332. Investing in change: balancing profit with purpose

26 September 2024 (pre-recorded 20 September 2024)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.

[INTRODUCTION]

Staci West (SW): Welcome back to the Investing on the go podcast brought to you by FundCalibre. To celebrate Good Money Week, taking place in the UK next week from 30 September, we’re focusing on sustainability and the importance of balancing strong financial returns with meaningful social impact.

I’m Staci West, and today I’m joined by James Corah, head of sustainability at CCLA and Charlotte Ryland, head of investments and manager of the Elite Radar CCLA Better World Global Equity fund. James, Charlotte, thank you both for joining me today.

Charlotte Ryland (CR): Pleasure. Thanks.

James Corah (JC): Yeah, thanks for having us.

[INTERVIEW]

SW: Now this is your, both of your, first times on the podcast. And CCLA is a name that many clients may be unfamiliar with. So I just wanted to start briefly with introducing the firm and your philosophy to good investment.

JC: Yeah, so if I start with that, I mean, I guess in many ways CCLA is the heritage asset manager that very few people have heard about, given that exclusively until a few years ago, we focused on the not-for-profit sector and it’s only in the past couple of years that we’ve really gone out of that area to try and attract a wider audience, including the retail investor.

So a little bit about CCLA, we draw our roots back to 1958 and like I say, during that period through to about 2021, we exclusively focused on charities and local authorities and with the UK’s largest asset manager for charities at the moment. And I guess when it’s time to come back to, you mentioned our good investment philosophy, that heritage is so important for who we are and where it is that we’re going. Because in essence, charities require first and foremost good investment returns to be able to go out and do their good works. They are not able to sacrifice return for the sake of style for the sake of sustainable portfolios. They genuinely need their investments to perform. But the second thing that they want is they want to use everything they have to genuinely try and achieve their mission of driving change. And so sustainability, whilst not at the portfolio level, has been hugely important to them. And that’s driven our approach to always trying to give our clients that twin objective of great returns, but also using their assets as a force for good. And I look forward to talking a little bit later about how we do that.

SW: This fund, the CCLA Better World Global Equity Fund, which is Elite Radar by FundCalibre, what sets this fund apart in the sector of sustainability? It’s obviously a global equity fund, there’s a lot of options. But what’s some differentiators to this fund, in your opinion?

JC: Yeah, like I say, I guess one of the things that our whole approach has been is about this idea of needing to perform first. And as a consequence, we build, and Charlotte will talk about this, we build a portfolio with the utmost focus on actually how do assets achieve our client’s financial goals. But then from a sustainability perspective, we use that portfolio as the platform from which we can go out and drive sustainable benefits by engaging with companies, getting them to make tangible environmental or social improvements their activities. And given the scale of the businesses that we’re investing in, those businesses that almost touch everyone’s everyday life, little changes can genuinely make big differences.

So one of the things that we’ve been focusing on recently is Amazon. Amazon of course, is a company that wouldn’t be in a normal sustainable portfolio, has performed relatively well over the past few years. But it’s something that has significant problems, particularly relating to its labour standards, wouldn’t be in a normal sustainable portfolio given those labour standards issues. It’s in our portfolio because we want to use that holding as the platform to try and drive changes.

So what have we done? We filed shareholder resolutions on labour standards, particularly relating to the right of workers and fulfilment centres to form unions. Those resolutions have got 30 odd percent of the shareholder votes. And we’re using that as a tool to try and push Amazon to make those changes. And again, given the scale of that business, even if we can make only a tiny change, we actually can have quite a significant impact. Now, Amazon, of course, is a very difficult company to engage with.

Why do we think as CCLA that we can make those changes happen? Well, one, it’ll be very hard, but two, we have a track record and one of our focus areas is on mental health. And we have through dialogue with Amazon got them or encouraged them to actually go out and make a new global mental health policy. So we don’t see it as a loss cause we see it as a company that actually meets the financial objective of the portfolio. And that holding gives us the platform to go and address these really significant issues that genuinely need to change.

RC: So I suppose for us, you know, that that idea of good investment in terms of driving the returns, but also driving, you know, sustainability as well. I mean, when people talk about sustainability, they often start just talking about exclusions. And it’s very easy to come up with a whole long list of things you don’t like about a company or maybe even don’t even like about a government that a company might happen to be domiciled in. But actually if you go from an investment perspective, you wanna have as broad of a opportunity set to work from as possible.

And we need to be realistic about this. Most companies are frankly not perfect, but what we want to do is exclude, perhaps might be the worst, and then actually sort of work actively with others in order to improve what they’re doing. And so our firm does have some exclusions. It’s about 10% of the world market that we’re excluding from the portfolio.

