How Liontrust manages sustainable investments

Liontrust was founded in 1995 and listed on the London Stock Exchange in 1999. He currently has seven teams investing in global equities, sustainable investing, global fixed income and multi-asset, with one-third of Liontrust’s assets under management going towards sustainable investing. .

CFA charterholder Chris Foster joined the firm in April 2017 as part of the acquisition of Alliance Trust Investments. He co-manages the Liontrust GF Sustainable Future US Growth Fund, launched in July 2023, with Simon Clements and Peter Michaelis. It is an Article 9 fund and focuses on 35 to 55 stocks.

Liontrust has made a number of acquisitions in recent years, including Majedie and Neptune. How will the acquisition be integrated?

Each team is highly independent from the rest of the organization. Our team has been separate from other acquisitions since he joined in April 2017. We don’t have a CIO, we don’t have an internal view. For us, it was very seamless. All support services, sales, marketing, compliance, risk, performance, and distribution you receive from Liontrust remain unchanged.

You have offices in Edinburgh and Luxembourg. Is the fund manager based there?

The fixed income team is based in Edinburgh.

Your fund currently has approximately $100 million in invested assets. Do you have a target for total invested assets?

Although we do not have a clear goal, we would like to grow the fund to a size that is self-sustaining. The fund was established in July 2023 and is off to a very good start. The best times to raise money also tend to be the most difficult times to raise money. You want to raise assets after a period of weak business performance and negative sentiment.

Can you describe your investment style?

I think it’s quality growth and embedded sustainability that leads us to companies that are exposed to structural growth. We believe the world is becoming cleaner, healthier and safer, and we want to own businesses that help the world make that transition.

The three megatrends we are investing in are increasing resource efficiency, improving health outcomes, and increasing safety and resilience. There are 20 themes within these three megatrends. Our investment process seeks to find sustainable companies that we believe are more resilient and have better growth prospects than the market values. We leverage this undervalued advantage to deliver superior performance.

Which screen do you use?

Thematic analysis We identify companies with strong and reliable growth prospects as they align with our sustainability theme. It is also possible to generate ideas. We look for companies with tailwinds – companies in sectors that are growing rather than shrinking. We look at the percentage of revenue. At least half of the companies must be involved in one of our sustainable investment themes.

sustainability analysis We focus on companies with excellent management and core products and services that contribute to society and the environment. For more than 20 years, we have been evaluating companies based on our proprietary matrix ratings, which focus on the key ESG issues most relevant to the company and industry.

Analysis of business fundamentals We only select companies that can achieve a high return on equity. We use cash flow return on capital at the portfolio level. At the end of December 2023, it was 33.4 percent for the portfolio and 27 percent for the benchmark.

Evaluation analysis It was determined that the value of the company’s stock should increase significantly in the future. Companies eligible for the fund must have an annual absolute return of at least 10% over a five-year period.

We believe we have two major competitive advantages. First, we fully integrate sustainable analytics rather than outsourcing this process. Second, the time horizon is 5 years. In the 1970s, the average holding period for U.S. stocks was over five years. By 2022, that was reduced to nine months. We see this as an opportunity as so many market participants are focused on the next quarter, but our job is to assess the value of the company five years from now. We look away from short-term noise and market stress and focus on the long-term potential of the businesses we invest in.

what is your average What is the market capitalization and average holding period?

MSCI’s top 50 stocks make up half of the index. We only had 6 of them at launch, so you’ll get differentiated results from the index. Becoming an active manager requires investing differently. Otherwise, you will only get benchmark returns.

The good thing about the timing of our initial public offering in July 2023 is that mid-cap and small-cap stocks are being left behind by mega-cap stocks, and we see valuation opportunities there. We have a mid-cap bias, with approximately 36% of the fund invested in companies with market capitalizations of less than $30 billion. Our average holding period is 5 years.

Since it is a Article 9 fund, what areas can I not invest in?

Companies exposed to diesel engines, coal and oil, natural gas, tobacco, aerospace and defense, gambling, and nuclear power.

