The debate around climate change seems to have moved into the political mainstream in recent months. It has also become a far more pressing issue within the fund management industry, and this is reflected in a number of new fund launches and rebrands this month.
Many fund managers now talk of ESG (environment, social and governance) focused funds. These aim to consider these ‘risk’ factors alongside traditional metrics, such as cash flow and debt levels, when deciding where to invest. As a result, they may favour companies that take a more positive approach to issues such as reducing carbon emissions or promoting more equal pay policies.
Renewable Trust Seeks Funding for Launch
Tapping into this trend is Aquila Capital, which is looking to raise €300m to launch a new green investment trust on the London stock exchange.
The Aquila European Renewables Income fund will invest directly in a range of renewable energy projects across continental Europe and Ireland including onshore wind, solar and hydro energy assets.
The trust is targeting NAV total returns of between 6 and 7.5% a year, including an initial dividend yield of 1.5% in the six months after IPO.
The company says the trust will be diversified both geographically and by investing in a range of different renewable technologies. This, it says, should mean it has the potential to deliver a lower volatility return than trusts which focus on a single type of energy.
Aquila Capital, which is based in Hamburg, has €8.2billion assets under management including €6 billion in real assets. Lead adviser on the trust Christine Brockwell has 13 years of renewable energy experience.
Franklin Templeton Launches New Green Fund
Meanwhile, Franklin Templeton has launched a Green Target Income fund, which is primarily focused on debt issued by companies which are starting to engage on issues such as improving carbon emissions and water usage.
This is the third fund to be launched within the company’s Templeton Opportunities Fund range. It will invest primarily in higher-yielding euro-denominated debt issues by global corporations.
The fund will be managed by David Zahn, Franklin Templeton’s head of European fixed income, and Rod MacPhee, vice president and portfolio manager of Franklin Templeton fixed income group.
Zahn says: “A lot of high-yielding companies are not traditionally focused on ESG metrics.” He says the approach will be to focus on companies that are starting to engage on these two issues, as he believes this will help identify investment opportunities and lead to better profitability over the longer term.
L&G Launches Two New Sustainable Funds
Legal & General Investment Management is also increasing its attentions on ESG. The group has added two new sustainable investment funds to its multi-index Future World range.
Both products will have a pre-determined risk profile to help suit different customer needs. The asset allocation will be actively managed to meet this risk profile. However, within the funds equity assets will be invested in L&G’s Future World range of index funds, which takes into account an ESG focus as well as market cap.
L&G says each fund will primarily be invested in assets that incorporate LGIM’s Future World principles or have clearly defined ESG criteria. This would include companies that have made positive steps to reduce carbon emissions as well as those that meet high governance standards.
Terry Smith Stands Down as Trust Manager
Elsewhere, one of the biggest stories this month was Terry Smith's decision to relinquish day-to-day management duties on his emerging market investment trust. Smith has build a formidable reputation as a fund manager, with his Fundsmith Equity fund achieving stellar returns for its investors. But the returns for this investment trusts have been less buoyant, which has now prompted this change.
Terry Smith — one of the most successful fund managers in the UK — is to step down from his role managing the Fundsmith Emerging Equities Trust (FEET).
This trust has underperformed the MCSI emerging market index over the past five years, and is currently trading at a discount. Smith will hand over the day-to-day running of the trust to Michael O'Brien and Sandip Patodia, both of whom have been with the trust since its launch in 2014.
Smith will instead take on role of chief investment officer. This is a similar arrangement to the Smithson Investment Trust (SSON), which launched last year and has performed significantly better over this short period.
These changes are effective from the end of May. The board also announced that the annual management charges for the trust will be reduced, from 1.25% to 1%.
This underperformance is in contrast to the strong performance of the flagship Fundsmith Equity fund — run by Smith — which has a gold medal rating from Morningstar.
Chelsea Financial Services managing director Darius McDermott says: “We are big fans of Terry Smith and have supported the Fundsmith Equity Fund for many years.” But he adds the managers will still follow the “house style” implemented across the various Fundsmith funds and trusts.
McDermott adds: “We like emerging markets for the long term, valuations are cheaper than most developed markets and we see them being the main driver for global growth in the future. However over the shorter-term we are more nervous: if the dollar were to strengthen against emerging market currencies it will lead to continued underperformance.”
Investment Association Includes ETFs in Fund Sectors
The Investment Association will include ETFs within its main sectors from the start of next year.
This will allow investors to compare both vehicles side-by-side, to see how ETFs compare to both sector averages and the 3,500 open ended funds currently listed in these sectors.
Only ETFs that are either UK-domiciled, or are EU UCITs with HMRC reporting fund status will be included.
This will potentially see up to 200 ETFs included within these sectors. The IA is now inviting formal applications from ETF providers for their funds to be classified into the relevant sectors.
IA director of investment and capital markets Galina Dimitrova says: “We want to ensure that the IA sectors reflect the full range of products the asset management industry has to offer savers around the world.
“ETFs are a growing part of this market and their inclusion in the sectors will enable consumers to compare across a wider variety of products.”
BlackRock Renames Investment Trust
BlackRock has renamed its Commodities Income Investment Trust to the BlackRock Energy and Resources Income trust (BERI). It says this change is due to the underlying investments in its portfolio.
BlackRock says its current assets are predominantly energy and mining equities, as opposed to a wider range of commodities. The change also reflects the fact that its managers have started to build exposure to companies that may benefit from the move towards a lower carbon global economy.
Co-manager Olivia Markham says it is an interesting time for both the mining and energy sectors, with valuations against broader equity markets at historic lows.
British Empire Rebrand
The 130-year-old British Empire Trust has changed its name to AVI Global Trust. The trust, which has assets of £1 billion, says the new title better reflects its investment focus. Managed by oe Bauernfreund, the trust invests in other closed-end funds and family-owned holding companies around the world. It will also change its ticker from BET to AGT.
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