But actually, if you looked at those, all of those companies from an investment perspective, they’re probably not naturally things that we’d want to be investing in anyway. Our focus on policies on businesses, which we think are on the right side of change. And so something like the oil and gas extraction, for example, these are businesses where in the long term we are gonna be using less oil and gas than we are now. And even today these are deeply cyclical businesses, very capital intensive and just don’t produce the kind of returns that we think are the right ones for our clients. So that it, it doesn’t seem to us attractive from an investment perspective.

SW: Well, that’s fantastic. I think the human side of things and mental health as your example with Amazon and the workers and being able to form a union and all those things can often be overlooked because of those exclusions that you mentioned. It doesn’t tick a necessarily a climate box, which seems to drive the agenda much of kind of sustainable and ESG investing has focused on of late.

So that’s an excellent example and Amazon is one of the things in the portfolio that did kind of stick out to me as you have exposure to a few names that again, people maybe wouldn’t associate with sustainability. So alongside Amazon, you have McDonald’s, Nestle, LVMH, again, not necessarily holdings that I would expect to find in a sustainable fund. So how do these positions reconcile from a sustainability point of view, but then also as their investments as well?

JC: Yeah, Staci, this is a really good point. If I can, before I answer that question, just go back to your point about going beyond climate change, because I guess for me this is one of the most important things that we are trying to achieve. You know, CCLA, again, going back to our heritage, we genuinely want to be additive to the investment universe and sustainability and just doing what everyone else is doing isn’t going to do that. So we want to make sure that whilst we spend a lot of time on climate change and pushing things forward, because that is critical, it’s a long-term systemic risk. We also want to look at the issues that other companies have not looked at and build coalitions that genuinely will make sure that those underserved topics, those things that affect, affect people’s real lives like mental health and what slavery and poor labor standards actually are covered by our industry in the way they haven’t done before.

So I think that’s a really important point to make about what it is we’re trying to achieve. And I guess the other important point you made there is looking at the rationale for these everyday company holdings that wouldn’t necessarily fit under a thematic sustainable portfolio. Because again, you know, we’re quite open. We are not building a portfolio of sustainable leaders. We’re building a portfolio of what we think are great companies, but there are great companies that often need to change because we have to recognise that actually while sustainable investors like to think we live in a sustainable world, we really don’t. So we think it’s actually by expecting, by taking the world for what it is and trying to make it better, we can achieve the changes that we need to see. So for us, we want to see those companies in our portfolio that aren’t irredeemable cases, but genuinely do need to improve because our USP is getting into them, engaging with them and trying to get them to take those steps that they need to take to become a little bit better. And like I said at the start, a big company that gets a little bit better is a large amount of lives improved. So for us, that’s why those holdings are there. I can give you many and many examples of how that process has worked kind of as we go through this conversation.

SW: That’s probably one of the hardest things to reconcile though, isn’t it? Is that you want to believe that we have made these changes and live in a sustainable world and everyone’s trying to do things for the best, but actually when you take a step back, you find that’s often not the case.

JC: Yeah. And the sustainable investment sector for me has run this risk of let’s build a bubble that pretends the world is warm and cuddly and forget all of the bad stuff. And if you forget all of the bad stuff, you’re not going to make it better. You have to accept what the world is and be in it to actually drive improvements. And you get right back to the core of what a client is really looking for when you talk about sustainable product. Most want to make money and be proud that their money is doing something useful for society and the environment as well. So making sure that actually we’re not turning a blind eye to the problems of the world. We’re in the world and working to change it.

SW: Well I mean, we could talk for hours, so before we get too focused, I do want to shift slightly back to the portfolio. I got a bit carried away. And this fund has a significant allocation to healthcare and there is plenty of, you know rationale but behind having healthcare in a sustainable fund. But is there a particular focus or theme that it particularly sticks out at the minute, whether that’s pharmaceuticals or innovation or maybe something else entirely?

CR: Sure. So, I mean, when we’re looking for businesses to put into the portfolio, we’re looking for those decision on the right side of change. Those that have got that sort of long-term trends behind them. And healthcare for us seems like a really interesting area. I mean, one, you’ve got demographics on your side and the fact that we have an aging population in most of the world and as we get older, unfortunately we tend to consume more healthcare products. But the other side of that is the huge amount of innovation that’s going on within healthcare, whether that be genetics, whether that be new drugs that are coming out, whether it be new medical devices and getting access to all of those trends we think is really interesting.

