As at: 30/09/21

Contact: adam.kelly@edentreeim.com

Overview

Filters

Fund information

Policy

Sustainability Approach

Companies operating as sustainable businesses

The Fund seeks to invest at least 70% in companies identified which operate sustainable businesses. Following EdenTree’s Sustainability Approach, these companies are assessed in a systematic way, considering multiple dimensions of social and environmental sustainability to encompass a rounded assessment of a company’s practices

Sustainability criteria and themes

The suitability of potential assets is assessed across six key areas of sustainable business practice: Climate Change & Environment, Employment & Labour, Human Rights, Business Ethics, Community and Corporate Governance. In addition, investments aligned to the following sustainability themes are also favoured: Education & Financial Inclusion, Health & Wellbeing, Sustainable Solutions, and Social Infrastructure

Excluded sectors and activities:

• The Fund will avoid investment in companies which have a material involvement (10% or more) in alcohol and tobacco production, conventional weapon production, gambling, publication of violent or explicit materials, intensive farming, fossil fuel exploration and production and high interest (sub-prime) lending.
• It will also avoid companies that have exposure to the manufacture of unconventional weapons, where these are defined as nuclear, biological and chemical weapons, land mines and cluster bombs.
• The Fund will seek to avoid companies using animals to test cosmetics, beauty or household products.

Oppressive Regimes

• The Fund will avoid companies and governments with material operations in oppressive regimes.
• The Fund’s proprietary means of assessing oppressive regime risk is based on an assessment by Freedom House and Transparency International and operates on a case-by-case basis.
• For further information on our screening process please see Oppressive Regimes.

Process

Our responsible and sustainable criteria form a core part of our investment approach and are integrated into our stock selection and management processes. Our dedicated in-house team of responsible investment (RI) analysts considers each of our investments on the basis of their Environmental, Social and Governance (ESG) credentials and long-term sustainable return potential. We believe that those companies which have a well-developed approach to managing ESG risk are more likely to offer good quality, long-term investment potential.

We pride ourselves on our independent thought and analysis and are not afraid to adopt positions which do not conform to conventional thinking or prevailing consensus. We do not have model portfolios or preferred stock lists, preferring to give fund managers the flexibility and responsibility to implement investment strategies that best match the needs of our investors. Finally, our investment process places a strong emphasis on portfolio diversification at all levels, including geographical, sector, company size and investment theme, with the aim of reducing risk. Please see below the summary of the Fund’s investment process:

Stock Selection

We look for businesses that are out of favour but intrinsically sound, and where a change in circumstance or economic conditions will bring about a recovery both in company fundamentals and improved investor sentiment, thus leading to superior returns. We actively look to invest in companies which we believe have strong sustainable characteristics and this will then then be confirmed by our robust and comprehensive screening process managed by our Responsible investment team.

As value-orientated investors, we are seeking to buy undervalued companies which nonetheless have the ability to generate strong profits and cashflows and to grow these over time. Often taking a contrarian view from the ‘investment’ herd, we seek out-of-favour businesses, with robust balance sheets, and an underappreciated potential to enhance cashflows and create value for long term investors.

Identification of potential opportunities starts with a quantitative approach to find companies which appear cheap in terms of forward valuation multiples, which is followed by more in-depth analysis of both quantitative and qualitative factors to ensure the companies are not ‘value traps’, but have strong business franchises, so can maintain and grow these cashflows. Each prospective holding is subject to our Responsible & Sustainable screening process which helps to develop a more holistic view of a company using a wider mosaic of information which informs our understanding of the opportunities and risks associated with each holding.

The companies we invest in can be seen to fall into one of three broad buckets:

• Income Accumulators: unfashionable businesses with strong free cash generation operating in relatively mature industry but which nonetheless should continue to grow over time.
• Contrarian Plays: businesses suffering from short term challenges but where we believe that these fears are overstated, and there are strong grounds to believe the businesses will recover.
• Hidden Value: businesses which are seen as mature businesses but where the market has overlooked longer term structural growth opportunities from new technology or new market opportunities.

