ii ACE 40 investments:
M&G European Sustain Paris Aligned Fund

Why we recommend it

John William Olsen took over this strategy in July 2014, having joined M&G earlier that year from Danske Capital, where he had built strong track records on global and European strategies. In addition to this strategy, Olsen manages the Global and Positive Impact strategies. Olsen is supported by a well-resourced team and can also call on the work of the group's wider analyst team. 

Olsen employs broadly the same process here as he did at Danske which is to focus on finding companies with sustainable competitive advantages that should lead to pricing power and superior returns over the long term, and then wait for an opportunity to buy them at attractive valuations. In 2021, the process was adapted to include carbon research. The aim of this is to help identify companies which have a meaningful plan to reduce their carbon emissions using science-based targets, and thus aligning the portfolio to the Paris Agreement to limit temperature rises to 1.5 degrees. Furthermore, there is the requirement for the portfolio to have a weighted carbon intensity at least 50% lower than the benchmark. 

The portfolio is typically concentrated in 25-35 stocks with investments broadly split into “stable growth” (companies with a large competitive advantage) and “opportunities” (narrower competitive advantage) stocks, but this is a sliding scale of quality/valuation rather than a barbell. Opportunities stocks have more operational risk but greater potential upside, and the manager requires a larger margin of safety on the valuation for such stocks. With its re-focus on carbon, there are now some additional exclusions, such as gambling and weapons.

Performance over Olsen's tenure has been strong and given the fund's quality characteristics, we broadly expect the fund to hold up better than peers in falling markets but potentially lag in strongly rising markets. Additionally, the concentrated nature of the portfolio may at times mean that the fund's return profile is more volatile than that of peers.

Opinion

The fund benefits from strong execution of a well-formed investment process and we have a high degree of conviction in the manager’s approach and the level of detail in the team’s research.

While a concentrated portfolio brings the potential for higher volatility, we think the manager has demonstrated the ability to manage such portfolios effectively.

The fund's requirement for investee companies to have a meaningful plan to reduce their carbon emissions with science-based targets provides a measurable way to align with the Paris Agreement.

Sustainability criteria

Morningstar Sustainable Attribute: This fund is considered a sustainable investment product based on its prospectus or other regulatory filings. As a General ESG Investment, the fund uses ESG criteria as a central part of the security-selection and portfolio-construction process. These strategies endeavour to promote sustainability and minimize negative impact, without focusing on a specific theme or area of action.