Peter Michaelis, manager of the Liontrust UK Ethical Fund, tells interactive investor which stocks he’s been buying, his best investment themes, and shares some tips for budding ethical investors.
Filmed 28 May 2020
Lee Wild, head of equity strategy, interactive investor: Peter, how has the portfolio performed during the pandemic? Are you pleased with the outcome?
Peter Michaelis, manager of the Liontrust UK Ethical Fund: Well, I mean we’re never pleased when portfolios deliver negative absolute returns, but clearly this has been a major shock to the economic system and many companies are suffering, and so equity markets have fallen.
I am pleased though that, relatively, this fund has outperformed the UK benchmark which is great because it continues a long track record of our performance, of the strategy. Part of that is driven by the sectors we don’t hold, so we don’t hold any oil which has suffered really badly. We don’t hold any airlines, we tend to be underweight, or we are underweight, a lot of consumer-facing sectors and so the fund has held up pretty well.
I think in particular, if you look at areas where the fund has done well, it’s companies involved in what we’re doing at the moment which is remote working, supporting the online world, connecting people, which has done a huge amount to mitigate the impact of the lockdown.
So we’re pleased with how the fund has shown itself to be resilient and, longer term, we expect our companies to recover from this and to do well, but we have to now take a longer term view to get back to positive absolute returns.
Lee Wild: So you mentioned markets which, as we know, have come up sharply. Have you been taking advantage of lower share prices since the coronavirus outbreak and, if so, can you mention some of the stocks that you’ve added to the portfolio?
Peter Michaelis: The first thing we did when it was clear that this pandemic was going to lead to a severe economic shock, and that was in mid-February, was to look at all the companies within our portfolio and to analyse them to say, “First of all, are they going to be able to survive a period of low or no revenues?” How are their balance sheets?
And then to think in a post-lockdown world, are these companies going to be able to emerge into a strong market and so should we be backing them into the future? And I’ll give you an example of one that failed that test and there was a company called Cineworld (LSE:CINE), which we held in the portfolio. And our view was that in this new environment, the new news which we had to incorporate into our investment pieces, that a company, in spite of its incredibly low valuation, was really at risk in terms of the balance sheet point of view that embarked on a large acquisition which really stretched their position.
And also we were looking at the movie, cinema world, post lockdown and we felt that there’s a real structural acceleration in decline there. So we exited from that position which clearly had not performed well until then, but we felt it was better to cut and put your money into more robust business.
And on that side, we have had many companies that have been severely affected. One of them is Compass Group (LSE:CPG). Compass Group provides a lot of food, food services, so food to organisations from businesses to sports events to entertainment, and clearly that is going through a terrible period globally now, I mean it’s an unimaginable hit to their economy.
But looking as we come out of this, even with increased working from home and maybe fewer people gathering at events, we still think there’s a fantastic business there and they’re leading the way that they source their food, the way they’re pushing for healthier food to be eaten in their canteens, so that’s a business we’ve backed.
Equally, we are looking still across the world at businesses, and one company we’ve increased our position in is a company called Helios (LSE:HTWS). Now Helios owns and operates mobile phone masts, and the idea is that they provide a network which all the mobile phone operators can share. And the name of the game is to increase the number of mobile phone operators on each mast and then your returns go up very solidly.
Now Helios operates in, not only the UK, it operates in the Democratic Republic of Congo, Congo, Tanzania and Ghana, which are areas where you’ve got fast population growth, you’ve got a great growth in urbanisation and, importantly, there’s no landline competitor.
These are countries which made the sort of leapfrog in telecommunications where they rely entirely on mobile, almost entirely on mobile for their internet or internet and telephony services. So we think that company has got a great future ahead of it and so we’ve added to that.
One other company which is UK focused is Trainline (LSE:TRN). Trainline do the ticketing for rail and bus services in the UK and make the whole mass transport system that much easier. Clearly, going through a terrible time at the moment but we think it’s got dominance, it’s got market share growth which will more than compensate on a three-year view for the decline in revenues at the moment. So that’s a company as well that we’ve been adding to and backing.
So those are the main changes in the portfolio but it hasn’t been a sort of drastic shift because we’re pretty happy with the portfolio as it is.
