Understanding nutrition as an investment theme
In this interview, Ed Heaven, head of sustainable investing at Montanaro, talks to us about his role...
LF Montanaro Better World
LF Montanaro Better World is a global equities fund looking for medium and small sized businesses whose products or services are making a positive impact on the world. It follows the same process as the other very successful funds in the Montanaro range and the portfolio will consistent of around 50 high quality, growing businesses with good management teams.
Our opinion
We are big fans of the Montanaro approach: finding overlooked, small and medium sized companies whose quality and growth potential has been under-appreciated by the wider market. This fund has a global mandate, with the addition of a straightforward positive impact screen, which is highly complementary to the strategy. We think this fund could be a star of the future.
Company description
Montanaro is a small and medium-sized companies’ specialist renowned for its large team of analysts and high quality small-cap research. The company started off in the UK before growing globally as its success has continued. The firm was founded by Charles Montanaro in 1991 and now looks after more than €3 billion for clients through its 11-strong dedicated investment team. It is private and independently owned.
Fund manager
The fund has two co-managers, Mark Rogers and Charles Montanaro. Mark is the lead manager, though Charles is the head of the investment committee for the wider Montanaro firm and has managed the fund since inception.
Mark joined Montanaro in 2014. Before that he was Head of Research at Fidelity and a Director of European Equity Research. He helped to manage and coach the 45-strong analyst team there and helped introduce the valuation models that are still used today. Prior to this, he spent 17 years at Nomura Asset Management as Head of Research and four years at Bankers Trust Asset Management as an analyst and portfolio manager. He has a degree in Banking & Finance.
Charles graduated from Durham University with a BA in Anthropology. He spent the first four years of his career in industry, before joining Merryl Lynch in 1980 as a private client broker in London. After working for a number of other companies, Charles founded Montanaro in August 1991. An industry veteran, Charles has grown his company from scratch to become one of the most respected small-cap asset managers in Europe. Charles is a real character and his search for hidden gems goes well beyond company research – he has even taken a holiday looking for undiscovered tribes in the Amazon!
I like to invest in improvement. For myself, my team and the companies we buy. That’s how you serve clients best.
Mark RogersFund manager
Investment process
LF Montanaro Better World fund maintains Montanaro’s simple philosophy; invest in companies you can understand, buy things which are growing, back quality management, engage with your companies and don't over trade. It has a global scope, and in addition to the usual requirements it is looking for businesses whose products or services are making a positive impact on the world.
The process has three stages. The first of these is what differentiates Montanaro Better World from the other funds in the Montanaro suite: looking for firms creating a positive impact. To identify these companies, the team has six impact ‘themes’: environmental protection, the green economy, healthcare, innovative technologies, nutrition and well-being. And, in order to stay true to these themes, the team will also exclude companies that are causing harm, such as those involved in tobacco, weapons and fossil fuels extraction.
This stage will look at the product or service of the company and assess what problem it helps solve. At least 50% of the firm’s revenue will need to come from one of the six themes, with opportunities to improve the business through engagement with the board. This part of the process is supported by a sustainability committee which includes lead manager Mark Rogers. Historically, the committee has rejected around 1 in 5 companies on impact grounds.
The second stage of the process comes back into line with Montanaro’s house approach. It starts with a screen that looks at companies using 14 different criteria, rating the company’s growth, profitability, leverage, cash conversion and volatility. This work is all done by Montanaro’s eleven highly experienced sector specialists. From this list, the analysts will then conduct detailed fundamental analysis, including meeting management, site visits, talking to industry contacts, talking to customers and suppliers and undertaking their own investigative work. They will then score a company based on an internal qualitative check-list. A company must also pass a corporate governance check-list.
The final stage is to assess the company’s valuation. Here, the analysts will look at economic return the company is creating on the capital it uses and will factor in things such as a company’s hidden assets.
Geographically, the fund aims to be well diversified with both the countries of stock listings and revenue streams monitored. Most companies will be domiciled in developed markets, with the US as the largest single country, followed by continental Europe. Emerging market exposure will come from the revenue streams which make up around 15%, though this will vary.
ESG
ESG - Explicit
ESG is embedded throughout the investment process. Once an idea has been identified, analysts will spend several days examining the business. To help identify such companies, they use a thematic framework of six impact themes: Environmental Protection; Green Economy; Healthcare; Innovative Technology; Nutrition; and Well-being. Companies must have at least 50% of revenue aligned to these themes and be run by management teams who are focused on generating positive impact over time. They will complete a “Quality Checklist”, Montanaro’s Ethical & ESG checklist, and a financial model. Ethics is scored on pass or fail of revenue exposure to certain restricted areas. A final ESG Checklist score is then aggregated. Companies with scores of 5 or below are candidates for engagement. The ESG score plays a significant role in whether or not a business can be added to the "Approved List".
Companies on the Approved List will be closely monitored by Montanaro’s Sustainability Committee for their ESG scores. This gives an indication of whether companies are improving in matters of ESG. Any points of concern will be noted and engagement with the company will follow. The Sustainability Committee will consider if businesses still continue to meet Montanaro’s ESG standards and are able to challenge the approval of businesses if they fail to do so.
Risk
In order to manage risk, positions will be sized between 1-3% depending on the quality score in the analysis section, as well as the valuation of the firm and the stock’s liquidity. A maximum of 10% of a company can be held and this should be a maximum position in the portfolio of 5%. Country and sector weightings are monitored to ensure the fund isn’t taking too much risk in any one area.
Due to the philosophy, the fund avoids complex sectors such as biotech, miners, insurers and banks, as well as those that work against the positive impact remit. The fund’s positioning will look different to the benchmark as it will be underweight mega-caps and overweight small and mid-caps. It may also be more volatile.
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