So when pharmaceuticals, to be honest, isn’t that large an area of exposure for us, the big problem with drug companies is that whole patent cliff. So you have a great product, but 10 years down the line, it goes off patent, the price collapses, and you’ve gotta try and reinvent yourself continually. And that’s really hard for the businesses and it’s really hard for us as outsiders to look at, you know, pipelines and drug trials and have any idea which one of those is gonna be successful. And in frankly, the scientists don’t know which of those products is gonna be successful. So it’s quite a difficult area. So it’s actually an area where we don’t have that much exposure.

We’ve got AstraZeneca, which is a leader in oncology products. They’ve got quite a lot of products already on the market. They’re extending them from one type of cancer to another. And that’s been really interesting. We think that continues to be quite well placed. And then the other one we have is Nova Nordisk, which we originally bought because it’s diabetes franchise, but actually of course has generated this obesity drug, which is one that has been incredibly successful. They and Eli Lilly completely dominate that market at the moment, and that’s something that’s been very successful.

So actually the majority of our healthcare exposure is coming from what we call the picks and shovels of the healthcare world. So these are the businesses that are helping the scientists when they’re researching new things, but also when they are producing new molecules as well. So bioprocessing, so all these new protein based drugs really quite difficult and complicated to manufacture. So things like Thermo Fisher, things like Danaher, Agilent, these are all businesses along that supply chain, which are providing those tools but also providing a lot of consumables. And that gives you a degree of predictability in the revenues that they’re producing.

And I suppose the last area we think is quite interesting is medical devices. So clearly during the pandemic a lot of people weren’t able to get into hospitals and get procedures they needed done. Now they’re getting back in there. And there’s some, again, some really interesting innovations there. So companies like Stryker, which particularly specialise in things like hips and knees replacements, but also have robotic surgery. So that’s a really interesting area terms of getting those procedures done more effectively, fewer side effects and more cost effective for the hospitals as well. Or companies like Abbott Labs, which is a leader in things like cardiac devices, diabetes pumps. So again, some sort of really interesting technology and some businesses that we think are doing quite well for long term.

SW: And you mentioned innovation a few times within healthcare. One thing that we have heard quite a lot is this kind of overlap between healthcare and artificial intelligence. So what are your thoughts on AI, whether it’s particularly for healthcare or it’s just a wider theme of something that you’re looking to play into the fund. I mean, again, we’ve seen artificial intelligence leading to better energy efficiency, which can then have roll-on effects to multiple climate change as we talked about, but clean technology, et cetera, et cetera, kind of the list could go on. So is this something that you are looking at in this fund?

CR: Yeah so I mean AI has, you know, clearly been the trend of the last sort of 12 months. And so one stock in particular, which of course is Nvidia. So at the moment we’re still at the stage where people are building out the data centres, building out the capacity to train these models. And the big beneficiaries of that at the moment are either the semiconductor supply chain or it’s some of the hyperscalers. So companies like Microsoft, companies like Amazon, which are most big cloud computing assets at the moment though, it’s still a little bit too early to say exactly who’s gonna be the winners and who’s gonna be, you know, the killer apps.

I suppose in terms of how we actually use AI, I’m sure we’ve all sat there and played with Chat GPT, and every earnings call you look at has got, you know, the management’s coming out saying, oh, we’re trying some things out with AI, but it’s still very much in the sort of talking stage rather than the actual reality. So, you know, it could be really, really interesting at the moment. It’s more about investing in that infrastructure side of things.

SW: And you mentioned everyone having a kind of, we’re looking to use AI. Are they looking to use AI from a kind of cost saving point of view? Or is it things like you know, I’ve seen human resources and diversity, you know, AI can help you find, pinpoint kind of problems areas perhaps, or maybe making a better workforce or is it mostly this cost pay cutting like efficiency within the businesses that you’re seeing?

CR: Yeah, I mean, I think it undoubtedly could help with efficiency. I mean, so one of the companies we own is ServiceNow, which provides software for, well, initially is for managing our IT resources within the business, but it then increasingly expanded and things like supply chains and HR and it’s helping to digitise those processes and they are beginning to develop some AI tools which will help with that process. I mean, it’s not revolutionising their business, but it’s just making it slightly more efficient. And, you know, again, people I suppose worry about AI and will it replace jobs, but I think what we’ve found through history is when technology comes in, yes, some jobs that were tasks that have been done before might be done by computers, but there’s always new tasks and new efficiencies and opportunities that can come out of that technology as well. So it always tends to be a quite mixed picture.

SW: And you mentioned Nvidia the Magnificent Seven in the US has gained many headlines over the last year and no doubt will continue, but do you think that this large dispersion in the returns that we have seen from the Magnificent Seven and mega-cap stocks is going to continue into next year as well?