Our value-orientation naturally draws us to focus on companies on attractive valuation multiplies, although this is far from the only consideration. We also look for companies which have strong market positions, re-invest back into the business (whether that be in terms of growth investment in capital equipment, innovation, brand or people), as well as looking for opportunities to benefit from longer-term structural trends, particularly in terms of sustainable solutions but also in terms of scientific and technological advances.

We may use various quantitative tools to screen particular areas of the investment universe once a compelling structural trend has been identified, in order to identify potential valuation anomalies. This may be conducted to evaluate relative valuation of a prospective idea.

When assessing potential candidates for the Fund, we place particular importance on three attributes:

1. the company is capable of delivering strong short to medium-term cashflows
2. the company is in a good position to grow revenues over the medium to long term
3. the business aligns well with our Responsible & Sustainable approach to investment

These steps are not mutually exclusive, but they help us to determine the investment thesis and whether the valuation is attractive enough to offer enough upside potential to compensate for potential downside risks. The degree of upside that we look for in a new equity investment will vary depending on factors such as market capitalisation, visibility of earnings with preference given the cash returns in the near term, the stability of earnings in different economic and market environments, and the degree of leverage within the business.

Fundamental investment analysis and decision-making process

Assessment of upside potential

Our approach to the fundamental analysis of a company will be tailored to best suit the type of company we are investing in and its present circumstances. However, an emphasis on assessment of the ability of the company to generate high and sustainable cashflows which can be returned to shareholders and the outlook for the company given the prevailing macroeconomic conditions is common across holdings. We believe it is important to remain flexible about valuation techniques; they each have strengths and weaknesses, and the intention is to build a robust framework of information and to avoid simply choosing measures that satisfy confirmation bias.

• For Income Accumulators, we are interested in established companies operating in relatively stable markets which generate an attractive level of earnings and cashflow enabling them to pay a high and growing level of income through dividends (or via share buybacks though flexible nature of these payments would generally mean we would place less emphasis on them). In considering the sustainability of income payouts we would consider both financial and business factors. In our examination of financial factors, we would concentrate on fundamental analysis in areas such as earnings and cashflow coverage, the strength of the balance sheet (both in terms of the level of leverage and refinancing risk), historic stability of revenues and earnings margins, pricing power and the degree of inflation protection. In terms of the business, we would look at more qualitative factors such as the quality of the management, their market position, that they are maintaining the strength of their franchise through investment in innovation, brand, workforce, etc, as well as the degree to which the business face competitive or structural threats and opportunities. In general, these are companies which will tend to have a lower risk profile, we expect to offer stable, but growing, income streams and provide a stable base for the wider portfolio.
• For Contrarian Plays, we focus on catalysts for a re-rating, such as an increase in cashflow and earnings (which may be company-specific or related to the industry or economic cycle – e.g. for banks) that have potential to drive margin improvements, multiple expansion and reversion to mean valuations across a sector (or historical averages).
• For Hidden Value, we seek to understand the nature of the opportunity, the impact of an innovation or strategic shift of the business’s efficiency or new market opportunity (e.g. alternative energy and sustainability markets), conducting scenarios for growth in cashflows (the incremental cost of growing revenues, plus prevailing macro trends), employing techniques such as discounted cashflow and earnings growth analysis, as well as forecasts of prospective returns on operating assets. This bucket has the potential to generate the highest levels of alpha.

Assessment of downside risk

By investing in companies trading on low valuations, the Fund often takes contrarian positions which go against the prevailing consensus for the outlook for businesses. This could potentially lead to the risk of investment in companies in poor financial health or which are structurally challenged (value traps).

To minimise this risk, the investment process includes focused analysis of. 

