The Pax Global Opportunities Fund, launched in June 2018 and subadvised by Impax Asset Management Ltd, invests in companies well-positioned to benefit from the transition to a more sustainable global economy. In this interview, Portfolio Managers Kirsteen Morrison and David Winborne discuss their investment approach and key market trends.
Q: What long-term trends are driving this strategy?
Kirsteen Morrison (KM): A series of major factors are playing out in the world which will profoundly shape private sector markets over the coming decades, including demographic change, resource scarcity, inadequate infrastructure, and environmental constraints. We believe these trends, which will progressively drive the transition towards a more sustainable global economy, will lead to out-performance for well-positioned companies. In our view, portfolios that account for the risk of both sudden shocks and long-term value erosion can out-perform.
Q: How would you describe your investment process for the Fund?
David Winborne (DW): This Fund is built on the same investment process of investing in high quality companies, utilizing the same investment team, with the same environmental, social and governance (ESG) framework, that Impax has pioneered over the last 20 years.
The sustainable economy is broader in scope than the environmental markets – renewable energies, resource efficiency, water and waste – in which Impax has historically invested. We have developed a tool, the Impax Sustainability Lens, to help us find interesting companies that benefit from the many sustainable transitions that are underway in the global economy.
Q: Can you tell us more about the Impax Sustainability Lens and the role it plays in your process?
KM: The Impax Sustainability Lens is designed to highlight subsectors within the global equity universe that benefit from tailwinds or face lower levels of disruption risk in the transition to a more sustainable economy. It does this by ranking all economic sub-sectors by the opportunities and risks related to these long-term trends. This helps us find companies where the opportunities outweigh the risks.
An example of a current high priority sector is healthcare equipment suppliers that are well positioned to serve a growing, aging population who demand personalized healthcare services.
Low priority sectors currently include extractive industries, such as coal and oil, which are likely to suffer materially from the transition to a lower carbon intensity energy system in the medium term, and are facing operational health and safety risks today.
Q: What types of companies do you target?
DW: We aim to invest in high quality, well-positioned companies that we believe possess sustainable competitive advantages, are able to produce consistent returns on invested capital, with above average free cashflow predictability, and where we believe that future potential is not reflected in the share price.
The Fund consists of a concentrated portfolio of 35-45 companies, and we invest over a five-year time horizon with a low turnover. The portfolio has wide geographic and sector exposure, and is overweight mid-cap companies relative to its comparative index, the MSCI All Country World Index.
Q: Can you offer examples of companies that are particularly “well-positioned” for the new economy?
KM: Two fund holdings come to mind, Ecolab and Royal DSM.
The global need for improved water efficiency, water testing and water treatment has never been greater. Ecolab is a market leader in water optimization, efficiency and hygiene solutions across many end markets including hospitals, schools, governments, restaurants and industrial businesses. Ecolab has the biggest market share among competitors in food safety, and ranks second in water efficiency products. A strong management team has led the growth of the company from a U.S.-centric business to a leading global player across a broad array of end markets in a fragmented industry. The company has a strong focus on innovation and the business model is built on deep understanding of customer needs and providing solutions that drive customer savings.
Royal DSM is an example of a company that has been transforming its business model from its original cyclical chemicals roots to one based on advanced nutrition and performance materials with a very clear focus on sustainability. Headquartered in the Netherlands, Royal DSM is a science-based company active in health, nutrition and materials. Close to three-quarters of DSM’s business is now comprised of natural food ingredients, human nutrition and animal feed. Other product lines are in personal care, healthcare, and a variety of high-end materials with applications ranging from electronics to textiles and construction. We believe that DSM is uniquely positioned through its impressive transformation, and therefore, nicely differentiated from peers in the fine chemicals sector.
Q: What is the Fund’s sustainability profile?
DW: The Fund offers an opportunity for investors seeking long-term financial returns while also investing in companies that are positioned to benefit from long-term sustainability trends. ESG analysis is an integral part of our investment research and process, which provides risk mitigation and important insight into the ‘character’ of a company.
In addition, as a result of the Fund’s investment strategy, under normal market conditions, the Fund is expected to be fossil fuel-free (not invested in securities of companies that Impax determines are significantly involved in the extraction and/or refining of fossil fuels). Lastly, the Fund is also subject to exclusionary criteria whereby we seek to avoid investing in companies that manufacture tobacco products and those that manufacture or sell weapons.
Q: Why is now the right time for this type of strategy?
KM: We decided to launch this strategy because of the increasing evidence of the disruption that is happening in the world economy. We believe that the Fund should be more resilient to disruption in the long term because we look at risk at the early stage of our investment process and take this disruption into account.
The Fund is designed to deliver long-term capital growth by investing in high quality companies able to out-perform and generate strong and consistent investment returns. We believe that the transition to a more sustainable global economy provides an attractive backdrop in which to invest for this long-term capital growth.
To learn more about the Pax Global Opportunities Fund, please visit here.
Risks: Equity investments are subject to market fluctuations, the fund’s share price can fall because of weakness in the broad market, a particular industry, or specific holdings. Emerging market and international investments involve risk of capital loss from unfavorable fluctuations in currency values, differences in generally accepted accounting principles, economic or political instability in other nations or increased volatility and lower trading volume. The Pax Global Opportunities Fund is new and has a limited operating history.
As of 6/30/18, Ecolab, Inc. as 3.8% of the Pax Global Opportunities Fund and Royal DSM NV was 3.0% of the Fund.