15 Nov 2023
Time goes both slowly and quickly. Some days can seem to take an age to pass by, but the years fly by.
In November 2003, I became the lead manager for the Royal London Sustainable Leaders strategy, which at the time had less than £100m of assets. Fast forward 20 years and we have a range which consists of nine strategies and around £12bn of assets under management.
At times the days have taken forever to end, particularly in more challenging periods such as the financial crisis of 2008, but the years have most certainly flown by. What are the lessons learnt, the changes seen, and the companies we’re investing in on this journey? Here are a few.
What is surprising about the art and science of investing is not how much has changed, but how little. The characteristics of successful investors have not changed in the last 20 years and are unlikely to change in the next 20. Very few people are born into this world with the natural behaviours needed to succeed as a fund manager, and I certainly was not. It is a never-ending learning curve for all market participants, but there are some areas to focus on.
The longer the time horizon investment decisions are made on, the more likely they are to be successful. Investing is an ongoing battle between short-term news and long-term societal change. Somewhat counter intuitively, and unlike other forecasting occupations such as the weather, the longer the time horizon the more certain we can be of what is going to happen. The short-term outlook for economic growth, interest rates and inflation will always be less certain than the relentless long-term trend towards a cleaner, healthier, safer and more inclusive world. In my view, investing behind the latter, and not the former, is much more likely to lead to success.
"What is surprising about the art and science of investing is not how much has changed, but how little."
In my view, innovation and growth, bought through appropriately valued and established businesses, are the most powerful ways to grow capital. As investors, we have a huge range of potential investment opportunities to select from. These include businesses as diverse as Unilever, founded in 1929, and Google, founded in 1998. Innovation can be found in both, but with much more potent effects in Google.
The amount of value created for investors by companies creating new industries, such as knowledge search and cloud computing, dwarfs the returns obtained from more stable industries, but it can be more volatile and riskier. Our solution is to blend the two. When finding a new and innovative area to invest in, we tend to buy the longest established company within it. Buy AstraZeneca not Moderna, Microsoft not Zoom and we think that you can achieve the best of both worlds; innovation in established businesses that improves returns by more than it increases risk.
"As the saying goes, there are two types of forecasters. Those who don’t know, and those who don’t know they don’t know."
Behaviourally, humility is by far the most important characteristic. As the saying goes, there are two types of forecasters. Those who don’t know, and those who don’t know they don’t know. This isn’t an occupation where over confidence or false certainty work well. Over the long term, many things we believe to be true will turn out not to be, and vice versa. And many companies and industries that have fallen will rise again, as sure as many that seem the most certain to succeed will fail. This is the nature of investing, and I believe that having an open mind to being wrong, and to be humble in the face of uncertainty, will lead to better outcomes.
If the core of investing hasn’t changed much, sustainability is the complete opposite. The difference between now and 2003 is like night and day.
Back in 2003 the most used term was ethical, and everything was painted green to suggest environmental. Funds operating in this area were defined by their negative screens, often without consideration as to the broader impact of companies they invested in.
The first signs of sustainable investing appeared soon after, as positive screening and the idea of doing good rather than avoiding bad, was created. It was also the time when environmental was broadened out to social and governance to give the often-used abbreviation of ESG. This focus on the positive (which by definition, inevitably means excluding the bad) and a broader range of inputs via ESG analysis made the assessment of companies much more sophisticated and socially relevant. In the same way that cashflows, balance sheet and profit & loss statements were traditionally analysed, along came environmental, social and governance factors to complement them. When used together they became, and remain, a powerful set of tools to analyse a company with.
"Back in 2003 the most used term was ethical, and everything was painted green to suggest environmental."
Acceptance of sustainable funds as suitable for the majority, not the minority, of investors took much longer. Despite good performance it was only really in 2018 that the benefits of integrating sustainability – looking at products and services and operations of a company through an ESG lens – into financial decision making became generally understood.
Once investment flows started to move into sustainable funds this began to have an impact on the corporate world. Most companies we invest in will seek to raise new capital, equity or debt, and many began to see sustainable investors as a source of this. To attract this money, disclosures around sustainability performance improved significantly and standards soon followed. This meant more detailed sustainability assessments could be completed and more companies became suitable for inclusion in sustainable funds. In my opinion, this enhanced investment universe has been important in delivering good returns.
Overall, in the last 20 years, we’ve gone from ‘ethical and fringe’, to ‘sustainable and core’. This puts the sustainable investment industry on a level footing with other forms of investment, which can only help improve investor choice and broader society. It still feels early in what sustainable investing can achieve.
The final area to consider is how the companies we invest in have changed over 20 years. Generally, they are much better quality now. Although traditional industries, such as engineering and chemistry, are alive and well, the big progress has been made in areas such as technology and healthcare, where new giants such as Nvidia, Alphabet, Novo Nordisk and Apple have been created. These companies are much more profitable and better quality than many they have replaced and as a result investors can get exposure to higher quality funds than ever before.
There are some companies we have held for the entire 20 years. These include AstraZeneca, which is now one of the world leading oncology drug developers; SSE which has pivoted to being the largest developer of offshore wind in the world; and RELX which has moved from a print publisher of legal and healthcare journals to being a provider of data and analytics to those and other industries.
For all that changes, many things endure. Of course, 20 years is a pin prick on history and the next 20 will see the same change in trends as the last, only probably accelerated. It is as exciting to be a sustainable investor as it was on my first day, 3 November 2003. See you in 2043!
Risk warnings:
Investment Risk: The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested.
Concentration risk: The price of Funds that invest in a reduced number of holdings, sectors, or geographical areas may be more heavily affected by events that influence the stockmarket and therefore more volatile.
EPM Techniques: The Fund may engage in EPM techniques including holdings of derivative instruments. Whilst intended to reduce risk, the use of these instruments may expose the Fund to increased price volatility.
Exchange Rate Risk: Investing in assets denominated in a currency other than the base currency of the Fund means the value of the investment can be affected by changes in exchange rates.
Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Responsible Investment Risk: The Fund can only invest in holdings that demonstrate compliance with certain sustainable indicators or ESG characteristics. This reduces the number securities in which the Fund can invest and there may as a result be occasions where it forgoes more strongly performing investment opportunities, potentially underperforming non-sustainable funds
This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.
The Sustainable Leaders Trust is an authorised unit trust scheme. The Manager is RLUM Limited, authorised and regulated by the Financial Conduct Authority, with firm reference number 144032. For more information on the Trust or the risks of investing, please refer to the Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.com.