- The Liontrust ESG Trust which is due to launch in the next few weeks will be managed by the Liontrust Sustainable Investment team along the same lines as its open-ended funds
- There will be some key differences such as the number of holdings and size of companies held
- The trust will take a stricter ethical approach than the open-ended funds
Hardly a week passes without a fund launching or repurposing as a vehicle for environmental, social and governance (ESG) investing. But with so many fund managers claiming a sudden conversion to ESG, it can be difficult to spot the real deal. Hence the popularity of more established ESG funds with a good track record such as Rathbone Ethical Bond (GB00B7FQJT36) and WHEB Sustainability (GB00B8HPRW47).
This has also become apparent in Liontrust Asset Management's (LIO) more recent trading updates. Its Sustainable Investment fund range grew to become its biggest by assets under management last year, overtaking the Economic Advantage range that includes Liontrust Special Situations Fund (GB00BG0J2688).
Having existed in some form for 20 years, funds such as Liontrust Sustainable Future Global Growth (GB0030030067) and Liontrust Sustainable Future UK Growth (GB0030028764) have picked up momentum. The investment team that manages them is now looking to launch an investment trust, Liontrust ESG Trust, with an initial public offering slated for the coming weeks.
What the new investment trust could offer
The Liontrust Sustainable Investment team plans to make the most of the closed-ended structure, of which the benefits include not needing to sell or buy holdings to handle flows of investor money.
Like other funds in the Sustainable Investment range, Liontrust ESG Trust will focus on the best companies within a set range of themes (see table below) as judged by sustainability, business fundamentals and valuation criteria. The trust will have the same investment process and a similar objective and mandate to open-ended Liontrust Sustainable Future Global Growth, but should take a slightly punchier approach.
Liontrust Sustainable Future Global Growth fund holds around 50 stocks, but the investment trust should have between 25 and 35 holdings. Its managers will up the ante further by holding some smaller company stocks and using a moderate level of gearing (borrowing) to amplify returns.
Two other differences may appeal specifically to ESG enthusiasts. Peter Michaelis, one of the trust’s lead managers alongside Simon Clements and Chris Foster, says that they will back “companies exhibiting superior sustainability characteristics”, only favouring companies that their assessment awards an A or B rating. The open-ended funds, by contrast, can also invest in names with a C rating.
Also, a portion of Liontrust ESG Trust's 0.65 per cent management fee will be donated to research on and development of financial instruments to cover UN Sustainable Development Goals that are hard to focus on via investment. These include 'no poverty' and 'zero hunger'.
| Themes used by the Liontrust Sustainable Investment team | ||
|---|---|---|
| Better resource efficiency | Improved health | Greater safety and resilience |
| Improving the efficiency of energy use | Providing affordable healthcare | Increasing financial resilience |
| Improving the management of water | Connecting people | Saving for the future |
| Increasing electricity generation from renewable sources | Delivering healthier foods | Insuring a sustainable economy |
| Improving the resource efficiency of industrial and agricultural processes | Building better cities | Leading ESG management |
| Delivering a circular materials economy | Providing education | Improving transport safety |
| Making transport more efficient | Enabling innovation in healthcare | Enhancing digital security |
| Encouraging sustainable leisure | Better monitoring of supply chains and quality control | |
| Source: Liontrust | ||
Portfolio activity in the open-ended funds
Exploring the themes behind the investment approach and recent activity in the open-ended funds can shed light on how the trust's managers work. In recent times, they have topped up holdings that have had a more difficult pandemic in areas such as financials, while taking profits on more resilient names held by Liontrust Sustainable Future Global Growth fund.
“We trimmed DocuSign (US:DOCU) slightly in September after another strong rise, for example, as we felt the valuation potential near-term and momentum risk warranted some profit-taking, recycling [this money] into stocks left behind in the rally over the second and third quarters, such as Charles Schwab (US:SCHW)," says Clements. "We also took some profits in PayPal (US:PYPL) in July but continue to feel this business remains undervalued despite its considerable share price growth.”