CR: Yeah, I mean I think it’s been a sort of quite unusual period. I mean, 2023/2024 has been very narrow leadership in terms of the markets, particularly within the US, I think only 24% of stocks actually outperform the S&P 500 in 2024, 28% of 2023. And it’s normally about 40 to 50% of companies. And the last time we saw this degree of concentration was 1999/2000. I think we all know how that ended.

But you know, why these companies doing so incredible well is because a lot of them are so incredibly profitable. But we would say not all of them are as magnificent as others. We would say something like a Tesla for example, is it’s a car company, it’s not making a great deal of money and it’s got an awful lot of competition coming, not least from China. So we would not think that that was a particularly attractive business.

And we also have to ask ourselves, how much are these gonna companies gonna grow in the future? So something like an Apple for us, yes, it’s been a fantastically successful business, that smartphone revolution, but you know, that’s 20 years ago, roughly now, or maybe 10 years ago. But it’s certainly quite, quite a long way into it at this point. And we’re actually seeing that sales of smartphones are slowing, you know, length of time it takes for people to renew their phone is extending. This chat about new features, but none of them are revolutionary enough to drive really, really strong growth. So yes, it’s a great business, but it’s quite mature. So we again, don’t think that’s terribly attractive.

We’re much more concentrated on things like Microsoft, which are a real leader in cloud computing. Alphabet we still think is an interesting business in terms of its YouTube assets, but also that leadership within digital advertising. But actually we are really interested in technology beyond the Magnificent Seven. So we think there’s lots of really interesting businesses, whether it be something like a Synopsis, which is a company that provides software to design really complicated semiconductors. It’s a duopoly in the world and providing that software, you know, and that’s been really sort of benefiting from all the investment that’s been going on into semiconductors or perhaps something like TSMC, which frankly manufactures all the chips, whether it be the AI chips or whether it be the chips that go into your EVs or the chips that go into your fridge. You know, it’s the leader again in manufacturing and has that huge scale and capacity to do things even at the very, very tiny levels that, that the people do for complex cut semiconductors. So we think there’s lots going on within technology. You don’t have to just focus on that Magnificent Seven.

SW: And I guess just to wrap it all up, if we like, and this technology, but also technology as being a driver for good and good investment. So technology isn’t necessarily something that you would immediately say is that’s good, that’s a good investment for future and for sustainability and that fits in my sustainable portfolio. But what is it about technology and what they are doing that has you saying, you know, this is a good investment, this fits our philosophy of what we’re trying to achieve at CCLA?

CR: I think primarily what we’re trying to achieve is great returns for our clients. And these are businesses which are extremely profitable, extremely attractive from a return on capital perspective in terms of the growth that they’re providing. So I think there’s difficult to argue that this hasn’t been and won’t continue to be a really interesting area from an investment perspective. And then for us, it’s a question of making sure that we are aware of the sustainability risks within those businesses, whether it be the environmental footprint of some of the big hyperscalers and how they’re dealing with that, the supply chain of a lot of these semiconductors. And there are clearly issues in each each stage of that. And making sure again, that we we’re on top of those companies and making sure we can do what we can. James, you wanna touch on that?

JC: Yeah, I guess, it is really important to reiterate this point that we are looking for two things. We’re looking for a great portfolio and then to use our USP, which is engagement to make those companies better because when you start talking about these AI businesses, they are the ones that are gonna dictate people’s lives in the future. So we’re trying to use those holdings as a platform for us to go out and engage with them.

And NVIDIA’s a great example of a business that’s been in our portfolio for a while, has obviously undertook rapid expansion over the past few years. And of course, and as a consequence of that, their influence on the world has grown significantly yet because they’ve grown in a relatively short period of time, they don’t necessarily have the sophisticated sustainability approach that other firms of that size would do. So we’re getting in, we’re engaging with them, we’re talking to them particularly about the importance of human rights and really pleasingly, they’ve been listening to that and I’m making changes to their team on the back of it. So again, I want to try and reiterate this idea of good portfolio, use that as a platform to try and drive change.

SW: Well on that fantastic example of engagement. I will leave it there. So James, Charlotte, thank you both for joining me today.

CR: Thank you.

JC: Thank you so much.

SW: The CCLA Better World Global Equity fund is a quality strategy offering a combination of capital growth and income. The fund is managed in line with CCLA’s approach to investing for a better world and targets businesses with stable and persistent growth, trading at attractive valuations. We think this fund should be a strong consideration for anyone looking for a global fund with an ethical focus. To learn more about the CCLA Better World Global Equity fund please visit fundcalibre.com