Square Mile: Responsible multi-asset fund picks

It has been a tough period for responsibly managed investments funds. The multi-asset investment universe has been no different and we have seen outflows across many strategies. The advent of the FCA’s long awaited policy statement, Sustainability Disclosure Requirements (SDR) and investment labels, has meant we have seen managers close funds, deemed sub-scale, and where they see the opportunity for growth as being more limited. This has had a negative impact on the already under-served responsible multi-asset funds universe.

Investor appetite for responsibly managed strategies will remain. Multi-asset solutions sit at the centre of most advisers’ centralised investment propositions and so this should mean it will be a longer-term structural growth area. Like many equity orientated responsible investment strategies, many multi-asset funds within this area tend to have a mid and small cap growth bias and so have been out of favour with investors who have tended to favour mega cap businesses which look set to benefit from the growth of AI.

Whilst asset managers have generally had clear responsible processes for investing into equity and credit markets for many years, the assessment of a sovereign’s responsible credentials has been an evolving area, with groups having very different criteria. However, there is now at least clearly defined approaches that control which countries’ bonds will and won’t be held for a particular strategy and which allows investors to ensure the approach is in line with their own preferences.

Passive funds have driven most of the growth within the multi-asset market over the last decade or so. However, within the responsible multi-asset market, this remains dominated by active strategies. Despite this, investor focus on cost and value show no signs of abating and whilst there are some lower cost responsible investment options we see the potential for growth in this space, provided distributors can manage the positioning and articulation with clients appropriately. This will be aided by the FCA’s disclosure, naming and marketing requirements. Accepting that lower cost solutions will make more use of index funds within their investment approach, and that as a consequence this is likely to lead to a much broader based portfolio than some competitors, this may be an appealing characteristic given the stylistic biases mentioned above that many funds have tended to exhibit.

While the Square Mile Responsible Recommended-rated Rathbone Greenbank Total Return Portfolio has a relatively short track record, having been launched in 2021, it is managed by the highly regarded Rathbone multi-asset team and adheres to the same approach to asset allocation and risk management as the firm’s flagship range. The managers position this portfolio to target one third of equity market risk, grouping assets under three broad headings (Liquidity, Equity-type risk and Diversifiers) to help them better understand the level of risk they should expect from each.

This strategy, however, integrates a sustainable investment process which seeks to identify companies, bonds and alternative assets globally that are aligned with clearly defined sustainable criteria. Each holding within the portfolio, whether debt or equity, is classified into one of eight sustainable development categories, with no defined limit for exposure to each category, and with weightings determined by the perceived opportunity set. Nonetheless, investments will typically be diversified and not focused within a small number of categories.

Managers Will Mackintosh-Whyte and David Coombs, both experienced multi-asset investors, collaborate with the Rathbone Greenbank team which has a heritage in sustainable investing dating back to 1992, bringing significant credibility.

Their approach will naturally lead to a portfolio bias towards names that fit more naturally with its sustainable objective, such as technology and healthcare firms, and away from sectors including oil & gas, defence and mining.

We feel this fund represents a robust option for investors who are looking for capital growth from a strategy which combines an active multi-asset, risk managed approach with a focus on targeting companies and sovereigns which meet a clearly defined set of sustainability criteria.

Offering a combination of capital accumulation and inflation protection, the Square Mile Responsible A-rated Trojan Ethical fund invests across equities, high quality fixed income, gold and cash, while applying a range of ethical exclusion criteria. This means that investors should be comfortable that any companies or sectors which are not explicitly excluded could potentially be held in the fund. Nonetheless, the approach

applied by the management team generally leads them to businesses which are in sectors of the market which would not usually be screened out.

The fund’s investment strategy has been successful over the long-term, delivering strong returns significantly ahead of inflation, coupled with a much lower level of volatility than equities. Lead manager Charlotte Yonge believes in the importance of asset allocation combined with stock selection. Her approach is fairly simplistic, investing predominantly in traditional assets, as well as gold or gold related investments at times. Whilst there may be periods when the asset allocation doesn’t change meaningfully, there will also be times when she aggressively shifts tack, usually following stock market falls when valuation opportunities arise.

The manager starts by taking a view on asset classes, with the value offered by each being a key consideration. She will then home in at the individual security level, with stock picking favouring those sectors which tend to be less volatile when markets fall. This leads to a bias towards higher quality companies which are cash generative and provide more consistent revenues and sales. Capital intensive and cyclical businesses, on the other hand, are seen as destroying value over the cycle rather than creating it, meaning the manager will avoid high-risk, high-return businesses. The manager also overlays an exclusions-based screen to meet the fund’s ethical exclusion criteria. Whilst this screen reduces its investible universe, many of the businesses which are not permitted for investment would not meet the manager’s quality threshold anyway.

Beyond equities, the manager’s preference is for high-quality, liquid sovereign bonds, primarily those which provide inflation protection, investing directly to manage interest rate risk. Gold is also preferred for its protective qualities, and the fund will often have a significant cash weighting, again for its protective qualities but also for its liquidity benefits.

We think the simple and transparent investment approach of the fund, along with its clear exclusionary policy, will appeal to investors wanting capital growth but who also wish to avoid specific industries and businesses when allocating their capital.

The managers of the Square Mile Responsible A-rated Royal London Sustainable World Trust aim to provide capital growth over the long-term from a global portfolio principally of equities (around 80%), but with some exposure to bonds, all of which are selected on their sustainability characteristics and the net positive benefit they have on society.

While many profess to have environmental, social and governance (ESG) considerations integrated within their research processes, the Sustainable Investment (SI) team at RLAM truly lives up to that claim. It only manages funds which incorporate sustainability into their investment mandates and process and actively manages ESG risk. They firmly believe this focus on sustainability in their process adds value and does not limit the fund’s potential returns. The team’s strength lies in this process and its output, helping to identify sustainably strong and fundamentally sound businesses. The team does not dwell unduly on the broader asset allocation which stays relatively stable.

All holdings should have positive ESG characteristics and show leadership in their field. The team is drawn towards innovative companies who challenge the status quo, typically leading them away from older, traditional industries towards more innovative companies with structural drivers for growth. The team screens for stocks which have demonstrated long-term wealth creation and those with solid ESG credentials using MSCI Data. This creates a universe of stocks which is researched in more detail, analysing each company to determine its key drivers of value. The team does this via company meetings, idea sharing with colleagues and broker research and reports.

The equity portfolio will be reasonably concentrated, principally comprising businesses listed in developed markets. Its fixed income exposure will be made up primarily of corporate bonds, but unlike the equity holdings, will be very diversified and may be unrated or small in size. As a consequence, they can be less liquid than many larger or rated bonds.

The fund has an excellent record of meeting its objectives and we see it as a compelling option for investors who wish to invest in a mixture of equities and bonds from companies with sustainable business practices.