On 20 September 2021 Mattioli Woods launched the Responsible Equity Fund, the first of its kind for the company. We spoke to the fund managers in charge of the new fund – Christopher White, Jonathon Marchant and Lauren Wilson – to find out what exactly the Fund is and why it has been created.
What is the Responsible Equity Fund?
CW The Responsible Equity Fund invests solely in equity, which we believe is the best long-term vehicle for capital growth. It is a combination of both direct equities and equity funds. Responsible investing aims to generate attractive long-term returns while ensuring that the companies we own are behaving in the interests of their communities and wider society. Every company we invest in will address at least one of the United Nations Sustainable Development Goals (UN SDGs). The UN SDGs provide us with a recognised framework that has been developed to aid the achievement of the 2030 Agenda for sustainable development – a set of targets adopted by all UN members in 2015, which provides 17 goals covering economic, social and environmental factors. Within these there are 169 sub-goals, which are more specific in their nature. We will invest in companies that are already responsible, that are improving and those that are going to be the responsible companies of tomorrow.
Why has Mattioli Woods decided to only focus on direct equity?
JM This is the first time Mattioli Woods has launched a fund with direct equities. We have a wealth of UK direct equity experience in house, and we feel that there is a really wide and exciting opportunity set domestically. The UK trades at a discount to overseas peers, which we feel is unwarranted. Using direct equities has the added benefit of enabling the fund to have a lower cost to clients, as opposed to using an external fund manager.
The Fund focuses on ‘value and values’. What does this mean?
CW Looking at value is looking at all the things you would expect the financial characteristics of a company to be. It is profitability, cash flow, dividends, balance sheet, net asset value and paying the right price for it. Values is about companies acting with probity when it comes to the environment or society, and managing themselves properly from a corporate governance perspective. This is a holistic approach to investment which we really think is the way forward in the 21st century.
So why create a responsible equity fund?
LW The idea of a responsible equity fund is something that we have been planning for years and it is something that I personally have wanted to be involved in ever since I learned about responsible investing at the very start of my career. I think now is a particularly exciting time for this sort of strategy for a number of reasons. I believe we are at an inflection point in terms of the energy transition. You may have seen David Attenborough's wonderful film, A Life on Our Planet, where he presents the case that climate change is the biggest threat to security that modern humans have ever faced. I think globally there is now a heightened awareness of the devastating impacts of climate change, and over the past few years we have seen individual companies and governments really step up their efforts to become more sustainable.
What are you looking for in a responsible company?
CW We are looking for companies that are responsible towards the environment in terms of their carbon footprint, in terms of their water usage and their waste. We are looking for companies which are interested in the health and safety of their employees, in workers’ rights and in diversity. They also need to look after their supply chains and play a positive role in their communities. We are looking for companies that manage themselves properly, that have an appropriate remuneration structure, that have an appropriate board structure and pay the right amount of tax. We want to see companies that are willing to change and with leadership that truly understands the issues facing our society.
How are you allocating to different areas within your investment universe?
JM Many of our clients will be familiar with Mattioli Woods’ geographic and thematic approach to investing having invested in our multi-asset funds and portfolios. We are adopting a very similar approach with the Responsible Equity Fund. The main difference, as Chris alluded to, is that we only invest in one asset class and that is equity.
The geographic and thematic split works well for us, as it allows us to blend top-down and bottom-up approaches, so our geographic ideas tend to be driven by macro-economic views and our thematic ideas tend to be targeting very specific areas. Our thematic ideas aim to identify major structural growth trends and invest for the long term. It is no coincidence that many of the themes we are seeing at the moment are in the responsible investing arena. By investing thematically we believe we can display high and long-term conviction in these areas and potentially have the most impact on society.
Sometimes we might be sceptical about investing in a region as a whole and thematic investing allows us to cherry-pick those areas that we like. So, as an example, at the moment in the US we see relatively high valuations in certain areas and investing thematically allows us to target the areas we like – such as healthcare, insurance and technology – and perhaps avoid those that we do not like. What it also allows us to do is naturally remove some of the more ethically questionable areas of the market such as arms and tobacco. As an example, a clean energy thematic fund is not the sort of vehicle where you would expect to see holdings from either of the two sectors I have mentioned, which is a great thing for the Responsible Equity Fund.
How do you identify your investment themes?
JM We meet with a lot of different managers and we are looking for high quality operators who know their sectors inside out. We hold hundreds of meetings to uncover these truly exciting ideas but predominantly we want to have funds that pass the Ronseal test – do they do exactly what it says on the tin?