Lee Wild: The pandemic will change the way we live and behave perhaps once things return to a new normal, whenever that might be. So greater emphasis on all sorts of things socially, but do you think part of that might be a greater emphasis on ethical investing in this post-Covid world?
Peter Michaelis: We think definitely that this, when we look at our themes - and we have 20 themes which drive our investment strategies - and we’ve scanned them and we think now is this pandemic actually going to make companies in these themes stronger and their likely success in the future greater? And for the vast majority we do. I’ve mentioned connecting people as we do more and more remote interaction, more working from home, so demand for those sort of services will go up.
When I look at, we talked about insurance and savings, I think that’s going to more of a forefront in peoples’ minds, you know, at the expense perhaps of some of the more discretionary items that people buy.
But I think maybe more optimistically, when we look at things like the taste that people have had in cities of clean air, car free streets, we think this kind of helps people to – helps governments and local authorities to sort of say “Well actually, you know, that was pretty nice, that was a good environment, that’s something we want to have more of”. And so we see that trend accelerating.
And an interesting anecdote is that we invest in the National Express Group (LSE:NEX) and National Express do buses and coaches in the UK as well as operations in the US, Spain and Morocco. But in the UK they have committed to never buying another diesel bus. And they are looking for government support to help them make the shift in terms of the capital expenditure they need to move to fuel cell and electric buses.
But we asked them, is government retrenching from that, is the government sort of saying “Look, we haven’t got any money for any of these green initiatives”? And they said “Actually, the opposite, the government are looking for schemes whereby they can back this move to a more sustainable economy which is better for all of us. It’s great to have this cleaner air and to have less congestion in our cities, it makes them so much more liveable”.
But then the final point is that I think what the pandemic has shown all too clearly, is our vulnerability. As a global society we have been laid low by a tiny strand of RNA protein, and that has caused such damage to our global economy. And we’re coming together and we’re managing that and I have no doubt that we will come through it and there will be changes to the way we live.
But when you think about something like climate change and you think about the impact that that can have, they are very different in many ways, but they’re also very similar in that climate change is a global problem, it’s something that scientists have been warning about for many, many years.
There are solutions out there, solutions exist and I think this will only encourage governments, individuals, companies to invest that much more in mitigating and avoiding what could be, you know, given what the science is showing us, an incredibly dangerous situation to put ourselves in, in terms of allowing the climate to warm more than one and a half degrees, certainly for the next generation and their children.
So we think there are many aspects of our world which will make people sort of think actually this ethical, sustainable investing, that makes such a lot of sense, it matches my principles but I also get how it works as an investment proposition and that really would be our wish.
Lee Wild: So, if that is the case and there are lots more people wanting to get involved or invest ethically, whether they would be existing investors or new to investing, what advice would you have for a retail investor who wants to begin investing based on their own principles?
Peter Michaelis: My first advice would be, do it, because the option of doing nothing means that you are almost certainly investing in companies which you will find unpalatable. So that’s my first word of advice.
You know, yes, there are a lot of ethical and sustainable investment strategies out there, many more have emerged over the last few years so you – I feel sympathy with investors, retail investors, sort of thinking, scratching their head and think “God, well which one do I go for”?
I would suggest the following checklist. I would look at the team who manage it and I would look at their pedigree, so how long have they been managing these funds? What experience do they have? We feel we’ve been through several crisis and market shocks. We have a good understanding of how to make these funds resilient and deliver strong performance.
I would also look at how they make their investment decisions, so is it ethics and sustainability, is it just a sort of light dusting on top? Is it something that you just sort of sprinkle a bit of icing sugar on top of it? Or is it the actual cake? You know, is it what you have at the heart of your investment process or the team has at the heart of their investment process?
And finally, I would have a look at the portfolio. Look at the companies in the portfolio and if you look at the list of companies - we disclose every single company we hold - and there are some in there which you kind of raise an eyebrow and think “I wonder why that’s in there”, then write to the company, write to the Asset Manager, we love getting feedback from our clients or from advisors to say “Our client would like to understand a bit more about why you hold Smurfit Kappa (LSE:SKG)”.
If the company, if the investment company investment managers can explain that very, very clearly, then you can probably rely on them doing the right thing by your investments and delivering you strong returns, but doing so in a way which matches your principles.
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