In this series of short profiles, we ask leading fund managers to defend their investment strategies, reveal their forever stocks, and tell us what they'd never buy.
This time our interviewee is Alex Monk, portfolio manager at the Morningstar Sustainability 5-globe-rated Schroder Global Energy Transition fund.
Which Sector Provides The Biggest Opportunities in 2022?
We continue to be excited about long-term thematic winners. The world is about to go through a period of incredible structural change in areas including energy, food and water, buildings, automation, healthcare, waste management and digital technologies. These systemic transformations are needed to solve its pressures and imbalances, such as climate change, demographics and the rising consumption of scare goods. There are near-term supply chain pressures, and we do think that valuation discipline will be more important than before when investing in these sectors – particularly if interest rates start to rise – but the long-term earnings growth outlook for the leading companies is very hard to ignore.
What's The Biggest Economic Risk Today?
In the short term, inflationary pressures and rising real yields. Exceptionally supportive monetary and fiscal policy has pushed real interest rates to levels not seen since the 1970s, fuelling a surge in valuations across most asset classes. If inflationary pressures persist and central banks are forced to tighten, a reversal of the recent trend could be very disruptive to markets and the economy. Focusing on companies with robust but undervalued cash flows will be absolutely key. In the longer term is has to be climate change. If no mitigating action is taken to stop carbon emissions, the economic and social damage will outweigh almost any other force.
Describe Your Investment Strategy
Our sustainable resource equity strategies aim to provide investors with pure-play, actively-managed, thematic exposure to the leading companies involved in the transitions of our energy and food and water systems. Given the global importance of these structural shifts, as well as the substantial investment required to achieve them, we believe companies directly contributing and actively involved in driving these transformations are not only adding value to society, but are also well-placed to generate consistent real earnings and cash flow growth over the long-term.
Within these thematic sectors, we apply strict universe inclusion criteria and then aim to identify companies that can deliver strong and sustainable cash flow growth over time – but at reasonable or underappreciated value. We think this strong focus on valuation discipline is critical, and it is achieved using detailed bottom-up discounted cash flow models built on realistic, normalised expected returns. Crucially, we also integrate broader sustainability and ESG analysis when assessing companies within our thematic lens. We firmly believe that just because a company operates in a sustainable business area, does not mean they are a sustainable business. Good corporate governance, quality capital allocation and a sustainable management of supply chains, employees, and the local environment is critically important too!
Which Famous Investor Do You Admire?
Jeremy Grantham has always stood out to me for his long-term thinking, disciplined approach to valuations, and his early focus on investing in climate change.
Name Your Favourite "Forever Stock"
The idea of a forever stock is probably quite dangerous! Everything has a price and even the best companies in the world can become too expensive, creating risks to future investment returns. Being disciplined behaviourally – while sometimes very hard – is key. But companies in structurally growing markets, which have purpose, pricing power, a strong focus on sustainability, and the goal of generating consistent growth in shareholder equity should be solid long-term bets.
What Would You Never Invest In?
Management teams who do not care about their stakeholders or minority shareholder returns. Sometimes this is obvious when analysing a potential investment, but other times it is harder to spot at first. But if it ever becomes clear that management are allocating capital in a manner that either damages minority shareholder value or puts broader business stakeholders – employees, supply chain, customers, environment – at risk, then that business should not have a place in your portfolio, unless they can quickly demonstrate a willingness and concerted effort to change.
Growth or Value?
Growth but at a reasonable price. Overpaying for growth or falling into ex-growth or structurally declining "value traps" creates risks. We want a combination of both.
House or Pension?
If I was forced to put all my eggs into one basket, I would probably go with a house. Homes are real assets that provide financial value, but also a great deal of personal joy and utility –most of the time at least! To some extent, a home is a pension that you can live in. That said, having recently been (successfully) treated for a serious illness, I will never take for granted the value that the longer-term financial security pensions can bring.
Crypto: Brilliant or Bad?
I firmly believe digital currencies, digital assets and blockchain technologies are the future of finance. The benefits of digital and decentralised assets from an efficiency, flexibility and equality perspective are potentially huge. But we also need stability, both in terms of volatility and the assurance that central banks can still provide monetary support, and we must deal with the challenges around privacy and accountability too. Many of the leading cryptocurrencies today lack these latter characteristics, making their investability unclear. But the broader direction of travel is towards digital, which is something we should be excited about and not fear!
What Can be Done to Increase Diversity in Fund Management?
There are certainly lots of things we could and should be doing, including building and promoting role models, adjusting recruitment strategies, making work more flexible, changing cultures to be more inclusive, and direct mentoring and support. But for me the most powerful tool of all could be education in schools. Teaching children and young adults from all backgrounds about financial literacy and planning while they are still in school would help build awareness of the industry and make it more accessible and attractive too.
Have You Ever Engaged With a Company and Been Particularly Proud (or Disappointed) in the Outcome?
We are currently having really productive discussions with companies across the solar value chain, some of which are investments in the portfolio, while others are part of our wider universe of stocks. We're doing that to encourage improved practices and disclosures around supply chains and procurement, which is a topic of growing concern. With most of the companies we invest in already focused on contributing to sustainable solutions through the goods and services they provide, our engagements on how they do their business can be particularly important for managing potential risks – and hopefully help drive local social and environmental improvements too.
What's The Best Bit of Advice You’ve Ever Been Given?
When I first joined the industry I was told not to worry about outcomes at first, but to focus on "building my toolkit of knowledge and skills".
What Would You Be if You Weren’t a Fund Manager?
I'd be a climate scientist.
