Peter Michaelis

How our themes are evolving

Peter Michaelis

Those familiar with our Sustainable Future funds and investment process will be aware of our focus on transformative trends. We start our process with a thematic approach, identifying key structural growth trends that will shape the global economy of the future and then investing in high-quality companies whose products and operations capitalise on these changes and which, therefore, may benefit financially.

The three trends we have identified are: Better resource efficiency, Improved health, and Greater safety and resilience, with a number of underlying themes within these. These have been key to performance over the last decade and we revisit them annually to make sure they continue to drive returns.

Following our latest review over the summer, we have reduced the number of themes from 22 to 20 by removing four and adding two new ones. The new themes both fall within the financials space, split out from our Increasing financial resilence theme (which remains one of our 20) because they have become so prominent.  

Overall, we have concluded that the majority of our themes still have strong prospects for growth and we believe the updated list will continue to help drive performance over the coming years.

Our primary focus is on finding companies positively exposed to long-term transformative themes but we also limit investment in stocks exposed to activities that cause damage to society and the environment.

As part of the review, we have tightened thresholds for the revenues that companies can derive from unsustainable and unethical activities and still be included in our portfolios. From July, companies have been able to generate 5% of revenues from activities such as tobacco, gambling, intensive farming, weapon systems and nuclear rather than the previous threshold of 10%. This has been done to better communicate the low exposure to these activities across the funds the team manages as well as to reflect increased interest from clients in more stringent criteria.

The annual review

The culmination of our annual review is a workshop with the University of Cambridge Institute for Sustainability Leadership, where our team collaborates with experts in the fields of energy, food, health, construction, transport and finance. We aim to analyse and challenge all our themes to ensure they remain fit for purpose given the pace of change and to capture any major developments.

When the United Nations’ Sustainable Development Goals (SDGs) launched three years ago, we took steps to ensure they were represented across our themes, and later mapped our themes to the SDGs. At this latest review, we were pleased to note the growing recognition of the role of setting sustainable goals in overall economic development. The SDGs still encapsulate much of our thinking around our themes and form a useful point of reference in reviewing them. 

Other recent changes that have influenced our thinking include:

  • The continued fall in the cost of renewable energy. We have seen over $300bn invested in renewables over the last four years (Source: BNEF CleanEnergy Investment, July 2018), with onshore wind halving in cost since 2014 and photovoltaics falling even faster.
  • The advent of truly competitive electric vehicles, with growing penetration of new car sales (25% growth year-on-year in the UK).
  • The Paris Accord on Climate Change and the need to decarbonise quicker than previously thought: the ambition is to limit warming to 1.5C, implying a timeframe of less than two decades to cease using fossil fuels.
  • Revelations around the true impact of diesel combustion (VW and Dieselgate) on urban air pollution.
  • The fall in the cost of gene sequencing to below $1000.
  • The ongoing rise of social media networks and the emergence of negative impacts on society.
  • The Blue Planet Effect, which has driven home the harm caused by the way we use and dispose of plastics.

Theme revisions

As we said earlier, we have reduced the number of themes from 22 to 20 by removing four and adding two, both of which are in the financials space. All our financial holdings were previously under the Increasing financial resilience theme and, following our review, we have split this into three. We have retained Increasing financial resilience and added:

  • Saving for the future: As people live longer and governments and corporations retreat from providing long-term cover and pensions, individuals will need to take control of their own finances over the long term. Savings rates will have to increase and companies providing suitable products will enjoy strong growth.
  • Insuring a sustainable economy: This recognises that insurance, when done well, allows risk to be spread across a community. This lessens the impact of any single event, providing greater peace of mind and encouraging greater risk taking and innovation. Economic development and insurance penetration are well correlated, a function, we believe, of the positive social impact of insurance services.

The four themes removed all show how our thinking evolves in line with changing conditions.

Improving the fuel efficiency of cars has long been a key tenet of sustainable investing but we are now keen not to distinguish cars from other forms of transportation, especially with the advent of autonomous vehicle fleets. As a result, the theme is subsumed into Making transport more efficient, as is another now-defunct theme, Reducing pollution from cars and industry.

