Ninety One UK Sustainable Equity: April 2024 fund update

• Matt Evans is an experienced fund manager who is passionate about sustainable investing

• Evans works collegiately with other UK investors, as well as with members of the sustainable investment team at Ninety One

• The nature of the fund's approach means we expect it to perform differently to the broader UK stock market, and its peers in the IA UK All Companies sector

• The fund features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Ninety One UK Sustainable Equity fund aims to provide growth in capital and income over the long term while investing in companies it believes are making a positive impact on society or the environment.

The fund's positive impact approach makes it different to other funds in the IA UK All Companies sector, and to other responsible UK equity funds. We think the fund could be a good option for the UK portion of a responsible investment portfolio.

Manager

Matt Evans began his career at Legal & General in 1998, with a focus on analysing smaller companies based in the UK. During his time with the company, he managed a range of institutional mandates before joining Colombia Threadneedle (CT) in 2013. At CT, Evans managed small and mid-cap funds investing in the UK as well as a sustainable equity fund.

Evans joined Ninety One in 2017 to manage the smaller companies fund and with the intention of launching a sustainable UK equity fund. This fund was launched in December 2018, and he's managed it since then. He’s an experienced investor with 25 years in the industry.

The structure of investment teams at Ninety One means that Evans collaborates and engages in debate with other UK investors, as well as with members of the sustainable investment team on company analysis. We think this adds rigour to the process and contributes to a positive investment environment.

Process

Matt Evans wants to invest in companies making a positive contribution to society, the environment or both. The first step in identifying these businesses is excluding those whose activities result in significant negative impacts. Ninety One exclude companies directly involved in the manufacture and production of controversial weapons from their funds and to narrow the investable universe of UK stocks, some exclusions are applied at the fund level too. This rules out companies with significant involvement in sectors like tobacco, oil & gas and coal. Violators of the UN Global Compact principles (a UN pact on human rights, labour, the environment and anti-corruption) are also excluded. Overall, around a quarter of the FTSE All Share index by weight is excluded.

Evans then assesses companies across three pillars. A financial sustainability assessment digs into balance sheet strength, tests the quality of earnings and allows him to form a view on the management's track record of allocating capital efficiently. Meeting with company management is an important part of the process. These meetings help to build a deeper understanding of each business, and the challenges and opportunities it could have ahead. Evans believes a good business model will ultimately drive value, so thinks investing in high quality companies with strong competitive advantages will be a winning strategy over the long term.

Next up is an internal sustainability assessment. Evans assesses the environmental and social impact of a company's operations. The key areas of focus will differ depending on the type of business being analysed but can stretch from its carbon footprint and usage of resources like water, to its employee working conditions. The manager thinks that this analysis helps to identify businesses that are run sustainably, manage their negative impacts well and are aligned with the long-term interests of its key stakeholders.

The final step is an assessment of any positive impact the company makes. This aids in quantifying the impact that financing a company's products or services makes to the environment, society or both. Evans assesses this positive impact by mapping it to the UN Sustainable Development Goals (SDGs) to target attractive sustainability outcomes.

This process whittles down the universe to a portfolio of 30-50 holdings. The fund is currently invested in 38 companies across a range of industries, with its largest investments in the industrials, health care and financials sectors. The fund currently has only one overseas holding, US listed scientific research company, Abcam. Evans doesn't tend to make use of the flexibility to invest up to 20% of the fund overseas, so we expect this fund to retain its UK focus. The manager has the flexibility to invest in derivatives which, if used, adds risk.

Culture

Ninety One is a dual listed business, featuring on the London Stock Exchange and the Johannesburg Stock Exchange. It was established in 1991 in South Africa and demerged from Investec in March 2020, so is now a standalone business. 29% of the company is owned by it’s employees, helping to align their interests with those of the business.

Investment teams work together closely, creating a collegiate environment where challenge and debate is encouraged. Portfolio managers are rewarded based on the performance of the funds they are responsible for, with a portion of their variable remuneration invested into the funds they manage. This helps to align their interests with investors.

ESG Integration

Ninety One’s South African heritage gives the firm a unique perspective on the challenges of sustainability in emerging markets, and what a robust approach to ESG Integration should look like. The firm’s ESG journey started over a decade ago, when the aim was to build awareness, and a common understanding, of ESG across the business.

In more recent years, Ninety One fully integrated ESG Analysis across all investment teams, who are supported by the central Sustainability team. We like this approach, because it means the investment team is accountable for the ESG risks they take on. The exact approach to ESG integration differs from fund to fund, reflecting regional challenges, culture and context.

We’ve followed Ninety One’s progress on ESG integration for several years and met many members of the firm’s ESG team along the way. We believe they’re of high calibre, and that the team takes a robust approach.

The firm provides an annual Sustainability & Stewardship report, complete with its views on various sustainability-related topics and engagement case studies, as well as regular thought leadership articles available via its website. It also provides a comprehensive proxy voting search tool which allows users to search for voting results on a fund-by-fund, or a company-by-company basis. Rationales are provided where the firm votes against management.

Investors in the fund can also access a fund level sustainability report which offers a detailed view of the sustainability performance of each of the companies held in the portfolio as well as a justification for holding each one.

Cost

This fund has an ongoing annual charge of 0.76%, Our platform charge of up to 0.45% per annum also applies, except in the HL Junior ISA, where no platform fee applies.

Performance

Since launch in December 2018 the fund has performed similarly to the index, delivering a return of 40.32%*, compared to a return of 40.51% for the FTSE All Share index. We think this is reasonable outcome given its differentiated approach. The nature of the fund's approach, including the exclusionary element of the process means that we expect it to perform differently to the broader UK stock market, and its peers in the IA UK All Companies sector. This approach results in a longer-term bias towards higher-risk small and medium-sized companies.

Over the last 12 months the fund has delivered a return of 3.55%, lagging behind the FTSE All Share index return of 8.43%, and the average return from the IA UK All Companies peer group of 7.61%. This was a tough year for the fund as the Bank of England hiked interest rates from 4% to 5.25% over the period to combat above target inflation. Growth orientated companies tend to struggle more in this environment given that more of their valuation is based upon their potential to grow revenue and profits years out into the future.

Technology consulting business FDM Group and clean energy company Ceres Power were among the largest detractors from the fund’s performance. Some of the fund’s investments performed well over the year though. Medical instruments business ConvaTec Group and Chocolatier, Hotel Chocolat which was bought by Mars at a significant premium were among the biggest contributors to returns.

Overall, we think Evans is a committed and passionate sustainable investor and has the experience and resources at Ninety One to do a good job for patient investors over the long term. Past performance isn't a guide to the future. Funds will rise and fall in value, so investors could get back less than they invest.