Top Australian Ethical Fund Bets on Return to Normal After Virus
Australian Ethical Investment Ltd.’s David Macri has had a good crisis. His funds are beating their peers, inflows are strong and the firm’s stock price has more than tripled in the past year.
His secret? Betting that nothing has really changed.
“We’ve absolutely stuck to the process and what we think value is,” Macri, the firm’s 44-year-old chief investment officer, said in a recent interview. “No one has a lot of conviction around near-term earnings. Nobody knows how long the recovery will take. It really focuses the mind on what the underlying value of a stock or a security is.”
The fund’s investment screening process is two-fold. A negative-screen to exclude the likes of tobacco, then a positive-screen to look for companies that are actively contributing to its priorities -- including technological innovation and sustainability -- and offer long-term relative value.
With Australian companies on a capital raising blitz -- more than 15% of companies have tapped the market since March -- Macri says there have been lots of opportunities to invest at a good price. He’s put A$55 million ($38 million) into 25 raisings with a focus on technology and healthcare.
“It’s hard to form a view that the impact of Covid isn’t temporary,” said Macri. “There is going to be nuance, hiccups and changing behaviors, but fundamentally we should return to some kind of normal.”
While ethical investing isn’t new -- Australian Ethical started in 1986 -- its sharp growth in popularity over the past few years means for many investors this is the first chance to see how ESG-focused portfolios perform in a crisis. Positive inflows as well as investment gains lifted the firm’s assets under management about 9.2% in two months to A$3.9 billion by the end of May.
For a strategy that makes no claims about short-term performance, that’s been better than perhaps expected. In Finland, the CIO of the $26 billion Elo Mutual Pension Insurance Co. said in June ESG-compliant securities have been more resilient in the crisis, suggesting that’s because the business models of responsible companies are based on more solid foundations.
Across major developed markets, stocks with strong ESG characteristics are marginally ahead of their peers, according to Bloomberg data.
Australian Ethical’s balanced fund has beaten 9 out of 10 peers this year and is flat, compared with a decline of more than 4% for competitors, according to data compiled by Bloomberg. It’s also topped 95% of similar funds over the past five years, the data show.
Macri, who has been at the firm since 2009, puts performance in the short-term crisis entirely down to the long-term approach. Not holding oil, for example, insulated it from the chaos caused by plunging prices.
Secondly, they don’t hug the index. Whereas the S&P/ASX 200 is dominated by banks and big resource companies like BHP Group Ltd. and Rio Tinto Ltd. (neither of which they own), their portfolios have a higher weighting to small caps -- 61% of their Australian shares fund is in smaller companies -- and within that sectors like IT and healthcare.
Key long-term holding Fisher & Paykel Healthcare Corp., which makes ventilation and respiratory support equipment, is up 122% over the past year.
Another stock, Westpac Banking Corp., is still reeling from allegations in November of a mass breach of anti-money laundering laws, including some customer payments allegedly linked to child exploitation. While the company has admitted to the vast majority of 23.5 million breaches, it argues they were technical rather than systemic breaches. The court case is ongoing.
“We did a lot of research, we spoke to them a lot, we spoke to industry participants and we formed the view that it wasn’t a systemic issue,” Macri said. “They could have done things a lot better, absolutely, but that in and of itself didn’t mean that it would be cause for us to divest.”
For Macri, robust performance in the crisis is welcome, but not the point. Ever since ethical investment moved from niche to mainstream a decade ago the perennial question has been whether they can actually deliver superior returns in the long term.
“Hopefully, that myth is put to bed,” Macri says. “From a global perspective you can see that things are shifting.”
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