Interactive Investor

Fund profile: Alliance Trust Sustainable Future Global Growth

20th May 2015 10:58

Rebecca Jones from interactive investor

Launched in 2001, Money Observer Rated Fund Alliance Trust Sustainable Future Global Growth does not boast the most impressive return profile in the Investment Association's global sector: in the 10 years to 15 May 2005 the fund has returned just 97.4% compared to an average of 114% from the latter.

However, things have definitely been on the up for the fund since current manager Simon Clements took over in late November 2010, during which time the fund has beaten the sector by over 10% with a 57% return to 15 May.

Alliance Trust Investments acquired six of its eight-fund range of sustainable, responsible investment (SRI) funds from Aviva in 2012, bringing both Clements and head of department Peter Michaelis along with them.

Making a difference

Clements and Michaelis run the majority of the funds together (the exceptions being ATSF Corporate Bond, managed by Stuart McMaster, and ASFT European Growth, managed by Michaelis and Neil Brown), applying a tried and tested thematic approach to all of their holdings.

Clements and Michaelis invest according to four themes: climate change & energy efficiency, quality of life, sustainable consumption and resilience. Investments may fall into one or all of these categories with those that don't quite fit making it in on a 'sustainability only' ticket.

However, Clements says that at least 75% of the funds' holdings do fit into the themes, with each fund displaying a slightly different tilt. Global Growth currently has rather more investments that fall into the "quality of life" theme, which loosely speaking is concerned with companies that improve social and economic conditions within the countries they operate in.

Clements cites the fund's ninth largest holding, blood-diagnostics firm PerkinElmer, as an example. A leader in its field, PerkinElmer is based in the US and is already dominant in the West. But it is the opportunity that lies in emerging markets - particularly China - that makes the firm so interesting to Clements.

"Basic consumer product companies like Unilever have been selling in China and emerging markets for some time now, so there is not much more growth to go. However, a lot of the medical technology that is readily available in the West is starting to penetrate into emerging markets as healthcare improves.

"PerkinElmer is the largest blood diagnostics company in the world; in the US every new-born baby gets tested for around 35 blood disorders. In Europe each baby gets tested for around 10, but in China only one in two new-borns get tested, and then only for two diseases, so you can see the opportunity there for PerkinElmer. That of course also brings a great social and medical benefit across the country," says Clements.

Medical technology, biotechnology and healthcare occupy the largest chunk of the fund, accounting for around 25% of the total portfolio. Other holdings include Celldex Therapeutics, a biotechnology firm pioneering cancer treatments that work with the body's immune system to fight the disease, alongside more mainstream pharmaceutical names such as Pfizer.

Energy controversy

Climate change and energy efficiency is the fund's second largest tilt. As would be expected in this type of fund, Clements has some exposure to so-called "clean" or renewable energy firms including Sun Power, which is the largest solar panel producer in the world.

Less predictable is Clements' holding in oil and gas exploration company Oil Search. This is the fund's fifth largest holding at close to 3% of the total portfolio, and Clements admits that it often leaves current and potential investors stumped, with many questioning how such a company could make it into an SRI fund.

However, for Clements, the answer is fairly obvious once investors take a closer look at the company. "Oil Search is more than 90% gas, and it's conventional gas, not shale gas. The gas comes from the Papua New Guinea highlands and is shipped to Asia, where gas is displacing much dirtier, less environmentally friendly fuels such as coal.

"It would be great if you could move to a completely fossil free model - and hopefully we'll be there in two or three decades - but you need a bridge to get there and we think gas can be part of that," says Clements.

Moreover, Oil Search also fits neatly into the team's quality of life model. Unlike conventional oil and gas explorers, Clements says that Oil Search works closely with the Papua New Guinea government, which shares the royalties accrued from the project with 10,000 different landowners. Clements adds that the firm has also been pioneering initiatives including the establishment of health clinics for HIV and Malaria.

Principally, any energy firm that the team invests in has to be largely in the gas business rather than oil, and as hinted at above this doesn't include shale gas, which Clements says neither he nor his colleagues are "convinced" by.

"From an environmental point of view, shale extraction uses a lot of water and there is potentially a risk as it goes through the water tables. Also, from an 'energy in versus energy out' point of view it takes a lot more energy to get shale gas out than conventional gas. So when you put it all together, we don't think shale gas is something that fits our process," says Clements.

Turning Japanese

From a regional perspective, Clements' favoured region is Japan, which accounts for nearly 10% of the fund. This is an 'overweight' position compared to the fund's benchmark, the MSCI World index, which has an 8.5% weighting to Japanese companies.

According to Clements, Japan is and has historically been a solid hunting ground for SRI investors, due to the country's complete lack of fossil fuels which has driven successive governments to find energy efficient alternatives anywhere possible.

"Following the Fukushima disaster, the drive for energy efficiency has intensified as Japan had to turn off all of its nuclear reactors, so there is a real push towards covering their energy needs without importing lots of oil," says Clements.

The manager is playing this theme indirectly through technology firms developing new solutions for everyday problems. These include air conditioner manufacturer Daikin Global which designs and produces some of the most efficient air-con units around while also investing heavily in global environmental projects such as reforestation in Indonesia.

Outside of this theme the manager also invests in Japanese real estate firm Mitsui Fudosan, advertising and public relations company Dentsu and sports shoe manufacturer Oasics.

With Japan's Nikkei 225 index continuing to reach new highs, Clements' overweight to Japan has certainly benefited the fund in recent months, and indeed kept it afloat through an admittedly disappointing time last year.

In 2014 Global Growth delivered a third-quartile return of 6.9% which admittedly undershot the global sector by a very narrow margin (0.2%), but underperformed the benchmark (MSCI World) by close to 5%. According to Clements this was largely due to the fund's natural mid-cap bias (reflecting its focus on high-growth companies), an area of the market that suffered something of a rout in the second half of 2014.

Over the last three months to 15 May, however, the fund has put in a first-quartile return of 3.2%, compared to an average of 2.1% from the sector and just 1.3% from the MSCI World index.

Overall, Clements is positive on both the short- and the long-term future of the fund: "Last year was a very difficult year for the fund, but you accept that as a fund manager; you are going to have some down years but you build back up. Right now I feel good, I feel well-positioned, and that the themes that we look at are playing out well in the market."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.