“In many cases, these precipitous falls have come from a starting point of elevated valuations and expectations,” says Lough, adding that back in 2021 there was a lack of diversification among the fund offerings, meaning investors were over-exposed to the same narrow group of companies, as well as a large-cap and growth style bias.
By comparison, R&M Global Sustainable Opportunities is a value-orientated stock-picking fund that invests in roughly 50 companies of all sizes – often not found in other sustainable equity funds.
“This is either due to their smaller market cap or because they do not fit the ‘box-ticking’ approach that had, unfortunately, become too commonplace,” adds Lough, “in this sense, the sustainable sector needed to get its house in order, but it is doing so”.
What is the outlook for sustainable funds?
Peter Michaelis, co-manager of the Liontrust Sustainable Future Global Growth fund, brands 2022 and 2023 “very unusual years in investment that have favoured shorter duration assets, except for the AI-related ‘magnificent seven’ in the US”.
He admits this has been a headwind for his fund as “we are looking for those businesses that will grow over the next five years as they deliver solutions to critical environmental or social problems”.
But Michaelis sees no weakening of these sustainability themes and mega-trends, and we tend to agree. He gives the example of action to reduce carbon emissions.
“The US Inflation Reduction Act earmarks more than $370bn to fund clean tech, renewables and grid upgrades; the EU has a target of 55 per cent renewables by 2030 and China has ambitious targets to have 1,200GW of renewables by 2030,” he points out, adding that because the cost of solar energy keeps falling, these targets are likely to be surpassed.
“These companies will continue to see strong growth in the coming years,” Michaelis says.
Ed Heaven, head of sustainable investment on the team behind the WS Montanaro Better World fund, is unequivocal that sustainable investing is “undoubtedly part of the future”.
“We do not think sustainability is a sinking ship and some of the commentary on its apparent demise have been hyperbolic,” he says. Heaven gives two robust reasons for this stance, other than being a fund manager investing in the sector.
“Firstly, we need to transition to a more sustainable economy to deal with major problems such as climate change. There is no question about this, just look at the science,” he says.
Secondly, the long-term growth opportunities offer probably the most exciting growth story of our lifetimes, according to the fund manager.
“The global transition to a sustainable economy will see trillions of pounds reallocated and invested into new technologies, services and infrastructure,” says Heaven.