We have also removed the Accelerating the transition to lower carbon fuels theme: we had previously identified low carbon fossil fuels as an area of growth but following the Paris Accord and the success of solar and wind generation, this is no longer true. 

 

Finally, we have removed Making food production sustainable as we feel it is sufficiently covered by our broader Improving industrial and agricultural processes theme.

 

Old theme

Review comment

Updated theme

Better resource efficiency

Improving the efficiency of energy use

Keep: there is significant potential to increase the efficiency with which we use energy in lighting, cooling, heating, and data storage

Improving the efficiency of energy use

Improving sanitation and access to clean water

Broaden out to include all aspects of water scarcity

Improving the management of water

Increasing electricity generation from renewable sources

Keep: cost deflation continues and the majority of new capacity is now renewable

Increasing electricity generation from renewable sources

Improving industrial processes

Broaden to include agriculture and to assess whole system efficiency

Improving industrial and agricultural processes

Increasing waste treatment and recycling

Keep: the urgency of change has been reinforced by the Blue Planet series

Increasing waste treatment and recycling

Improving the fuel efficiency of cars

Remove: cars should not be distinguished from the concept of ‘transportation’, especially with the advent of autonomous vehicle fleets

X

Accelerating the transition to lower carbon fuels

Remove: we had identified low carbon fossil fuels as an area of growth. Following the Paris Accord and success of solar and wind generation, this is no longer true

X

Making transportation more efficient

Keep: transport is where we see exponential change, offering cheaper and cleaner mobility

Making transportation more efficient

Improved health

Providing affordable healthcare globally

Keep: demand for healthcare will continue to rise driven by an ageing population and availability of new treatments

Providing affordable healthcare globally

Connecting people

Broaden to include social media platforms

Connecting people

Delivering healthier foods

Keep: greater awareness of the importance of good diet will support growth in healthier foods

Delivering healthier foods

Building better homes

Broaden to look at infrastructure for urban communities as a whole

Building better cities

Providing education services and content

Keep, but the distinction between content and services has become blurred with increased application-based learning

Providing education

Enabling innovation within the healthcare system

Keep: the advances in bioscience are leading to a step change in treatment efficacy

Enabling innovation in healthcare

Enabling healthier lifestyles

Keep: we see increasing demand for active lifestyles

Enabling healthier lifestyles

Greater safety and resilience

Increasing financial resilience

Keep, but sub-divide into Saving for the future, and Insuring a sustainable economy

Increasing financial resilience

Saving for the future

Insuring a sustainable economy

Leading in governance

Broaden as the focus on ESG continues to increase

Leading ESG management

Improving auto safety

Keep: the strong push to reduce road deaths continues

Improving auto safety

Enhancing digital security

Keep: the sophistication of malware attacks necessitates higher levels of protection

Enhancing digital security

Better monitoring of supply chains and quality control

Keep: companies cannot outsource responsibility for environmental and social impacts of their supply chains

Better monitoring of supply chains and quality control

Reducing pollution from cars and industry

Remove: this is a subset of Making transportation more efficient

X

Making food production sustainable

Remove: this is now captured within Improving industrial and agricultural processes

X

 

For a comprehensive list of common financial words and terms, see our glossary here.


Key Risks 

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The majority of the Liontrust Sustainable Future Funds have holdings which are denominated in currencies other than Sterling and may be affected by movements in exchange rates. Some of these funds invest in emerging markets which may involve a higher element of risk due to less well regulated markets and political and economic instability. Consequently the value of an investment may rise or fall in line with the exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest geographically in a narrow range and has a concentrated portfolio of securities, there is an increased risk of volatility which may result in frequent rises and falls in the Fund’s share price. Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed-interest securities - fluctuations in interest rates are likely to affect the value of these financial instruments. If long-term interest rates rise, the value of your shares is likely to fall. If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds. This is because there is low trading activity in the markets for many of the bonds held by these funds. Mentioned above five funds can also invest in derivatives. Derivatives are used to protect against currencies, credit and interests rates move or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions.

Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing. 

Tuesday, September 11, 2018, 9:06 AM