Interactive Investor

Fund Spotlight: high-quality shares with an eye on sustainable growth

The ii Research Team gives an update and view on a global equities fund that combines financial and ESG analysis.

20th March 2024 11:12

ii Research Team from interactive investor

It’s challenging to overlook the dominance of the Magnificent SevenMicrosoft Corp (NASDAQ:MSFT), Apple Inc (NASDAQ:AAPL), NVIDIA Corp (NASDAQ:NVDA), Inc (NASDAQ:AMZN), Meta Platforms Inc Class A (NASDAQ:META), Alphabet Inc Class A (NASDAQ:GOOGL) and Tesla Inc (NASDAQ:TSLA) – that have recently been driving stellar returns in global markets. However, investors may want to look further afield and invest in market leaders at much more attractive valuations to diversify their portfolios and avoid further concentration in the largest tech names.

The Wellington Global Stewards fund attempts to capture such investment opportunities through disregarding short-term, growth-at-all costs trends in favour of companies with strong leadership, that deliver sustainable profits and create lasting competitive advantages.

Wellington Global Stewards is a global equities fund that tries to beat the MSCI All Country World Index (ACWI) through investing in companies that display exemplary stewardship and incorporate environmental, social and governance (ESG) considerations. The team believes that such companies are better positioned to enhance their return on profit in the long term.

The investment team defines stewardship as the effective balance of the interests of all stakeholders (natural world, human and financial), supported by robust corporate strategies and strong governance structures. Management concedes that even the highest-quality companies should be prepared to face some volatility over a 10-year cycle. Accordingly, the team’s prioritisation of strong and independent leadership, strategic decision-making and effective governance aims to identify companies capable of weathering such challenges.

Led by experienced co-managers Mark Mandel and Yolanda Courtines, the fund employs a rigorous investment strategy focused on long-term value creation, targeting a minimum holding period of 10 years. This strategy involves thorough qualitative research with a long-term outlook, as well as extensive short-term fundamental analysis.

The investment process is enhanced by the comprehensive engagement strategy, continuously working with investee companies to hold management to account and set science-based targets. These are clearly defined pathways for companies to reduce their greenhouse gas emissions and net-zero targets in line with the goals of the Paris Agreement.

What does the fund invest in?

The portfolio is concentrated yet well diversified with 35 to 45 stocks (currently 37). Unlike many ESG peers, it contains a spread of investment styles (like value and quality), rather than the typical growth bias. It focuses on the largest companies in its benchmark index.

At the sector level there are overweights to industrials at 16% of the fund (6% overweight), financials at 20% (4% overweight) and a slight underweight to technology at 22% (2% underweight) versus the benchmark, MSCI ACWI. The fund has nothing in energy and basic materials sectors due to its prioritisation of ESG considerations.

The portfolio favours developed markets, with more than half the portfolio in North America (-12% versus benchmark) and has a large allocation to developed Europe at 24% (+13% versus benchmark). Developed Asia and the UK also have small overweights at 9% and 8% of the portfolio, respectively, while the fund has no allocation to emerging Europe, emerging Asia and Latin America. 

While Microsoft remains a prominent holding at 5.7%, the fund distinguishes itself from peers by intentionally avoiding the Magnificent Seven. This strategic decision is rooted in the fund's long-term investment horizon and the uncertainty surrounding the future demand dynamics and competitive landscape of these industry giants over the next decade. Instead, the team is focused on identifying enduring leaders within the ACWI that are positioned to maintain their leadership over time.

One example is Deere & Co (NYSE:DE) (4% allocation), a manufacturer and distributor of agricultural, construction and forestry equipment, that management view as effective allocators of capital which leads to a strong balance sheet, healthy dividends and share buyback programme. The team also view Deere & Co as strong stewards through successful innovation using technology to reduce the environmental impact of machinery, limit the use of pesticides, increase productivity and reduce costs for customers.

How has the fund performed?

Wellington Global Stewards, which just passed the five-year anniversary of its inception, has an impressive track record of delivering outperformance versus its MSCI ACWI benchmark, with five-year annualised returns of 14.4% (+2.8% versus benchmark and +5% versus peers).

Year-to-date performance of the MSCI ACWI has been strong at 5.7%, propelled by the record highs of the US mega-cap technology stocks and AI frenzy. In line with the managers reluctance to succumb to such trends, the fund’s underweight to technology has been a detractor of performance so far in 2024, and not owning Nvidia has been one of the biggest contributors to relative underperformance versus the benchmark over the period. 

However, the fund’s differentiated strategy showed its strength in 2022 as global markets struggled against a backdrop of geopolitical tensions, monetary tightening and slowing economic growth. While the fund’s returns remained flat at -0.1%, this beat both the benchmark and peers, with returns of -8.1% and -9.2%, respectively. 

The fund has a history of stronger risk-adjusted returns and lower volatility versus the benchmark, which means the fund tends to perform better in times of market downturn. Such performance reflects management’s strong investment philosophy focusing on companies with strong stewardship and effective management of risks and opportunities.

Investment01/03/2023 - 29/02/202401/03/2022 - 28/02/202301/03/2021 - 28/02/202201/03/2020 - 28/02/202101/03/2019 - 29/02/2020
Wellington Global Stewards GBP N Acc14.
MSCI ACWI NR USD17.91.712.319.08.2
EAA Fund Global Large-Cap Blend Equity13.82.18.717.26.0

Source: Morningstar Total Returns (GBP) to 29/02/24. Past performance is not a guide to future performance. 

Why do we recommend this fund?

The fund has successfully implemented its investment strategy of identifying strong companies that have a history of high return on capital (a measure of profitability and value creation) and are capable of succeeding across a variety of market cycles.

The sustainability aspect of the Wellington Global Stewards fund is not an end in itself, but management seeks companies that are effective stewards of all stakeholder interests and are able to manage sustainability risks and opportunities successfully. As such, the team prioritises an extended time horizon and low turnover to fully reap the benefits of stewardship and engagement activities.

The fund is sizeable at £1.5 billion and has a very competitive ongoing annual charge of 0.65%. It is a recent addition to ii’s ACE 40 rated list as a core option.

The latest factsheet can be found here.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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