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ESG no longer means no returns, say Liontrust bond duo

ESG no longer means no returns, say Liontrust bond duo

Ethical factors used to be – unfairly – considered a luxury incompatible with return on capital, say Stuart Steven and Aitken Ross, co-managers of Liontrust’s sustainable bond fund. But no longer.

‘Clients give us their savings so that we can get a return,’ they stress. ‘We do that first and foremost, but we are also fossil free, have no mining and are still top quartile.’

The Edinburgh-based team says nothing has changed in the fund’s composition, strategy and style since joining Liontrust from Alliance Trust Investments in an acquisition at the beginning of the year. The duo, alongside colleague Kenny Watson, runs two corporate-bond funds.

Much like their equity peers at First State, the managers are keen to emphasise that not only are ethical, social and governance factors not antithetical with greed, they may actually be implicit elements among some of the most powerful long-term performers.

‘We do traditional credit analysis,’ Aitken says, ‘but by focusing on sustainability we are able to identify other risks that may have not been factored in otherwise.’

To them, the management of ESG factors is not just an indicator of ‘do-gooding’ but a sign that those in charge of a business understand potential liabilities which are frequently under-priced, something that drives long-term returns in their bond portfolios.

 

Volkswagen a non-starter

Steven cites Volkswagen as an example. The fund would not consider taking a position in it, or the auto industry as a whole, but not just because of environmental reasons. Regulatory issues the sector looks likely to face, as well as the general stress that it could be put under play an important role too. For similar reasons the team stays clear of energy and coal.

Instead, one of the largest positions is insurance. ‘If you think of the good things insurance companies are doing for society it makes sense,’ Steven says.

‘You might not think of it as “ethical” but saving for the future is a big social issue. Zurich Insurance Company, for example, gives people in GEMs [global emerging markets] access to savings, helping generate wealth for society. We deem that as sustainable.’

Both funds invest in corporate debt, are actively managed and have fairly concentrated portfolios, with a 25%-35% annualised turnover. Between them they manage around £800 million in assets plus discretionary mandates.

Performance has been decent. The Monthly Income Bond fund (MIB) holds some 60 positions and in the three years to July returned 21.3% against a peer average of 17.5%. The Sustainable Future Corporate Bond fund (SFCB), a short duration income proxy fund with 85 stock names, returned 16.2% against an average of 13.8% in the same period.

Lloyds, Prudential and Standard Life Aberdeen are in the top 10 holdings of both. ‘From an issuer point of view, we’ve liked Lloyds for the past seven years, but started off in the senior pot, then sold that and bought subordinated debt and have now moved through different tranches of debt. That’s one of the reasons we really like banks and insurance as a sector,’ Aitken and Stuart explain.

 Another example is Greater Gabbard, a company which owns pipes connecting windfarms to the shore. Student finance deals is also a sector of preference.

Aitken and Steven say they mainly focus on Europe and the UK because it is the space they know best. Both portfolios have some 70% exposure in the UK and most of the rest spread around the continent.

‘We concentrate on what we believe we are good at,’ Steven explains. ‘We choose names we know well. Even if they are not known to the wider public, they would definitely be within the industry.’

With Europe making a move towards sustainable investment, they add, and other types of investors, such as universities and charities, having to invest as such, the space seems set to grow. 

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