Schroder Global Sustainable Value Equity – added to the Charles Stanley Direct Preferred List

We believe a well-rounded portfolio should include both ‘growth’ and ‘value’ elements. Growth investors focus on identifying companies they believe are capable of above-average growth in their earnings and profits. Value investors, meanwhile, aim to uncover businesses whose share prices are at a discount to their true worth in the hope that, over time, their full value will be realised. Both styles can work well over a long timeframe, although they tend to move in and out of fashion and deliver for investors over different shorter-term periods.

When it comes to funds investing in global equities there are relatively few value options available, especially for those wishing to invest responsibly in companies with better or improving ESG credentials. Value stocks are more likely to reside in the more traditional industries where it can be harder to demonstrate tangible progress towards sustainability goals. Yet arguably there can be greater real-world impact through raising standards among the bad and the ugly than confining investment to the already good.

With all this in mind we have been pleased to review the Schroder Global Sustainable Value Equity Fund, which seeks to identify ESG leading companies whose shares also trade at a substantial discount to their fair value.

Schroder Global Sustainable Value Equity fund – things to know

1. Investment team and process

The fund is co-managed by Simon Adler, Liam Nunn and Roberta Barr, members of the Schroders 11-strong Global Value team headed by the highly experienced Nick Kirrage and Kevin Murphy. The fund managers take responsibility for portfolio construction by region and strategy using the shared research the team produces.

The approach is contrarian and based on the premise that many market participants make two key errors. Firstly, extrapolating short-term trends, both good and bad whilst ignoring the potential for reversion to longer term trend in profits. Secondly, the stock market ascribes companies a valuation that reflects their short-term prospects and not their long- term ‘mean reversion’ potential. In their view this creates a significant opportunity for value investors to buy those areas of the market where valuations are at their lowest, but where companies can improve profits.

The team do not take a view on macroeconomic trends, as they believe identifying mis-priced individual shares is a more repeatable skill than that required to forecast the complex interrelated variables in a macro-based strategy.

2. Characteristics and risk

Given the value-seeking approach, sector and geographic allocation will tend to be very different to the benchmark. The fund has a maximum limit of 50% in any country and hence, as things stand today, will have a permanent underweight to the US market, which represents more than 60% of the global benchmark.

In terms of sector exposures, the fund has sizable position in telecoms at present. Technology also features prominently but not through the usual heavyweights. Holdings such as Intel, IBM, and Western Digital are described as ‘unloved old tech’ that deserves greater attention. The team state there is no conscious ‘home bias’ with the fund’s near-30% allocation to the UK a function of its perceived value within a global context.

The fund’s portfolio will likely consistently trade at a significant discount to the market on various metrics such as price to earnings, price to book and price to sales. We’ve seen a wide range of economic conditions in the last few years, which offers good insight into when this strategy will and won’t tend to add value. Periods of accelerating economic activity tend to be beneficial with higher interest rates not necessarily a headwind.

Given its distinct style and differentiation from the global benchmark and many of its peers, performance may be erratic on a relative basis and extended periods of underperformance and outperformance are inevitable. The concentrated portfolio of 30 to 70 companies adds to the risk as each position has a larger impact on returns compared with a fund with a greater number of holdings. Greater ups and downs than the average fund in the sector are therefore to be expected, meaning the fund should be seen as higher risk.

3. ESG framework

ESG factors are non-financial considerations that guide investment decisions based on an assessment of the risks and opportunities these factors pose. They are generally a central part of any responsible or sustainable investment approach.

This fund invests only in companies the management team identify as ‘ESG leaders’ through having an overall positive impact on society as well as significant scale and importance. Although businesses might themselves not directly play an active role in the sustainability themes such as the transition to cleaner energy or improvement in social mobility, they are chosen based on setting high standards within their industry or otherwise being on a journey of significant improvement within a reasonable timeframe, generally up to three years.

The criteria assessed includes the treatment of employees, communities, suppliers and customers, governance practices and management quality. There are also some important exclusions with the fund actively avoiding any company with significant exposure to fossil fuels, weapons, alcohol, gambling, adult entertainment, or tobacco.

For those looking to invest responsibly any fund should be carefully considered to see if it fits individual principles as well investment objectives. Follow the link for full details of the fund and its investment policy.

Our view

In recognition of the highly experienced and well-resourced management team, as well as the differentiation from other global funds, and in particular most other responsible products, we have added the fund to the Charles Stanley Direct Preferred List. This list of fund options represents investments we consider to be worthy of consideration for new investment within their respective sectors but does not represent a personal recommendation.

The fund potentially makes a good counterbalance to a more growth-orientated fund in the global sector, or indeed a passive investment, within a broad portfolio. It could also pair well with one of the other responsible global equity funds on the Preferred List in a portfolio for diversification purposes. FP WHEB Sustainability and Baillie Gifford Positive Change are at the other end of the spectrum stylistically with a focus on more expensively rated growth companies, while EdenTree Responsible and Sustainable Global Equity sits in the middle with a balance of value and growth characteristics.

Investors should regard any investment as long-term and before investing consider the risk warnings set out in the Fund’s Key Investor Information Document in the context of their objectives and level of risk they are comfortable with. This document can be found on the fund’s page on our website here.