A change to the fund prospectus
The new team are widening the themes which the funds will invest across. Prior to the arrival of George Latham the WHEB fund ran on 7 themes. The Henderson Industries of the Future fund runs on 10. The re-launched IM WHEB fund will run on 9, dropping the Social Property and Finance theme, which George explained had proved too difficult to find opportunities in.
To enable this to happen WHEB will be updating the prospectus of the fund describing their approach to be a fund 'which invests in solutions to sustainable challenges'.
Rebalancing of Portfolio
The fund has rebalanced geographically and will move in line with the regional allocation to the MSCI World Index. Tim Dieppe explains, "this fund is not playing geography" to generate performance.
The fund has also diversified since Tim arrived (on 1st April) to hold 70 or so stocks, as opposed to 40. Tim has added high conviction names to the portfolio and 3 of the top 10 holdings are new to the IM WHEB Sustainability fund. The heaviest stock weighting is 2.1% and in April Tim estimates that he turned over 50% of the portfolio.
However, Tim is keen to point out that the turnover of the portfolio will settle down. He expects the average holding period in the fund to be three years which is much higher than the US and UK stock markets which George Latham quoted as being 7 months currently and added that the last time it was this low was in 1929.
Tim estimates that 50% of the fund is in stocks which are common to the MSCI index. 90% of the fund is in stocks with market cap greater than $1bn and 80% of the fund in stocks with market cap over $2bn. Equally the fund will not invest in stocks with a market cap under $200m.
How will exposure to themes be managed?
Tim Dieppe was keen to point out that 70% to 80% of the process involves picking stocks 'bottom up'. This means identifying stocks which the fund management team feel are well placed for the future, rather than identifying companies which fit into a particular theme, or sector of the stock market. Thus the amounts held in various themes are almost a consequence of the stock picking process.
The WHEB fund has no 'ethical screens' and in this way it is quite different to the funds Tim Dieppe managed at Henderson before (the Henderson Industries of the Future fund and Henderson Global Care Growth fund). Not having ethical screens though does not mean that value judgements are not made by the team. In the meeting I asked what their view was on, for example, genetic modification. George's answer was, "Is GM a solution to a sustainability challenge? In our view the answer is no."
Tim Dieppe also talked through how the Industries of the Future fund had over time reduced its exposure from 15% to 4% in clean energy stocks. He said it was not a sudden move based on a thematic overview, but rather a shift over a period of time based on stock fundamentals and natural attrition. He went onto explain that health is the biggest theme currently, with energy efficiency and sustainable transport next. The fund would try and keep a single theme though to under 30% of the fund.
What risks do you see in the future?
Tim said that he is most cautious of any company relying on government expenditure. This impacts on all sorts of areas in health, education and water infrastructure. The main point behind companies he is investing in is, "does it save the customer money?". George Latham added, "there is a large sector of the economy which will find it very difficult to grow. There are natural impediments to growth in more than half of the economy." George is confident that within the themes the Sustainability fund is investing, which are based on global megatrends surrounding resource scarcity, an ageing population, rising living standards and increasing interconnection, there will be growth and "where GDP growth is anaemic and growth is found it will be rerated."
I was left with a positive feeling about the fund and its future prospects. The fund team is well resourced now with 5 people focused on managing one fund and all at WHEB are very focused on making this work and are highly motivated to do so. The WHEB group have given George a three year funding commitment to make the Sustainability fund work economically and the ambition is to emulate firms such as Generation, who closed to new money after raising £6bn institutionally - though having Al Gore on their team can't have hurt! What is important to me is that this fund is unique in the market and addresses the issues it faces differently to other fund managers in the space. Whilst at the same time Tim's track record at Henderson gives investors the comfort of knowing this is not a leap of faith.