There are a lot of models emerging for so-called impact investing. In this interview with Seb Beloe, Head of Research at WHEB Asset Management, we uncover a relatively small but growing fund that targets a discrete group of mid-cap firms, all of which have significant revenue streams coming out of sustainability related products or services. The result is measurable impact and competitive returns. A key question is how it can be efficiently scaled. Tim Nixon, Managing Editor, Thomson Reuters Sustainability.
Tim: People use different tools to assess performance. You tend to compare yourselves against the MSCI World Developed Markets Index and against other global equity funds. Net of fees you are ahead of the MSCI World over 1, 3 and 5 years and are also either first or second quartile in the global equity peer group over these time horizons as well. Are you happy with the performance of the fund?
Seb: Our target is to deliver superior risk adjusted returns from global equities, and we believe that our long-term performance track record stands up well.
Tim: Is there a performance trade-off for achieving the impact goals?
Seb: No, in fact quite the contrary. Our core thesis is that companies which sell products and services that the world needs more of is a good place to be looking for revenue and profits growth. The FP WHEB Sustainability Fund has experienced annualised revenue growth over the last six years of 10%, well ahead of the MSCI World average of 5.6%. Of course, you still need to find companies that can turn this growth into profits and cash for their investors, but companies that are providing solutions to sustainability challenges at least have the benefit of strong end market growth.
Tim: What is different about this impact investing model from the mainstream?
Seb: We lead first and foremost with a strict definition of only investing in companies that sell products and services that clearly provide a solution to a sustainability challenge. The company’s products and services need to create a positive impact on society or the environment, and our intention in investing is to create the positive impact. This approach means that only 16% of the MSCI World index qualifies in our investment universe. There are no oil and gas companies, no banks or insurance companies and only a handful of retailers or car manufacturers. Instead, we have lots of industrial companies, as well as companies focusing on health and well-being which tend to sit in the GICS healthcare sector.
Tim: Is it scalable at WHEB?
Seb: We believe that our existing strategy has capacity for $3bn in assets under management in its current form. So we still have plenty of room for further growth (there is approximately $300m in the strategy at the moment).
Tim: How about scalability more broadly in the marketplace?
Seb: It is our strong view that the whole market is already moving towards the themes that we invest in. In the last few years we have seen extraordinary change in the utility sector, and evolution is coming just as fast in the automotive sector. As this happens, the opportunities to invest at scale in infrastructure, real estate, public and private equity and in credit will continue to grow and will eventually become the mainstream.
Tim: Is data quality and transparency a key challenge to investing with this methodology?
Seb: Yes but no more so than any other fundamental bottom-up strategy. You need to know how a company is positioned in the market place and how its products are able to compete. This is certainly true for our strategy but no more so really than any others.
Tim: Do you have growing interest from asset owners?
Seb: Yes – impact investing, while still small overall, has seen very rapid growth in recent years. Initially this was driven by committed institutional investors such as high net worth individuals and institutions such as foundations. However, this profile is changing as private banks try to position themselves to capture the millennial market and pension funds get pushed by beneficiaries to deploy capital into these areas.
Tim: What kind of partnership network is involved in implementing and marketing this strategy?
Seb: Impact investing is growing and developing very quickly from niche to scale. WHEB is a specialist boutique, but our long track record with the strategy means that we have been around since it was still the niche. We are quite well known for our thought leadership and for innovating and evolving methodology in the space, for example with our impact reporting, where we have just launched an interactive microsite and impact calculator, enabling investors to see the impact of their own investment. Our intellectual property is our best marketing, so we need to keep that in house, however, we are keen to develop partnerships to address markets which we couldn’t service on our own. For example, in Australia we jointly manage the Pengana WHEB Sustainable Impact fund with Pengana Capital. We are really pleased with this relationship and very excited about the potential in the future.
Tim: How do you see your business 10 years from now if trends continue?
Seb: We’ll see a lot more competition in the market place and in fact we already are. There have been a whole slew of fund launches in the last year or so and we would expect this to continue. However, we do have a head-start on most of the competition as we have been doing this for such a long time. We hope to participate fully in the growing market and as the market matures, we would aim to develop and launch other innovative positive impact products that build on our core expertise and reputation as a leading impact investment business.