Mike Fox, the Royal London fund manager at the helm of the UK’s fastest growing fund in the hot area of finding companies with strong environmental, social and governance (ESG) credentials, believes a lasting legacy of the coronavirus crisis will be sustainable investing’s transformation into a ‘core’ part of money management.
The Royal London Sustainable Leaders fund, managed by Fox, has swollen to £1.7bn after well over £5oom of net inflows this year, including £400m in April alone. This is impressive given it has come without any marketing push from Royal London, the manager said.
Year to date the fund, which invests in UK shares, has limited stock market losses to 5.6% as the FTSE All-Share has tumbled 19%, and has proved one of the strongest performers over one year, rising 6.6% as the index has fallen 12.6%.
Citywire AAA-rated Fox argued that sustainable investing’s outperformance both before and during the crisis meant investors would increasingly flock to funds like his.
‘It was happening anyway but I do think that the last 10 weeks have probably done more than the last 10 years to make the case for sustainable funds being a core solution,’ Fox said, adding that this had shifted from even a year ago.
‘Traditionally, as a sustainable manager, you sold to sustainable people, and we absolutely service that and that area is growing. But more and more people now accept “sustainable” as a style of investment. It’s a way of making strong investment choices to deliver outperformance,’ he said.
‘When you put it in that context, the number of investors that have it as a core solution is tiny, because it is an area that’s been considered to be specialist. So, as those investors begin to accept it as a core solution, then that’s why you’re seeing such rapid growth.’
Investors see change
Fox’s approach as Royal London Asset Management’s head of sustainable investments is essentially a positive one, focused on investing in companies ‘with solutions to societal issues’ rather than those that ‘create problems in society’.
The two other main funds in the range, the £1.4bn Sustainable Diversified and £1.3bn Sustainable World funds, which both invest in a mix of shares and bonds, have also experienced significant inflows. Investors added around a net £180m to each in the first four months of the year.
The Sustainable Leaders fund’s strong record extends over 10 years, as it has delivered a total return including dividends of 182%, while the index has risen 85% and competitors in the IA UK All Companies sector have generated an average of 97%.
Highlighting the consistently strong, long-term performance of the approach, Fox (pictured above) has gained a Citywire performance rating in every month bar one in the past seven years.
The manager argued, however, that beyond the performance data, people’s experience of the crisis would alter the investment landscape.
‘Really, if you’re tying to understand this idea of solutions versus problems, we’ve got one of the biggest problems our generation’s ever faced and a whole bunch of companies that are going to provide solutions to it,’ said Fox.
‘People can look around in the real world and see the benefit of finding companies with solutions and once you can see that, investing in those types of businesses is only a very small step from that.’
He argued that a parallel could be drawn with what had happened during the 2008 financial crisis, the ‘previous biggest shunt up’ for ESG investing. At that time, most sustainable funds owned few banks due to corporate governance concerns, meaning they avoided the savage share price falls in the sector.
‘That gave you the first stake in the ground to say, actually, the G of what is known as ESG was valuable. The E and the S: this crisis will prove the validity of that,’ said Fox.
‘Our premise is in ten years’ time all investing will be sustainable investing, because you cannot optimise your risk-return without embedding sustainability into your investment decision.’
Greggs and Microsoft ‘tickle us pink’
Fox said recent contributors to performance had been holdings in technology, such as Microsoft (MSFT.O) and Alphabet (GOOGL.O), where the manager takes advantage of an ability to invest up to a fifth of the fund outside the UK.
Healthcare was another positive area, with AstraZeneca (AZN) being one of the fund’s top holdings, along with Rentokil (RTO). Best known as the world’s largest pest control company, it also has a large hygiene division, offering services like disinfection and washroom cleaning, that stands to benefit, the manager said.
However, Fox pointed out that ‘what we don’t own’ had been as significant, citing sectors like oil and mining which he shuns. In energy, power company SSE (SSE) is a big holding, which Fox described as the ‘UK’s largest renewables developer’.
The manager also looks to invest in businesses which ‘might not be saving the world but are hugely responsible in the way they’re managed’.
The fund took advantage of plunging share prices in March to buy Greggs (GRG), the purveyor of both vegan and meat sausage rolls. Although he acknowledged it faced short-term challenges from the lockdown and closure of its shopes, Fox said the company was ‘most definitely an ESG leader’, citing its positive treatment of staff.
Fox felt portfolio diversity was a major attraction of the fund and helped to ward off any idea of an ‘ESG bubble’ forming in a narrow group of companies.
‘It tickles us pink that in one fund you can get Greggs and Microsoft,’ Fox said.
In February, the Royal London Global Sustainable Equity fund was launched, to take the same approach across global developed and emerging markets.