Why Greta would Outperform most Hedgefunds
Unless the investment vehicle of my choosing involves an underage and woefully underpaid Victorian boy up a chimney with a cigarette behind his ear, then I don’t want to know. Because if not, then there’s no way it’s outperforming any index I care to glance at over a malt whiskey and my copy of the FT.
Or so that’s certainly what investors have been led to believe since time began. None of that fair pay hocus pocus! I mean, how’s a corporation meant to keep up a worthwhile dividend schedule if their workers are given a fair shake?
Even as recently as 2011, when a young Tim Sunderland was studying for the CISI Investment Advice Diploma, it was written in the rule book then that the chances of an ESG fund outperforming their traditional counterparts were slim to none.
“Whisper it, but low-cost ETFs tend to outperform their actively managed competitors”
How could they? - Given the limited nature of ESG investing and not to mention the evil villains already have a leg up through their cheap labour and high margin cancer inducing products.
That may have been true, until recently at least.
So much so have the tides turned, the likes of BP and Shell both trade at exactly a 41% discount from their former 5-year highs despite the price of oil conversely sitting at multi-year highs.
Don’t get me wrong, both oil majors have followed the price of oil up somewhat but it’s a far cry from their former titan status.
If I am to try and encapsulate this shift in investor mentality, it would be best to compare the kind of valuation awarded to an oil major such as BP to that of electrified newcomer Rivian Automotive.
Two very different companies with two very different means of making money. On one hand, BP (who produce 1.53% of the world’s greenhouse gas emissions) is forecast to generate revenue of $258bn in 2022. Rivian Automotive on the other hand - blank. In fact, I’d have to skip forward to 2023 to find anything worth writing about, even then, it’s a paltry $4.25bn in forecast revenue. That quoted figure of $4.25bn means they’ll need to complete the 55,000 back-log of pre-orders and make good on Amazon’s order of 10,000 EV delivery trucks without a hitch.
Spoiler alert - I suspect they’ll encounter a hitch considering they’ve yet to deliver even 1,000 cars in total to date.
Yet despite this chasm is tangible revenue, Rivian Automotive commands a market capitalisation of $100bn. BP on the other hand sit nearly $10bn short of this figure at just $91bn despite the vast stockpile of hard cash.
*Admittedly the Rivian truck does look rather cool.
Clearly there’s more to it than just the fact Rivian is electric, it’s all the future potential that comes with the market segment and the seismic shift away from environmentally polluting industries such as oil extraction.
But at the very least, we can start to understand that just good ol’ fashioned revenue and profit is no longer enough to outperform the market. It needs to be environmentally friendly, socially responsible and with transparent governance. No longer is ESG just an afterthought, but for many it’s the whole agenda.
Starting out, I was told there were two hard “rules” I had to abide by if I were to be a stockbroker;
No brown in town
Never sell Shell
The first rule I’d happily stick to, except town has been replaced by a Zoom meeting room and nobody can even see my beautifully polished black shoes. As for the second rule, I’m certainly not prepared to die on that hill. In fact, envisaging that hill, I can only see a collection of what remains of an old boy’s club, “I don’t get all this, *takes drag on B&H Gold cigarette* Instagram and Bitcoin malarky”.
With all that in mind, I don’t wanna get left behind with the old boy’s club at the top of that lonely hill, so let’s explore a few different ways that we as investors can grasp the power of all things ESG!
iShares MSCI USA ESG Screened UCITS ETF (SASU)
Just rolls off the tongue this one.
Jokes to one side, I thought I’d kick off proceedings with a low-cost ETF and for very good reason too. Whisper it, but low-cost ETFs tend to outperform their actively managed competitors.
An actively managed fund, on average, will cost 5X more in fees meaning any fund manager is already on the back foot before they’ve begun the process of carefully selecting stocks. It comes as no surprise then to hear Warren Buffett sing their praises, given their low-cost profile and easy to access exposure to a wide market segment such as the S&P 500.
I tell you what else is no joke, SASU’s performance. Strip out all the nasties from weapon makers, tobacconists and anyone violating UN Global Compact Principles and you’re left with 84% Total Return over the last 3 years.
“The fund seeks to track the performance of an index composed of U.S. companies. The index screens out companies associated with controversial weapons, nuclear weapons, tobacco, thermal coal, oil sands, civilian firearms and those violating United Nations Global Compact principles.”
To appreciate the significance of this mighty performance, the regular S&P 500 ETF from the same provider (iShares) including gun makers and nuclear arms dealers can only muster 55% total return over the same period.
Now it’s important to note that past performance is certainly not a reliable indicator of future results, but it’s interesting to see just how much the ESG version of the S&P 500 has pushed on in recent years. To be completely honest, I’m not entirely surprised either. Because in reality, you’re left with the greater weighting towards cutting edge industries of the futures and not help back by the names such Phillip Morris who have severely underperformed the wider market.
Not only is this ESG screened version outperforming the regular S&P 500, it pays for its own fee schedule. The total expense ratio is only 0.07%, however the fund has managed to outperform its ESG benchmark by at least this amount every year since inception. Warren Buffet would be very pleased indeed.
