Discerning investors who are looking for well-managed, well-capitalised companies with a sustainable edge have been finding their way to the Stewart Investors Worldwide Sustainability Fund (B7W3061) steadily over the past decade.

A £10,000 investment in the fund 10 years ago would be worth £22,372 today, although at the peak towards the end of 2021 it would have been worth just over £28,000 according to Morningstar data.

WHAT MAKES THIS FUND DIFFERENT?

The use of the word ‘sustainability’ in the fund’s name isn’t a case of the firm jumping on the ESG (Environmental, Social and Governance) bandwagon, it is central to the way the managers think about the companies in which they invest.

In any case, the fund pre-dates the ESG boom and its focus on sustainability has its roots in Stewart Investors’ many decades of experience investing in Asia, where, as portfolio specialist Clare Wood puts it, ‘if you didn’t do proper due diligence on management and the sustainability of the business you were very likely to lose your money.’

The managers assess companies on three criteria. First, companies with a sustainable business tend to have been around a long time and tend to have high-quality management who have a long-term vision and are good ‘stewards’ of shareholders’ money.

Second, and key to a company’s sustainability, is the quality of its business franchise, including its ability to grow. Third is the quality of the firm’s financial position and its reporting – the managers are only interested in businesses with strong balance sheets, preferably with net cash, ‘clean reporting’ with no financial engineering, and a conservative approach to accounting.

Combining these qualities with businesses which are sustainable in the ‘green’ sense, in that they do good rather than harm, means the pool of companies in which the fund can invest is much smaller than other global funds.

WHAT DOES THE FUND AVOID?

‘We don’t own luxury stocks, because although they undoubtedly have great management, great franchises and solid balance sheets, what they do doesn’t sit with our sustainable approach,’ says Wood.

Nor does the fund invest in solar or wind companies, because although the energy they produce is clearly sustainable their franchises aren’t high-quality and neither are their finances.

On the other hand, so long as they fit the quality criteria, financial companies can be a force for good, particularly in emerging markets where access to basic banking services is one of the first steps for people lifting themselves out of poverty.

‘We obviously pay attention to what is going on in the world in terms of interest rates and economic growth and so on, but that has no impact at all on how we build the fund or which stocks we own,’ says Wood.

North America accounts for just over a quarter of the portfolio against almost two thirds in the MSCI All-Countries World Net Index (the fund’s benchmark), while EMEA (Europe, the Middle East and Africa) accounts for nearly 40% against just 12.5% for the index.

The same is true at a sector level, where healthcare is the biggest position at 25% of the portfolio against less than half that level for the index, and industrials and consumer staples which jointly make up over 30% of the portfolio against just over half that figure in the index.

Similar to a Premier League club where competition is fierce for a place in the squad, Wood notes the portfolio managers only invest in the very best sustainability companies that have the ability to generate returns whilst benefitting society and the environment.

The portfolio includes US cybersecurity firm Fortinet (FTNT:NASDAQ), Swiss pharmaceutical giant Roche (ROG:SWX) and German semiconductor maker Infineon (IFX:ETR).

It also has stakes in UK safety equipment firm Halma (HLMA), Italian diagnostic specialist DiaSorin (DIA:BIT) and French biotech company BioMerieux (BIM:EPA), among others.

SOCIAL AND ENVIRONMENTAL FOCUS 

As of 30 June 2023, the fund held 50 companies, all of which were contributing to at least one human development pillar such as healthcare, housing, standard of living and education.

Just under three quarters of companies in the portfolio (72% or 36 stocks) were contributing to climate change solutions.

Source: Stewart Investors

The managers rarely sell stocks, and if they do it tends to be for one of two reasons: either the shares have performed spectacularly well, in which case the valuation has become too stretched, and the managers will look to reinvest at a lower multiple going forward; or the investment case has changed and either the management, the franchise or the financials are no longer compelling.

Two recent sales were Japanese robotics maker Fanuc (6954:TYO), where the team grew concerned over the firm’s rising capex needs and its ability to fend off cheaper Chinese competition, and electronics manufacturer Tokyo Electron (8035:TYO), whose valuation has soared four-fold since 2020.

‘For tech stocks, the outcome is often binary,’ says Wood. ‘All the time the company is doing well, that’s fine, but if it warns and the shares have quadrupled it’s not going to be fine.’

Interestingly, the managers are not only standing by their investment in Dutch payments firm Adyen (ADYEN:AMS), a former fintech ‘darling’ whose shares have more than halved in the last two months, they have added to their holding.

‘Adyen was involved in a price war with Paypal (PYPL:NASDAQ), but it turns out the US firm was losing money in its attempt to gain market share so it called a truce. We think Adyen is a much better business than Paypal anyway and will pick up a bigger share of more complex transactions,’ explains Wood.

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