How do you divide the sectors?

Every fund manager is also an analyst, so each sub-theme has an analyst covering it. For example, I cover “Saving for the Future” on the savings gap, so I cover Charles Schwab (held in the US and Global Fund), Avanza, the Swedish online bank, and AJ Bell, which is held. I am. in British funds.

We take a collegiate approach. The team was founded in 2001 and some members have been with it for many years. We meet every Friday morning to review corporate sustainability analysis, new ideas, or annual updates. We update all holdings in our portfolio at least once a year.

If a company undergoes a sustainability analysis on Friday, we review business fundamentals and assessments together on Tuesday. However, it is the fund manager who makes the final decisions about how stocks fit into the portfolio (size of position, timing of purchases, etc.).

We’ve reinvested in our team, especially in the last few years, and in the past we’ve hired three new analysts on both the equity side and the fixed income side, so we’re seeing tangible benefits, so we’re at least three new analysts a week. Day is back at the office. 3 years.

Can you talk about some of the large holdings in your portfolio?

thermo fisher scientific teeth 4.2% of the fund. The biggest theme is “realizing innovation in the medical field,” which accounts for 13% of the fund. Additionally, there is a lot of excitement in valuations as the healthcare sector has been hurt by events such as the normalization of the pandemic, China’s economic downturn, and the weight loss drugs that finally spooked the sector.

Thermo Fisher is a life science tools company that provides analytical instruments and services to laboratories. It’s a “pick and drop” of innovation in healthcare, and a way to tap into an exciting growth area of ​​the economy without having to choose a life-changing drug.Waters also owns And Agilent. If you have a long-term bullish view on innovation and spending from research labs and pharmaceutical companies, these companies are a great way to get exposure to that topic.

American Tower Corporation owns 3.4% of the fund. The company owns more than 220,000 wireless communications and broadcasting towers around the world, but as its name suggests, the United States is its largest region. These towers are used by telecommunications companies as the backbone infrastructure of their mobile networks. This is clearly a huge growth area in terms of connectivity demands such as 5G and the Internet of Things.

Markel Group owns 3.3% of the fund. One of the advantages of investing in the United States is the depth and size of the market. Markel has a market capitalization of $20 billion, but it’s not a household name. The company’s main business is to provide ultra-niche insurance specifically for music festivals and other events. This feeds into our theme of ‘ensuring a sustainable future’, given the safety net that insurance provides (without the need for large cash reserves).

palo alto networks The position could be bigger, but valuation is holding us back. We have held it in the Global Fund since 2017/2018 and it has been an incredible investment. I think it has become a platform in much the same way as Microsoft. Cybersecurity is so difficult/complex for businesses to understand/manage that Palo Alto has become a platform for outsourcing that business.

“Strengthening digital security” is a theme that Palo Alto is working on, and as the world becomes more digital and the attack surface expands to include desktops, laptops, mobile phones, printers, and CCTV, this is a huge opportunity. That’s what we think. Given the complexity posed by AI and cybersecurity risks, growth is unlikely to slow down, making it an exciting area to invest in.

Want to meet management before buying stock?

We try to do that, but it’s not always realistic. We are very keen to understand the culture of an organization and believe this is highly neglected by the market. Putting cultures into cells in Excel is difficult and difficult to model. When you own a company for five, 10, or 15 years, culture is very important. You can get a good feel for the culture by visiting the company’s headquarters and talking to people who worked there.

What is your preferred method of meeting with management?

One-on-one time at the headquarters is usually more relaxed and you can get a tour. Edwards Lifesciences is a holding he visited in December. Heart valve replacement. After the visit, we got a better idea of ​​what it’s like to work there and the manufacturing process, which is mostly done by hand. You won’t get this type of insight by attending a large conference.

Why should companies meet with you?

We have a five-year plan and do a lot of work before making an investment. We support long-term action by being patient with the potential for management to make difficult short-term decisions to solidify our future. Our meetings focus on the long-term potential of businesses and, where possible, we seek to help companies improve their ESG disclosures.