The February and March 2020 sell-off allowed the team to add certain names at prices that seemed attractive. These included Ansys (US:ANSS), a simulation software specialist, and robotics-assisted surgery company Intuitive Surgical (US:ISRG). Later last year the team bought into drug dicovery and development firm Evotec (GER:EVTX), payments platform Adyen (NV:ADYEN) and Swedish investment platform Avanza (SWE:AZA).
As part of their “encouraging sustainable leisure” investment theme the team also invested in Spotify (US:SPOT). Other relatively new positions include Illumina (US:ILMN), corporate-sponsored childcare specialist Bright Horizons Family Solutions (US:BFAM) and Knorr Bremse (GER:KBXX), a provider of transport safety technology.
When assessing valuations, the Sustainable Investment team consider what they expect a business to deliver over five years and what that might be worth. If a company’s share price gains seem out of sync with fundamentals, they may feel forced to sell. This, in part, explains some disposals from the fund. They sold Salesforce.Com (US:CRM) and Eli Lilly (US:LLY) as they neared a long-term price target last year.
Earlier this year they also sold US pet insurance company Trupanion (US:TRUP) following very strong performance. “Sell decisions are driven by the deterioration in any of the four pillars of our process – thematic, sustainability, business fundamentals and valuation – and our favourite reason to sell is the last on that list,” Clements notes.
PerkinElmer (US:PKI) was sold out of the portfolio due to a combination of factors including strong performance, a sense that further gains may be limited over five years and “concerns around improvements we have requested relating to ESG issues”.
Activity in Liontrust Sustainable Future UK Growth fund has been relatively similar, with the investment team taking profits and reallocating them. They have topped up on positions in National Express (NEX), DFS Furniture (DFS), Legal & General (LGEN), Trainline (TRN) and Countryside Properties (CSP) in recent months. And they have taken some profits on Softcat (SCT), Croda International (CRDA) and Ceres Power (CWR).
Relatively new positions include Oxford Instruments (OXIG) and cyber security name Avast (AVST). The investment team has also invested in Home REIT (HOME), which seeks to help alleviate homelessness in the UK, and First Derivatives (FDP). Cineworld (CINE) and Informa (INF) totally exited the fund last year. The investment team had worried about Cineworld’s balance sheet while changes at Informa led to sustainability concerns.
Kingspan, Tesla and controversies
Running an ESG portfolio can involve responding to setbacks and controversies. The Liontrust Sustainable Future funds hold Kingspan (KGP), an insulation specialist embroiled in the Grenfell Tower scandal, and Compass (CPG) which ran into trouble this year amid reports of sub-standard free school meal provision.
The Liontrust Sustainable Investment team have downgraded Kingspan’s sustainability rating but continue to hold it and will "reserve judgement" until after the conclusion of the Grenfell Tower inquiry. And they believe that Compass has taken significant steps to address its issue which should be an isolated incident.
Generally speaking, the Liontrust Sustainable Investment team prefers to engage with a company when problems arise rather than divest of it. But they may exit if a company seems unlikely to deal with the problem, or it notably affects its sustainability or fundamentals.
“No company is perfect, nor do we have an infallible crystal ball,” Michaelis notes. “Occasionally, businesses will end up with controversy around them. The process is to investigate what is the actual issue, look at that in greater depth and ascertain the company’s responsibility, what remedial action it should take and whether it can take it.”
Other controversial names held by the Liontrust Sustainable Future funds include Google owner Alphabet (US:GOOG), Liontrust Sustainable Future Global Growth fund's biggest position at the end of March. Clements acknowledges some “clear negatives” but argues that Google has clear appeal in making information accessible. And although last year Clements and his colleagues told Investors’ Chronicle that Netflix (US:NFLX) was the other FAANG that had come closest to being investable, according to their criteria, it has not passed muster so far.
Tesla (US:TSLA) tends to be a rare sight in active ESG funds and Clements noted last year that they considered it uninvestable.
"Parts of it we love, mainly the safe cars, with safety as important to us as efficiency," he explains. "But we only invest where we are comfortable with the corporate governance structure. Elon Musk is such a big part of the shareholder base and, as a minority shareholder, you want more there to protect your interests.”
