This fund puts your money to good use

FP WHEB Sustainability is an impact fund. In ESG land, this means it invests in companies that have a positive impact on social and environmental issues, and that the impact is measured and reported on. As the fund’s asset manager, a boutique house dedicated to investing for impact in listed equities puts it: “Much of the interest in ESG is primarily directed at meeting new compliance requirements or as an element in managing investment risk. In contrast, impact investing embodies an investment philosophy that gives positive impact equivalence to risk and return at the heart of the investment decision.” 

Impact fund backers should be very clear on this point. Non-financial criteria are an important consideration in the investment process, and you need to be prepared to sacrifice some returns in exchange for having your money deployed in a broadly 'ethical' manner. As some of the challenges that the fund's holdings are trying to tackle become more urgent, and climate change becomes an ever bigger issue, sustainably oriented companies have the potential to outperform in the long term. But this is not guaranteed or likely to materialise quickly.

While some impact funds have a very narrow remit – Ninety One Global Environment (GB00BKT89K74), for example, is mainly concerned with decarbonisation – FP WHEB Sustainability invests across nine different impact themes, offering a decent level of diversification. This broadens the fund’s investment pickings, but the portfolio bears little resemblance to its benchmark, the MSCI World Index.

As of 29 February, the fund had 42 holdings, many of which will be unfamiliar to the average investor. The fund’s “active share”, which measures how different a fund is from its benchmark, stood at 96.6 per cent. This is a positive for a fund that aims to do something completely different from the index, especially considering that its ongoing charge is fairly significant at 1.03 per cent.

However, it also means that its recent performance has left something to be desired. The fund has underperformed the index quite significantly over the past three years, having lost a lot of ground in early 2022 and never fully recovering it. 

The underperformance was partly due to the fund’s preference for mid caps with quality and growth characteristics, stemming from its impact focus. The fund does not hold any of the Magnificent Seven either, which has been another obvious headwind compared to the index. 

With the potential for interest rates to start falling over the next year, growth-focused mid caps could be due a comeback. However, in the short-term uncertainties abound, and the road remains potentially bumpy, so this is a fund for investors that have a long time horizon ahead of them and can afford to wait things out.

According to the managers, the fund also tends to avoid sectors such as financials and energy, and has significant overweights in other areas such as health and industrials. Health companies made up 28.7 per cent of the fund’s portfolio as of February, against 12.1 per cent for the MSCI World Index. The fund’s three biggest holdings are all health businesses. 

The top one is Icon (US:ICLR), which accounted for 4.1 per cent of the portfolio at the end of February, and is a good example of the fund’s investment process and attachment to impact reporting. The company provides a range of services to pharma and biotech firms to help them develop drugs. WHEB scores it 22 per cent on impact, noting that its “services result in reduced time and cost in clinical trials”, but its clients “are already well-served and the impact generated is incremental as these processes would otherwise be performed in-house”.

Meanwhile, the company gets a 66 per cent score on fundamentals, for being one of a few companies with the “expertise and capability to conduct clinical trials in most major therapeutic areas on a global basis”, and having “a strong management team with a high quality management system”. Icon has recently been a performance driver for the fund – its share price has increased by more than 50 per cent over the past year. 

Impact and fundamentals assessments are available for the entire portfolio, offering investors a good level of insight into the managers’ thinking as well as the fund’s composition. The company with the highest impact score at the end of 2023 was wind turbines manufacturer Vestas Wind Systems (DK:VWS) at 63 per cent. But there are a lot of companies with fairly low scores, which is both an indicator of the team’s commitment to transparency and a reminder that impact investing in listed equities does involve a lot of ethical trade-offs. Education services provider Grand Canyon Education (US:LOPE) has the lowest impact score at 9 per cent.

FP WHEB Sustainability invests globally, but has a 62.8 per cent exposure to the US. This is well below the benchmark’s 70.9 per cent, but still a significant concentration that investors will want to keep in mind when considering the role this fund plays in their wider portfolios. The portfolio does also feature some European giants, such as AstraXeneca (AZN) and the recently added Novo Nordisk (DK:NOVO.B). The fund invested in the pharma company in February, based on the managers’ conviction of the “long-term demand and high impact” of its diabetes and weight loss drugs. The other UK-listed business in the portfolio is chemicals company Croda International (CRDA), chosen for its focus on bio-based materials.

After a couple of quiet months, the management team made a few changes to the portfolio in February. As well as Novo Nordisk, it also added health technology company Siemens Healthineers (DE:SHL) and NEXTracker (US:NXT), which makes technology for solar panels. Meanwhile, it sold its holdings in recycling company Tomra (NO:TOM), due to “clear evidence of eroding competitive position” and transportation business JB Hunt (US:JBHT), on the basis that the company’s penetration of the intermodal freight market had been "slower than expected”.

FP WHEB Sustainability is a well-run fund that gives investors exposure to businesses that have a positive impact on society across a wide range of sectors, offering a good level of transparency to those who do not like to stop at a generic ESG label. While growth companies might still have some volatile months ahead of them, and the impact focus can be at the expense of returns, the fund should do well for investors who want to deploy their money ethically while still aiming for attractive long-term returns.