Blue Chip Issue 81

RESPONSIBLE INVESTMENT
Superior strategy
Blue Chip speaks to Brendan de Jongh, Head of Research at PortfolioMetrix,
about their Sustainable World Equity Fund of Funds launching in South Africa
Please tell us about the global groundswell to ESG.
Let’s step away from ESG investing as a topic and ignore the
warm, fuzzy feeling one gets from “doing the right thing”. For
some perspective, it is proposed that a new epoch in geological
time is created called the Anthropocene, meaning a period where
changes to the earth’s climate, geological processes, biodiversity
and species extinction are primarily driven through activities
of humans. This impact will ultimately, if unchecked, have a
devastating, interconnected impact on human society. Civilisation
as we know it today is significantly more fragile than our current
response to global challenges suggest.
If we consider sustainability through the lens of how much
one earth can provide, we are currently consuming 1.5 earths,
meaning we are not heading into enemy territory, but are
already far behind enemy lines. We have no time left to dither
in our response. What you are seeing with the ESG groundswell
is simply a rapid catch-up on the realisation that market forces
have failed to factor in the “external costs” of our industrialised
society. We need to be far more assertively pro-active in
our response and, as allocators of capital and overseers of
governance, investors can be a powerful force for change.
What is PortfolioMetrix’s investment proposition?
PortfolioMetrix (PMX) is a specialist investment manager that builds
portfolios around needs, not wealth. We question the suitability
of one-size-fits-all solutions and believe the best client outcome
requires the investment management process to be closely aligned
with the adviser’s process, using well-constructed, precision
engineered portfolios. Our investment proposition is driven by the
understanding that the return path matters and so we focus strongly
on a risk-based approach that emphasises portfolio efficiency.
Brendan, please give an overview of the PortfolioMetrix BCI
Sustainable World Equity Fund of Funds due to be launched
in South Africa.
The fund is designed for clients who wish to generate a positive
social and environmental impact alongside financial returns. It is a
South African Collective Investment Scheme that invests in global
equity markets by selecting underlying managers that specialise
in sustainable equity investing.
What is the fund’s strategy, investment philosophy and process?
The fund follows the same investment philosophy and process as
all portfolios at PMX. This starts with asset allocation and then fund
selection and portfolio construction. However, this strategy only
selects underlying funds that embrace sustainability and positive
change. This means underlying funds only invest in companies
delivering a clear, positive benefit to society and the environment
through their products, services and business practices. This
typically leads to funds that adopt a multi-thematic approach,
often aligned to the UN’s Sustainable Development Goals.
Do ESG influences offer investors long-term performance
advantages when factored into portfolio construction?
There is a lot of evidence that individual companies benefit
from having a higher ESG rating. Numerous studies have found
a higher ESG rating was strongly correlated with a lower cost of
capital (the company could raise both debt and equity on easier
terms) as well as outperformance in a business sense (higher
accounting profits). However, this is not the same as saying that
ESG strategies tend to or will outperform over long periods at a
portfolio level. This holds more mixed results. What we do know
is that, typically, thematic approaches will have biases to certain
sectors and may exclude or have very little of other sectors. This
will produce variability of returns relative to the broader market.
Please tell us about the fund managers selected for the fund.
We have populated the fund with underlying managers that
specialise in sustainability and impact investing within either
developed/emerging markets, listed infrastructure or property.
The fund managers have gone through a rigorous due diligence
process carried out by us and in our view have a superior
investment product within this space. Each fund manager has a
unique philosophy and process and will implement their strategy
differently. This diversity in implementation creates a product that
we believe is uniquely attractive.
Why does PortfolioMetrix prefer active
funds as opposed to passive funds for its
sustainable funds?
We believe that sustainable investing is an
active management process and the use of
passive funds, while cheaper, is less impactful.
This is because applying a comprehensive and
truly impactful solution requires an in-depth
knowledge of a company’s products, services
and business operations to understand
how the company impacts society and the
environment. This process is qualitative as
the data provided by companies is never
comprehensive and often difficult to interpret.
Unfortunately, passive funds are reliant on this
data and therefore are not able to implement
the strategy effectively in our view.
Brendan de Jongh, Head of
Research at PortfolioMetrix
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PortfolioMetrix Asset Management SA (Pty) Ltd is an Authorised Financial Services Provider.