1. The balance sheet, cash requirements and refinancing needs of companies facing short term negative trading conditions.
2. An assessment of the outlook for the company in terms of the danger there will be no short- to medium-term improvement in operating conditions and the extent to which economic and market development may impact on product demand and the profitability of the business.
3. Responsible Investment screening, which can highlight potential ESG risks and opportunities, and those the business may face as a result to the shift towards a more sustainable economy.

The team believes the extra layer of due diligence provided by the Responsible Investment Team provides potential informational advantages, which is especially important given the Fund invests in companies that have been neglected or priced for poor outcomes.

Historical governance analysis may also be reflected in our assessment of the financial health of the company; propensity for off balance sheet leverage or future contingent liabilities. Similarly, the governance and remuneration reports can enable a broader assessment of the underlying drivers and sources of cash generation, capital expenditure requirements. Key KPIs around remuneration framework can provide insight as to how free cash flow will be deployed, i.e. M&A, dividends, buybacks etc. enabling the analyst to undertake a thorough examination of a company’s willingness and ability to pay dividends.

More broadly, in considering a company’s management quality, we assess Board independence, tenure, and experience, in order to assess the focus on shareholder value, organisational culture to deliver future potential. The process outlined above will typically involve a meeting or call with management as part of the due diligence process.

Quantitative screens typically contain a wide range of metrics in order to get a full picture regarding the source of valuation anomaly, including but not restricted to: fundamental metrics such as free cash flow (FCF) yield, Return on Equity (ROE), Return on Invested Capital (ROIC), Net Debt/EBITDA, and Interest Cover, as well as valuation metrics such as EV/EBITDA, Price to Earnings and Price to Book. It must also be noted that quantitative analysis is only part of the overall due diligence process that goes into identifying prospective investments and typically forms the basis of consensus data gathering. Typically, quantitative screens will not reflect our estimates from our proprietary insights.

Portfolio Construction

The Fund’s investment process is primarily driven by bottom up, value orientated, stock picking. The Fund’s intention is to create a well-diversified portfolio in terms of countries, industrial sectors and at an individual stock level consisting of a portfolio of 50-70, With no stock accounting for more than 5% of a fund (and a soft cap which involves not adding to any holding which accounts for more than 3% of the Fund and generally looking to take profits when holdings exceed this amount). We strongly believe in the merits of low portfolio turnover, believing that high trading activity acts as a drag on performance. There is a desire to ensure a broadly diversified portfolio in terms of geographic, industry and sector allocations and whilst there are no set constraints, the Fund is subject to extensive risk modelling to ensure it is not overly exposed to any of these factors. At a higher level we will consider the exposure of the Fund to defensives, cyclicals and financials.

Over time the tilt of the portfolio will change depending on our views on financial and economic conditions as well as underlying valuations of the various market segments which will mean the behaviour of the Fund towards differing economic conditions will change over time. At its heart, the positioning of the Fund will be driven by stock picking with areas of the market which offer the best opportunities to invest in companies at low valuations, strong cash flow characteristics and good market positions having the highest weightings.

Sell Discipline

Each company in the portfolio undergoes regular review with the fund manager making a decision based on the valuation, business fundamentals, economic and financial and investment environment as well as how it sits with the overall portfolio, and whether it should remain. The portfolio is subject to regular review by our CIO and analysis by the investment oversight committee, headed by the Head of Investment Risk Management to ensure that the Fund Manager is not undertaking any excessive or undue concentration, stock specific, sector or country risk. Any previously invested stocks which fail the ongoing screening process will be sold in a timely fashion taking account of market conditions to ensure this is in the best interests of the clients. All holdings must be divested within a 3-month time frame but normally the sells will be carried out in a much more timely fashion. There have been no deviations from this process.