Over the years we have developed a number of red flags that we look out for. First of all, we look at revenue purity, which can tell us how much revenue an underlying company is actually deriving from the theme in question. The answer to this can have a ‘knock-on’ effect on other areas. We have a baseline and anything that is not up to that standard would require more investigation. If a fund manager is faced with a limited number of companies with high levels of revenue purity, they end up with a small investment universe. Having such a limited subset of stocks to choose from can potentially push managers into sub-optimal investment decisions, allocating to companies they do not necessarily like, but they need to include them for diversification's sake.
One of the reasons we like investing thematically is because of the expertise that we can benefit from. If we think a manager does not have a fundamental understanding of the investment universe and the technology behind it, then that is a major red flag for us and can cause issues in other areas.
How are investors in the Responsible Equity Fund protected against ESG scandals?
CW A company becoming caught up in any sort of environmental, social or governance scandal is an investment risk and that is where we come in. We have seen a number of instances where share prices have collapsed because of poor corporate behaviour. The one that is most widely cited is the Deepwater Horizon oil spill in the Gulf of Mexico. BP’s share price took years to recover from it. Some sectors are more prone to ESG scandals than others, so there is some merit in reducing exposure to those particular areas. The reality is that an ESG scandal could appear in any sector and there is no alternative to in-depth research, analysis and meetings with company management.
How do you feel climate change is impacting investment?
LW Unfortunately we are already seeing some glimpses of the impacts of temperature increases and changing weather patterns. Over the past few years we have seen an increase in wildfires and recently the Pacific Northwest of the US was engulfed in a deadly heat dome, resulting in some of their cities essentially shutting down because their infrastructure could not handle the heat. Even more recently, Hurricane Ida left more than a million people in the US state of Louisiana in devastation, without running water, electricity or air conditioning amid a sweltering heat index topping 38°C. Evidence of the climate emergency is all around us and sadly only going to increase unless we act now to preserve a liveable climate on this planet.
I think there is finally this collective understanding that these risks are imminent, but the good news is they can be mitigated if we work together and act on climate change and its impacts now. We are at a crucial time because the 2020s are the decade in which we need to cut emissions by at least 45% to limit an overall global temperature increase to 1.5°C. We have already seen more businesses, nations and individuals seek to reduce their carbon emissions and turn to some more renewable sources of energy, as per the Paris Agreement framework. The great thing is that it is no longer just about ‘doing the right thing’. It now makes good business sense to embrace the energy transition because the price of renewable energy tech is plunging.
The fact that companies and wider society are taking more action has helped to grow our investment universe significantly. Years ago there was a distinct lack of investable companies in the space, but now, thanks to innovation, there are plenty of investable companies and the opportunities are just so vast. Even technologies in the past that were maybe written off as too capital intensive or difficult have now become a possibility thanks to research and development. I believe we are only at the beginning in terms of the energy transition. We have so far to go and now we have the powerful support of the G7 economies.
We have recently seen the UK set the world's most ambitious climate change target to reduce emissions by 78% by 2035 compared to 1990 levels. You may also have heard about President Biden's bipartisan infrastructure deal in the US. While it did end up being quite watered down in terms of climate change measures, that was really just to attract the Republican support. However, the deal does include things like funds for electric vehicle charging stations, which even four years ago would seem quite incredible for the US to do. And do not forget that the bolder measures such as the clean energy standard that some of the more progressive Democrats were pushing may still move through Congress just in the legislative vehicle of budget reconciliation.
So that is one to watch and there is certainly more to come. Overall, there has been a paradigm shift in the way we consume products and generate energy, and these patterns will really only continue to evolve and grow when supported by government and regulation. It is quite amusing that one of the few things that Beijing and Washington actually agree on is the need for energy transition. Relatedly there has been an increased awareness of the importance of biodiversity, that is the co-existence of an imbalance of different animal and plant species within the same ecosystem. While climate change is to a certain extent reversible if we act now, once a species becomes extinct – particularly those unknown to science – there is just no going back. So the UN has made the protection of life underwater and on land an important part of its SDGs. It is now becoming the norm for companies to have policies on biodiversity and make a commitment to give nature the space and protection it needs, and it is something that is really important for me. I like to see that companies have a really robust policy and are taking demonstratable actions on biodiversity.
We are also interested in innovative companies that are making significant breakthroughs, such as those that are reducing the need for animal testing. And while building a sustainable economy does not just relate to the environment, we also need happy, healthy, thriving workers and engaged consumers.