The Liontrust Sustainable Future Cautious Managed Fund obtained a low score overall because of the weakness of the screening process of interesting sustainable companies. No investments are made in companies that are explicitly unsustainable (gas, oil, tobacco), however, that doesn’t make the fund « sustainable » as they would like to be called. The fund’s approach to sustainability is too flexible and tolerant, which permits for more or less sustainable investments in their asset portfolio. This fund is perfect for consumers that want to ease their conscience about sustainability while making profitable benefits. Yet, it doesn’t commit enough to global transition and isn’t recommended for environmentally conscious consumers who want to use their investments to make a positive commitment to the long-term protection of the environment. Lastly, what is the most disappointing is that the fund manager has a 20-year career in financial sustainability (Peter Michaelis), but doesn’t seem committed to actively participate in the global sustainable transition that markets are experiencing.
The Liontrust Sustainable Future Cautious Managed Fund is a sub-fund of the Liontrust Sustainable Future ICVC. It represents an £838.7 million investment in a combination of global equities, bonds, and cash across 179 holdings. As of January 2021, equities represented 52.54% of their investment and were directed only towards companies based in developed countries. Another 24.10% were directed to bonds, such as UK government bonds, UK sterling debt securities, and US dollar debt securities. And finally, 8.36% of investments were allocated to collective investment schemes in the US and the UK. Overall, the fund is investing in a broad spectrum of sectors such financials (25.4%), information technology (12.9%), consumer discretionary (7.8%), healthcare (7.6 %), utilities (6.2%), sovereign (5.2%), etc… They have a diversified portfolio that targets strategic investment in a wide range of sectors, without focusing on particularly green sectors. The portfolio excludes investments that have exposure to oil, coal, mining, autos, nuclear, or tobacco, which credits the fund as « sustainable » but doesn’t guarantee that their investments are funding companies that actively participate in the transition to a sustainable economy.
Overall, the top 10 holdings include the US Government (4.6%), Alphabet, a parent company of Google (1.4%), 3i Group (1.3%), Smurfit Kappa (1.1%), Iqvia Holdings (1.1%), Compass Group (1.1%), Croda International (1.1%), Liontrust SF Corporate Bond Fund (1.1%), Ecolab (1.1%), Avanza Bank Holding (1.0%). The fund has a large part of its fund invested in low-risk assets, such as US government debt securities. These investments have no sustainable purpose but aim to balance the financial risk of the fund’s portfolio. A part of these investments is encouraging, such as Croda International, Compass Group, Ecolab, or Smurfit Kappa. Indeed, it seems that the fund targets company that value sustainability. Yet, these companies don’t follow a comprehensive approach to sustainability, often having a ‘sustainable branch’ that ticks the box, without fully transitioning to a completely sustainable model.
The fund has created a four-step approach to identify potential investments. First, they have defined some themes, which can be summed up by these 3 principles: Better resource efficiency, Improved health, and Greater safety and resilience. According to their report, these core beliefs are inspired by SDG principles (n*3,4,6,7,8,9,11,12). These themes are very wide, and can easily be manipulated to act as an amorphous group that welcome all companies, only excluding the ones explicitly harming the planet. The first step of the screening process isn’t very reliable. Indeed, it feels like these themes could easily be manipulated to justify any kind of investment. For the second step, to give thorough ground to their investment’s choices, the fund has created its rating system: a matrix that combines two criteria: product sustainability (1) and management quality (2). Spending time to design a rating system is an interesting initiative. At this point of the research, I expect an efficient and rigorous method that evaluates and targets the most performant companies. The first criteria assess the extent to which a company’s core business helps or harms society and/or the environment, rating the companies from A (excellent contribution) to E (poor contribution). The second criteria assess whether a company has the appropriate structures, policies, and practices in place for managing its ESG risks and impacts. Management quality are graded from 1 (excellent) to 5 (very poor). The combination of these criteria is interesting, it presents a double entry approach that tackles both the business and the management, thus providing a rather global analysis. Companies must score C3 or higher to be considered for inclusion in the Sustainable Future (SF) funds of Liontrust, yet on average companies' score is close to B2. The fund has tolerance for average performance, which indicates that their dedication to participating in the development of sustainable companies is limited.
What struck my attention is the way the fund justifies their investments in their report. I will take the example of Trupanion, which is a company providing health insurance services for pets. The fund partners categorized Trupanion as a company Insuring a sustainable economy and followed their explanation by presenting the rapid expansion of the pet insurance market in the US. While investing in pet insurance doesn’t necessarily harm the planet, I believe it doesn’t participate in ensuring a transition to a sustainable economy. It feels that justifying the investment in that way is misleading the client and demonstrates the incapacity of the fund to honestly act for change.
The fund is managed by Peter Michaelis and Simon Clements, who have combined industry experience of more than 34 years and are part of a team of 14 investment professionals. They transferred to Liontrust from Alliance Trust Investments (ATI) in April 2012 and, as stated in the 2021 report, they plan on targeting « companies that can grow as the global economy becomes more efficient, offer a higher quality of life and provide a more resilient global economy ». Peter Michaelis has an interesting career, he started working in sustainability investment in 2000 at the early beginning of sustainable finance. On the other hand, Simon Clement started his career in finance without a particular interest in sustainability before joining Peter Michaelis in 2012 to run the Sustainable Future Fund range at Aviva Investors. Based on their career, clients should be optimistic in believing in their capacity to assess sustainability performance, yet as understood in the previous sections it is not the case which is very disappointing. It seems that the fund’s management has failed to understand what sustanibility implies in 2021: honest commitment to the transition. Lastly, in terms of transparency, the detailed calculation of companies’ matrixes is not provided, which makes the verification and the understanding of their portfolios’ choices difficult. The lack of transparency and the failure to develop an effective investment strategy demonstrates the management’s lack of commitment to sustainability.