Resources, Affiliations & Corporate Strategies

The five person Responsible Investment (RI) Team is part of the wider Investment Team, and provides the specialist in-house resource for ESG screening, engagement, voting and thought-leadership. All members of the Investment Team are required to have an understanding of responsible and sustainable investing, and to include this into their thinking and analysis for the Responsible & Sustainable & Green fund range. The RI analysis is subject to peer review by the whole team with agreed sign off to ensure quality control and consistency. Our dedicated RI Team biographies are detailed below:  

• Carlota Esguevillas, Head of Responsible Investment – Prior to joining the firm, Carlota worked for a leading sustainability consultancy advising global companies on their ESG strategies and disclosures. She holds a First-Class Honours BA in Geography from Oxford University, a master’s certificate with distinction in Business & Human Rights from Bergen University, and the Investment Management Certificate (IMC). She is also a member of the UK Sustainable Investment and Finance Association’s (UKSIF) Industry Development Committee.
• Amelia Gaston, Senior Responsible Investment Analyst – Amelia holds a BA in Geography from Durham University and previously worked as a Responsible Investment Analyst at LGPS Central, one of the UK Pension Pools. Amelia holds the Investment Management Certificate (IMC) and CFA Certificate in ESG Investing. She leads EdenTree’s work on climate and environmental issues.
• Hayley Grafton, Senior Responsible Investment Analyst – Hayley leads on the firm's approach to corporate governance and proxy voting. She holds the Investment Management Certificate (IMC), and is a member of the StePs (Stewardship Professionals) Association. Previously, Hayley worked at Mercer, where she focused on the firm's stewardship approach and activity across portfolio funds in her role as a Sustainable Investment Specialist.
• Cordelia Dower-Tylee, Responsible Investment Analyst – Cordelia holds an MA in History from the University of Edinburgh, and a Certificate in Sustainable Finance from the University of Cambridge. She has previously worked with the International Water Management Institute and has experience in a green-focused corporate advisory firm. She leads EdenTree’s environmental work, with an emphasis on water, and supports the company’s work on governance.
• Aaron Cox, Impact Strategist – Aaron joined EdenTree in June 2022 and is Impact Strategist within the Responsible Investment Team. Prior to joining EdenTree, Aaron had roles at First State Investments (now First Sentier), Jupiter and Majedie and as a writer and researcher with a focus on ESG and sustainable investing. He started his career as a derivatives broker in Sydney.  Aaron has a BA in English from the University of New South Wales, Post Grad Certificate in Environmental Economics from SOAS and Certificate in Sustainable Investing from Harvard Business School.  He is currently undertaking a post graduate research project at Birmingham University on computational linguistic methods to identify sustainability stretch goal tensions and the risk of greenwashing and corporate misbehaviour.

ESG risk exposure is constantly monitored by our data providers, ISS & Sustainalytics, who flag potential violations of global norms. In addition, if any of our holdings breach our screens, we are immediately notified by our data providers and can then review the breach with the ultimate sanction of divestment if we deem it necessary. Furthermore, periodically stocks and instruments held within our funds are reviewed by the RI Team to ensure that they remain suitable, whilst the team monitors any negative news flow, engaging with companies to provide clarity and assess the risk level involved.

Our Responsible Investment Team hold overall responsibility of the ESG process. Whilst this involves some input from senior management, we view it as a crucial component of our investment decision-making process vis-à-vis determining a security’s suitability for portfolio inclusion on responsible grounds, that this ownership sits with the RI Team.

Our RI team conducts research and analysis from publicly available materials including:

• Company literature (annual reports, websites and sustainability reports)
• Industry or trade body publications and websites
• Non-governmental organisations (NGO) reports and websites e.g. Banktrack
• Government and academic research
• Investor benchmark initiatives

EdenTree plays a leading and longstanding role across multiple organisations. They are signatories, members and subscribers to a number of industry partnerships and initiatives including:  

