
Over time as climate targets, in particular warming targets, become more talked about in fund constructs and SDGs do, we will obviously have a role to play there. But I do think - you want to run a process over 30 years. Lots of things come and go, and I think you've really got to understand what you're good at yourself, where you think you can add value, and back that, and then work with whatever construct clients want to give us in terms of how they want to think about our portfolios.
Russ Evans: Thanks, Mike. The questions are rolling in. Another one here is, how do you avoid majority investing in certain sectors where sustainability is a given, i.e. green energy? Or is this not an issue?
Mike Fox: You've always got to have a twin goal running these funds which is sustainable and financial. The number of times I've taken phone calls from slightly odd corporates who want to turn algae into energy or want to do a big tidal project somewhere in the UK, and then you look at the risk/reward from a financial perspective and it just doesn’t work at all.
It's quite notable. I do think when we talk about our sustainable strategy, we say we think this is the best way to invest bar none. Part of that is a belief that the risk-adjusted returns over time will be attractive. You can find these areas where there's an assumption that we will have a lot of exposure there, but when we do the work sometimes we can have a different view.
We do own companies like Scottish and Southern Energy, Ørsted, genuine world leaders in decarbonising energy, and they will be a notable part of our portfolios, but we do have to be careful we don’t get overexposed to any areas, particularly those that seem attractive thematically but when you actually do the work on them the investment return is sometimes missing.
Russ Evans: I've known you for quite a few years now. You're a pretty relaxed character, but we've been asked here about what you fear most in markets. Can you give a bit of detail on that, please?
Mike Fox: The longer I do this job, the things you need to worry about are the ones you don’t know about. This year has been an interesting lesson in that we're literally tripping over risk management systems here as big asset manager. Many of the corporates that we invest in equally have very sophisticated risk management systems as well. Not one single of those systems had forecast what has happened this year. Nobody thought the global economy would get shut down for two months.
The lesson that we've learnt in that is that you've got to fear the dark basically. It's not things that you can see that you should be worried about; it's things you can't see. When you come to managing funds, that's quite a profound observation, because you realise that the only way you can manage risk effectively is making sure you conduct yourself in the right way in the good times. So when these unforeseen things come along when you switch the lights on and it's something scary, that you're not getting caught out because you took undue risk in the good times. My message to you basically is, it's the things you don’t know about that you should worry about, which is a bit of a strange comment, but when you think about it, it does make some sense.
Russ Evans: Thanks, Mike. One last question to leave you with. We had Andrew Neil as a keynote speaker. He was asked who came across the best when he did the interview with them. He said the Dalai Lama, which I found pretty interesting. If you had to go to dinner with one investor, and obviously it would be a socially distanced dinner following COVID restriction rules, who would it be on the investment side?
Mike Fox: There's a guy called Bill Miller in the US. The standard answer is Warren Buffett or somebody like that. I'd absolutely like to share a steak with him or whatever vegan options might be suitable. I think Bill Miller, the US value manager, fascinates me because one, he's highly differentiating in the ways that he thinks, but secondly, he had a terrible time in the financial crisis and made so much money he didn’t have to bother coming back from that. His reputation was tarnished. Lots of people said very bad things about him, and he came back. He's now very successful again.
One thing you have to learn to live with in life and in fund management is failure, making failure the reason why you're successful next time round. I think he would be a very good person to speak to about that.
Russ Evans: We are out of time. Thank you very much, Mike. Thank you to the audience. We've had loads of questions, so we will endeavour to come back to you on these. There will be CPD certificates which will be issued. In a second, you'll see the pelican come across the screen. After that, there'll be a contact page. Please get in touch with your contacts if you've got any questions and any follow-up, but otherwise, have a great rest of your day. Thanks very much. Take care.
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