Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Phillip Harris. He is Manager of the EdenTree Responsible and Sustainable UK Equity Opportunities Fund. Hello.
Phillip Harris: Good morning to you.
Black: Now, Philip, that fund name is quite a mouthful and also is recently changed, hasn't it? So, do you want to tell us briefly what the fund does and how it has changed?
Harris: Yeah, definitely. It's now obviously ethically screened. So, we are looking as a responsible and sustainable tag. So, we are looking to screen the fund obviously to get out of all negative criteria such as alcohol, tobacco, but also look at positive criteria as well. But the underlying dynamics of the companies that we look at haven't changed at all. We are still a growth fund. We are still looking at high-quality businesses, high returns on capital, high margins and good cash flows. So, that bit hasn't changed. We are just screening the fund now.
Black: And there has been a huge uptick in interest in responsible investments. Is that what's driven that name change?
Harris: Yes, it has. I mean EdenTree has a very much historic focus on this area and there were two unscreened funds in the firm which this was one of them. So, obviously, it was a natural progression to change what was an unscreened to a screened fund and obviously, in line with what our clients are looking for.
Black: And did you have to make many changes to the portfolio as a result?
Harris: Surprisingly not. I mean, we did have to, say, obviously remove things like British American Tobacco, some of the oil and commodity stocks. So, in the sort of FTSE stocks, yes. In the small cap stocks, only one stock particularly went, which is Morses Club, which is a high interest lender. So, actually, the changes in terms of the total percent of the fund were relatively small.
Black: And it's a UK-focused fund obviously. We know that a huge chunk of the UK index is oil and energy and commodities. So, how difficult is it to marry up UK investing with a responsible remit?
Harris: It's actually very easy. I mean, a lot of the sort of big old-fashioned oil and those sorts of companies are in secular decline. The fund has always been massively focused on Mid 250 and small cap stocks. So, roughly half the fund is in those stocks anyway. There are some really good stocks in the FTSE that meet our criteria as well, like Ashtead. So, there's lots of opportunities to invest on an ethical sort of sustainable basis and to avoid what we think are those secular declining stocks. So, no, it hasn't been an issue at all.
Black: And you talk about the small and midcap space there. Obviously, it's had a tricky time for the past few years, but it seems like the tide might be turning. What were your thoughts on that?
Harris: It's an area that I specialise in from my 30 years in the City. It's an area we think there are some huge and significant opportunities. The lack of research, the lack of broker contacts for a lot of these companies mean there's some real, sort of, uncovered gems out there, and that's why we focus on them. And I think our sort of investment performance there actually shows that this is a great area to go into and invest into and actually make a lot of money for our unitholders in.
Black: And what do you think some of the biggest tailwinds to investing in the U.K. are at the moment, because again an area that's been out of favor for a while?
Harris: Yes, it's a very good question. And clearly, Brexit and obviously, then the pandemic has basically put up a problem, an issue for a lot of U.K. companies. But there is a hugely diverse and great base of U.K. companies out there in that small and midcap – exporters, home delivery companies, all sorts of interesting growth markets. So, there's a great opportunity now that some of those uncertainties have gone to actually invest there. Not all of those concerns have gone. We still have some issues over Brexit with the Northern Ireland Protocol. We obviously have the recovery from the pandemic which is still working through. But we are very confident with some really, really good businesses out there that we can get some great growth opportunities over the next 5 to 10 years.
Black: And are there any areas that you tend to be more cautious over not just because of the ethical screen?
Harris: Yeah. I mean, we don't like sort of asset intensive businesses, so not just, obviously as we talked about, the oil companies, anything with lots of assets, anything that's a sort of value business that's got old-fashioned assets that earn low returns. We like asset light businesses, or say, high returns on capital, modern businesses that are capable of growing. So, that's the sort of thing we look at. Anything that's not capable of being a materially bigger business in five years is something we would avoid.
Black: And obviously, home working, home schooling, home delivery, these were the big trends of 2020. What do you think are going to be the big trends for investors for the year ahead?
Harris: I think there are some big, big changes coming through and you've highlighted some of them for '20. A lot of the things like at home working still and the way we work and the way we shop, those are the things that will be still actually working through. So, many of the trends that became apparent or accelerated probably in 2020 are still going to be very prevalent this year. So, we are all going to be working from home potentially part time even in the future. When we go back to the office, we may go to a flexible office, not a modern office. So, all of those trends have big opportunities and big risks for certain companies and how they adapt, but that's the opportunity to find some interesting investments in those sorts of areas.
Black: Philip, thank you so much for your time. For Morningstar, I'm Holly Black.
