“This whole ESG thing is great, because it's really an economic argument. It's not a doing good argument,” says Hugh Cuthbert, portfolio manager at well-regarded Scottish boutique asset manager SVM.
Mr Cuthbert has been involved with ESG investing for 25 years, starting with Jupiter before moving on to legacy Henderson Global Investors to run their global care funds. This experience has really informed his view on sustainable investing and while many firms will use an exclusionary methodology for their ‘green’ funds, for instance banning fossil fuel companies, this does not sit well with his strategy.
“My argument has always been if people want to invest their money in an environmentally friendly way, if you really want big bang for your buck, invest in the bad industries, not the good and make them change,” Mr Cuthbert states.
Although investing in oil companies to help them transition into more eco-friendly entities is hardly a revolutionary idea, it seems that investors are still wary of investing like this. Mr Cuthbert describes the fund with this idea at the core as ‘a small fund’ as ‘nobody was interested in that for a long time’.
Furthermore, with the clamour for a standardised set of ESG reporting, Mr Cuthbert has an interesting observation.
He makes an amusing parallel to a situation where analysing a company’s financial performance was outsourced to an external provider such as one of the Big Four accounting firms, ie the accountancy firms are responsible for checking a portfolio holding’s financial merits. ‘You’d laugh at me’ is what Mr Cuthbert says would be the response to such a situation but that is what the market wants from ESG ratings of companies, a standardised methodology compiled by presumably one source. He admits that as ESG is in its infancy this idea is not as ridiculous but given Mr Cuthbert’s 25-year experience in ESG he views it as an integral part of his job.
European ambitions
Mr Cuthbert’s focus is on European equities and the performance of the firm’s Continental Europe fund suggests he’s pretty damn good at it. While some may bemoan the relatively high fee of 1.92 percent, it has beaten its benchmark by over 18 percent on a yearly basis and has achieved similar outperformance over a range of time periods.
One thing about the fund is that most of the names in the top ten holdings will be unfamiliar to many. “If you look at our top 10 stocks, I always pride myself that I would hope you wouldn't have heard of a lot of them. And you wouldn't even be able to pronounce some,’ he jokes.
This is where boutiques can add value and this fund’s performance outlines this perfectly. Given the relative obscurity of the holdings, there’s little broker coverage of the companies meaning that if they are researched well, these hidden gems can prove to be very profitable. As Mr Cuthbert says, if he discovers a company, rather than the market, this is where true value can be found.
This is not to suggest that due to the size of the firm, the big companies won’t take notice of SVM. Indeed, Mr Cuthbert says that even compared to Henderson, SVM receives more visits from true global giants such as Total Oil and pharma behemoth Novo Nordisk.
Returning to the theme of sell-side coverage, the global giants such as Nestle might have over 40 analysts covering them but as Mr Cuthbert observes, there’s often little difference in predicted earnings per share estimates. So either the company is giving them a good steer, the analysts are comparing notes or there’s little that the market doesn’t already know about the firm, harking back to Eugene Fama’s efficient market hypothesis in a way.
Of the continental fund’s make-up, it might surprise some that technology is the largest sector weighting. This is not to suggest that SVM takes a top-down macro view of the market, they are intrinsically bottom-up stock pickers but Europe as a whole is seen as lagging other major markets such as the US due to their lack of tech giants.
While SAP may be one of the better-known European tech names, Capgemini is the fund’s third largest position and has appreciated by almost 100 percent in a year. It might not be too far of a stretch to suggest that investors could have made the same, or more, investing in the smaller European tech names than others have made in the well-known US giants such as the FAAMGs, with the latter surely being priced in by now.
To underline the alignment between the fund manager and the investors in SVM funds, Mr Cuthbert says: “We will live or die on the performance of our funds. that's my future in my fund.” Skin in the game indeed.
