Stewart Investors Worldwide Sustainability: May 2024 fund update

• Edgerton and Gait are highly experienced sustainable managers.

• Given the fund’s focus on sustainability and quality it can look very different to the benchmark

• The fund continues to typically protect when markets are falling however it can lag when markets rally

• This fund is not on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

Stweart Investors Worldwide Sustainability aims to generate long-term returns. The manager aims to grow returns by investing in high quality companies that are well positioned to contribute to and benefit from sustainability.

Given its focus on quality and sustainability, this fund could work well alongside other investments in out-of-favour companies with recovery potential – also known as ‘value’ investing. It could also add a sustainable element to an investor’s broader investment portfolio. Sustainability views are personal though, so make sure you’re happy with the fund’s approach before investing.

Manager

Nick Edgerton joined the team in April 2012 before quickly becoming co-manager in November 2012. At the time experienced investor David Gait was the lead manager of the fund. Previously Edgerton worked for two years at First State investments group and prior to that worked as an Analyst with the sustainability funds at AMP Capital Investors. In July 2016 Edgerton and Gait swapped roles and Edgerton led the team whilst Gait became co-manager.

Gait uses his experience to support Edgerton in his hunt for quality sustainable companies around the globe. Gait is a well-known manager in the industry with over 27 years’ experience. He joined the team as a graduate in 1997 and is the lead manager for numerous sustainable Asia Pacific funds as well as the Pacific Assets Trust.

Process

Edgerton and the team are truly long-term investors taking a 10-year mindset when first investing in a company. They believe that the sustainability of a company as well as quality of people, franchise and financials can help drive investment returns and reduce the risk.

Idea generation comes from a variety of sources and it is the responsibility of every investment analyst to bring ideas forward for the team. Analysts have no specific region or sector which is something called being a ‘generalist’, but their ideas typically come from meetings with company representatives, industry experts and external research.

After finding a potential idea, the analyst is required to undertake a detailed report analysing the sustainability positioning and quality of the company in more detail. To analyse the sustainability the analyst will use bottom-up research along with third party information and external research. For the quality aspect there is a focus on whether the company’s management are aligned with the team’s interests, alongside the quality of the franchise and if there are enough growth opportunities for that company. Finally, the quality of the financials where there is an emphasis on resilient cashflows and safer balance sheets.

If the idea meets Edgerton’s sustainability and quality requirements, then valuation becomes the final aspect. Valuation is dependent on the nature of the company’s earnings profile.

Edgerton is aware that none of the fund’s investments are perfect from a sustainability point of view. They will actively engage with many companies in order to help drive returns and reduce risk. This might be done directly to the company on specific issues, they may engage with multiple companies on the same issue or collaboratively engage with other investors.

Over the last 12 months Edgerton has made a number of changes to the portfolio. He added US Industrial company Advanced Drainage Systems, Swedish Industrial company Assa Abloy and Japanese consumer discretionary company Shimano. He also made a number of sales including Canadian technology company Constellation Software, Japanese industrial company Fanuc and German industrial company Rational.

Culture

We think the culture and philosophy that has evolved at the group over the years is attractive. The team doesn't put personal gain ahead of its investors and looks for companies that treat their customers in a similar way. It also places emphasis on recruiting and maintaining great people. Every manager and analyst advocate the team's overriding philosophy.

Stewart Investors forms part of First Sentier Investments, which was acquired by Mitsubishi UFJ, a Japanese bank, in 2019. Takeovers can sometimes lead to disruption and corporate change, though positively Stewart Investors remains an independent investment team.

ESG Integration

For the team at Stewart Investors, Environmental Social and Governance (ESG) considerations are much more than a label or box to be ticked. Taking these factors into account is a natural extension of the same investment process they’ve used for decades. The team’s philosophy is founded on stewardship – when they make an investment, they see themselves as part-owners of the business and want to make sure it’s run in a way that’ll benefit all shareholders.

ESG issues form a core part of this. For example, they don’t like companies that make reckless decisions in the pursuit of short-term gains, rather than focusing on longer term, more sustainable growth. A business shouldn’t exploit its workforce, take advantage of tax loopholes, or skirt around industry legislation. Importantly, it should cause little, if any, harm to the environment around it. Stewart Investors has made a firm-wide commitment not to invest in companies whose primary business is to make cigarettes (or other tobacco products), or controversial weapons.

The team also engages closely with company management. It helps them make sure management remain on track with sustainability initiatives, and means they can encourage a change in behaviour if required. If they don’t think a business meets their standards, or is doing enough to address a problem, they won’t invest. They produce an annual Responsible Investment report, and a Stewardship report. These reports outline the firm’s voting record, provide engagement updates and case studies, and present other ESG-focused research.

Cost

The fund is available for an annual ongoing charge of 0.68%. 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 Edgerton became lead manager in July 2016 the fund has returned 71.54%*. This is behind both the IA global sector average which returned 108.12% and the MSCI AC World which has returned 135.88%.

Although the fund has underperformed, it is important to remember that Edgerton focusses on companies that he believes are sustainable and are quality businesses trading at a fair valuation. This narrows his universe down quite considerably compared to other global funds. Many of the large US technology names that have led the market are names that Edgerton has naturally avoided for these reasons and caused the fund to lag the wider market.

Since the end of March 2024, the fund has returned 5.10%, behind the IA Global sector average which returned 16.36% and behind the MSCI AC World which returned 21.18%.

Given Edgerton’s focus on quality companies along with his valuation discipline, we typically expect the fund to hold up relatively well when markets are falling. In contrast, we expect the fund to lag the peer group when markets rise quickly.

Stock wise, over the last 12 months, Edgerton’s investments in German technology company Infineon Technologies and Suisse healthcare company Roche hurt performance. It wasn’t all bad though with investments in US industrial company Advanced Drainage Systems and UK insurance company Admiral Group having helped performance. As expected not holding names like Nvidia hurt performance compared to the benchmark but a name like this does not meet Edgerton’s criteria.