Lauren Ryan from Thinktank speaks to Laurence Parker-Brown for our IN60 series. The Inside Adviser
That consumers are influenced heavily by well known, trusted brands comes as no great surprise. What does, though, is that they rate life insurance as the least most important tool in ensuring financial security.
With short-term investors heading to the exit ‘opportunity’ arises in small caps
Australia’s leading ethical investment firm, Australian Ethical, has been among those to bear the brunt of the at times ‘brutal’ sharemarket selloff that has hit the S&P/ASX200 and S&P500 alike in 2022. The very nature of the ethical or even ESG investing is such that those few energy and commodity companies that are performing well today, simply aren’t investable from an ethical standpoint for one reason or another. Case in point being fossil fuels which have been central to Australian Ethical’s short-term performance against the benchmark.
Speaking in a recent update on the group’s equity program, head of equities Mike Murray, highlighted the fact that over every period barring the last two years investors have been receiving significant, and strong absolute, long-term returns. While the velocity of the selloff may have been unexpected, it is a natural part of investing into sharemarkets and the pursuit of returns above cash.
“When markets are falling it is very easy to become backward-looking and reactive” explained Murray, which is ultimately to the detriment of investors. These comments were made in the context of the better performing ASX companies operating in the ‘carbon intensive’ resource sectors, with markets currently ‘voting’ for resources at the expense of smaller growth-oriented companies.
Said smaller companies were central to the performance of the group’s suite of equity strategies with those funds holding the largest allocation to smaller companies underperforming the benchmark by the largest margin. A key driver of this and long-term returns has been Australian Ethical’s focus on sticking to their Ethical Charter, rather than straying into the increasingly grey area of ESG investing.
Murray explains that “ESG focused less on beliefs and often references the concept of risk” which can ultimately lead to the investing into fossil fuel or even tobacco stocks if the price is right. “While small caps have underperformed over the year, historically our ethical approach pushes us outside of Australia’s largest companies and we have found some of our best value adding opportunities” in this part of the market.
Commenting on the state of the market, Murray says “as shorter-term investors head for the exits, we are seeing attractive opportunities” with the industrial sector finally trading at a discount to their larger comparatives. Two of the highest conviction exposures are to Gentrack and the renewable energy cohort of companies including Contact Energy.
The focus in the technology sector is for companies offering “recurring earnings, attractive returns on investment and scale customer advantages” with billing software provider Gentrack a highlight, pumping out strong free cash flow and over NZ$100 million in revenue but a market cap of just NZ$150 million.
The return to popularity of fossil fuels amid surging prices has seen investors turn away from ‘bond-like’ renewable energy assets, however the old saying that ‘higher prices are the cure for higher prices’ is actually driving a jump in demand for renewable energy assets that will last decades.
After a difficult period for the sharemarket Murray is optimistic, saying “as the current inflationary environment evolves, we should expect a more nuanced ‘weighing’ of the fundamentals of companies and sectors to drive their values” something he hopes will payoff for patient investors.