Signatory organisations

• Principles of Responsible Investing (PRI);
• UK Sustainable Investment & Finance Association (UKSIF);
• Global Impact Investing Network;
• UK Stewardship Code FRC;
• Institutional Investors Group on Climate Change (IIGCC); 
• Farm Animal Investment Risk & Return (FAIRR);
• Financing a Just Transition Alliance;
• World Benchmarking Alliance; 
• Access to Nutrition Initiative;
• Access to Medicine Initiative;  

Collaborative engagement initiatives 

• PRI Advance Human Rights - Human Rights; 
• IIGCC Banks Working Group - Climate Change;
• CDP (formerly Carbon Disclosure Project); 
• Climate Action 100+ - Climate Change;
• Nature Action 100+  - Biodiversity;
• Investor Action Group on Anti-Microbial Resistance - Water & AMR;
• Valuing Water Initiative - Water;
• Investor Initiative on Hazardous Chemicals - Water & Chemicals;
• Microfibre pollution initiative - Plastics Pollution;
• 30% Club Investor Group - Diversity;
• WBA – Digital Inclusion Group - Digital rights;
• Good Work Coalition - Good work;
• Votes Against Slavery - Modern slavery
• Find it, Fix it, Prevent it initiative on modern slavery  

EdenTree believes these partnerships signals their commitment to having an active and positive role in the investment community. Collaborations are critical to driving change, whilst learning from expert sources allows them to provide more for their clients.    EdenTree also sits on UKSIF’s Analyst Committee, which advises on the development of UKSIF’s knowledge sharing programme on evolving sustainability issues. They also sit on the PRI’s Circular Economy Reference Group, which explores how investors can better integrate the principles of a circular economy into investment processes. EdenTree’s CIO, Charlie Thomas, sits on the IA’s Sustainability and Responsible Investment Committee.

Responsible Investment Advisory Panel Overview

In addition to the review provided by the RI Team, this team itself has independent oversight from an external advisory panel of senior industry practitioners with expertise in the field of responsible investment.   The EdenTree Responsible Investment Advisory Panel (“Panel”) meet three times each year to review the Responsible & Sustainable Fund portfolios, recent investment decisions and to discuss the latest responsible and sustainable research and trends.

The purpose of the Panel is to:

• Help to ensure that the EdenTree Responsible & Sustainable range of funds meet the stated aims and objectives.
• Provide advice in the formulation of policy in the light of changing social and environmental issues.   The Panel will provide advice to the RI Team including:
  • Advising on emerging issues or topics relevant to RI criteria.
  • Provide advice and guidance on individual companies or sectors, and engagement work.  

The Panel is made up of a number of industry experts, including:

• Will Oulton – Panel Chair, (former Head of RI at First Sentier)
• Mike Barry – Former Director of Sustainable Business
• Verity Mitchell - Independent Consultant, (former Director of Utilities for HSBC Global Research)
• Julian Parrott – Client Member, Ethical Futures 
• Sue Round – Chair of EdenTree Investment Management ACD Board and former CEO
• Annette Ferguson – Independent Consultant (former Head of Sustainable Business at Vodafone)
• Paul Simpson OBE – Strategic Advisor (former CEO of CDP).

Literature

• Fund factsheet
• Fund literature
• Fund overview
• Approach

Regulatory Notice             

To obtain further information please speak to your EdenTree representative, visit www.edentreeim.com or call our support team on 0800 011 3821. This document has been prepared by EdenTree Investment Management Limited for Financial Advisors, other intermediaries and other investment professionals only. It is not suitable for private individuals.

This document has been produced for information purposes only and as such the views contained herein are not to be taken as advice or recommendation to buy or sell any investment or interest thereto. A full explanation of the characteristics of the investments is given in the Key Investor Information Document (KIID). Any forecast, figures, opinions statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, EdenTree Investment Management’s own at the date of this document. There is no guarantee that any forecast made will come to pass. Please note that the value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations, you may not get back the amount originally invested. Past performance is not necessarily a guide to future returns.

Last amended: 08/02/24 03:30