Andrew Morgan, portfolio manager at Walker Cambria talks about putting ESG front and centre of their investment process.
'A notable feature of our managed portfolio service, ALPHA:r2, is the inclusion of environmental, social and governance (ESG) factors in our investment process – in both our ethical and our ‘standard’ portfolios.
We are signatories of the UN Global Compact and members of the UK Sustainable Investment and Finance Association.
We think a focus on ESG is not just about doing the right thing: it’s also about making some great investments. We believe that a socially responsible approach to investment, which focuses on sustainability, is likely to outperform over the long term.
There is evidence to suggest that high sustainability companies significantly outperform their counterparts in the stock market over the long term. Governance is a particular focus for us. Few companies can sustain high levels of profitability and low levels of corporate governance. In our view, corporate structures which support sustainable growth will be the leaders of tomorrow.
To us, the Janus Henderson Global Sustainable Equity fund encapsulates many of our views, and it is widely held in our portfolios. Our ethical portfolio observes ESG factors to a more rigorous degree: other funds, such as the Old Mutual Ethical Global Equity and the Kames Ethical Corporate Bond funds, are also included.
More positive view on UK equities
In recent weeks, we have developed a more positive view on UK equities. We think many investors have been overly pessimistic on the UK. The employment market is strong – 32.3 million people in work in Q1 – up 396,000 on Q1 of last year. And the employment rate is up to 75.6%, the highest level since records began in 1971.
While economic growth came to a near-standstill of 0.1% in Q1, this has been marginally upgraded recently to 0.2%. Sustained rises in workers’ pay – in real terms – now appear to be in prospect. For an economy driven by the consumer, that’s great news. The manufacturing sector, too, looks set to provide some welcome support to GDP this year, and recent PMIs suggest there has been a rebound in Q2.
As is well known, the UK’s stock market allows an investor to gain global exposure, with 70% of FTSE 100 earnings coming from overseas. What may be less well known is that we are currently able to attain this global exposure at a discount to that of many other developed markets.
Value in the UK
While we have been increasing the value bias of our portfolios in recent months, the UK market as a whole is now displaying value characteristics. On a price-to-book value measure, the UK market is well below its 20-year median, in contrast to other developed markets such as the US, which is well above its 20-year average valuation on this metric. While we would agree that some of this discount is justified, given the uncertainties surrounding Britain’s departure from the European Union, there are numerous opportunities in our domestic market that we are pursuing.
We invest in the UK through the Threadneedle UK Equity Income fund, managed by Richard Colwell (pictured above), which has done well in recent months. We also like the Jupiter UK Special Situations fund, managed by Ben Whitmore (pictured left), which also displays a value bias.
Overall, our balanced portfolio has performed well since its inception in 2014. Key to this performance continues to be our unrelenting focus on risk management. We also believe our incorporation of ESG factors into our investment process will help deliver strong returns into the future.'