SASU is available to trade with Mitto Markets, but for their full performance and fact sheet data just click on the following link;
Dunedin Income Growth Investment Trust PLC
Remember what I said earlier about actively managed funds costing ‘on average’ 5 times more than their passive equivalent? Well, I can do one better with a whopping 9-fold increase on SASU’s fee schedule!
Costing a grand total of 0.64% in ongoing charges, Dunedin Income Growth Investment Tr PLC has some seriously big expectations to fill.
Now while it’s important to remember higher fees will inevitably eat into any performance figure, this by no means concludes that the fund in question can’t justify this through benchmark beating results.
Which is exactly why I’ve decided to highlight the Dunedin Income Growth Investment Trust PLC.
Their investment objective reads as follows; “To achieve growth of income and capital from a portfolio invested mainly in companies listed or quoted in the United Kingdom that meet the Company’s Sustainable and Responsible investing criteria as set by the Board.”
Co-managed by Ben Ritchie and Georgina Cooper, the fund has comfortably managed to outperform their FTSE All-Share Total Return benchmark over 1-, 3- and 5-year periods. So far so good!
Some of their key picks which have helped the fund outperform over the last year include Diageo (up 30% YTD), Nordea Bank (up 62% YTD) and British analytics firm Relx (up 27% YTD).
It’s important not to use their historical performance as any sort of forward guidance, but at the very least it’s reassuring to know they’ve done a stellar job thus far.
A dividend yield of 4% certainly doesn’t hurt matters either for those keen to capture income which is paid out on a quarterly basis. This is all well and good, but let’s not get distracted from their ESG credentials which I’m glad to report are robust indeed.
Making the move in April this year to become ESG friendly, the Dunedin Income Growth Investment Trust actively excludes tobacconists, weapon makers, oil and gas extractors or anyone involved in coal.
Furthermore, you won’t find any companies that fall short of the UN Global Compact 10 principles which is set out to help fair treatment of workers, stop corruption and aid human rights.
No underpaid and underage Victorian chimney sweepers in this portfolio, if the Dunedin board have anything to do with it!
If this UK centric Investment Trust sits nicely with your ESG outlook and you’ve carried out your own research, then shares in DIGs can be bought and sold here at Mitto Markets.
Pod Point Group
For this last ESG selection, I’m going to veer away from any sort of fund, because after a while they all become rather correlated to a high degree and largely only separated by region.
Stick a blue-chip fund through an ESG screen and, by and large, you’ll be left with a group of very similar names with a near perfect 1 correlation.
So in light of this, I’m going to try my hand at picking out an individual equity which would make even Greta Thunberg happy!
Welcome Pod Point – The UK’s leading EV charging point provider, with over 50% of the home charging market.
Witnessing such obscene valuations handed out to EV car makers makes one think, surely there’s an opportunity by way of proxy with the ‘picks and shovel’ side of the industry. And apparently so when you consider the current and forecast growth of EV car sales and lack of charging point infrastructure to support it. For example, Manchester alone currently has to make do with a miniscule 360 charging points to support it’s 2.8m population.
Pod Point themselves are estimating the UK market will need to install approximately 25m charging points by 2040, with much of this being home charging ports. Clearly, the addressable market is vast and having exposure to a well-established sector leader could very well be wise option for any bonified ESG/Impact portfolio.
A quick glance through their revenues only adds further conviction for this argument.
The top-line revenue showed £33m for the whole of 2020 and just in the first 6 months of 2021 they’ve already produced £26.5m. This isn’t just a flash in the pan jump in sales either, but part of an aggressively increasing trajectory for several years now.
If this weren’t listed on the London Stock Exchange, but rather a SPAC on the Nasdaq, I can’t help but feel this rate of top-line growth would command some kind of pie in the sky valuation but instead I’m looking at a market capitalisation of just £362m.
It would be nice to look at some kind of Price-to-Earnings ratio at this stage, but for there to be a P/E Ratio, there needs to be positive earnings of which there are none. Thus far, it must be noted that Pod Point has incurred significant losses despite their revenues growing impressively. Just in the first 6 months of 2021, Pod Point were losing around £500K a month. Far from ideal but not to be completely unexpected given the expansion on hand.
In saying that however, I can’t help but notice that explosive share price movements often occur when high-growth companies are still at the loss-making stage. By the time exponential rates of revenue growth slow, and sensible profits are on hand, you’ve already missed the multi-bag boat.
With it still being such a newcomer to the market, it’s yet to be seen if the market agrees.
But if you fancy adding an element of individual equity speculation to your green focussed portfolio, then Pod Point may very well be a nice addition. If you’ve carried out your own research and want to invest in Pod Point, then shares of PODP can be bought and sold with Mitto Markets.
If you’ve enjoyed this article and want to start your investing journey, feel free to reach out to me personally on t.sunderland@mittomarkets.com or call 0208 159 8985
Important Notice: When investing in shares, your capital is at risk. The value of the investment and any income from it can fall as well as rise, so you may get back less than your original investment.