Speaker 0:
this happened.

Speaker 0:
Joining me here in the studio, we have Chris Hines, head of multi asset strategies and European equities at entry. Chris, thank you very much for being here. So, Chris, you've been managing the fund for 15 years, but sustainable investing has had a tough time of it. Have you As the manager weathered the storm there,

Speaker 1:
um, I I I think you're right. It was a tough year in 2022. There were a lot of headwinds for, uh, sustainable funds. Um, that was coming both from the fact that most sustainable funds have very, very strong growth biases, but also sectoral impacts as well. And most particularly, oil. It is only a small proportion of the overall universe, but it still had a very significant effect because it performed extremely strongly over that period. Uh,

Speaker 1:
but, you know, in terms of the fund I run, which is a responsible and sustainable fund, Uh, but run very much from a value orientated, uh, perspective. You know, based on fundamental stock picking.

Speaker 1:
Um, there, You know, I I actually think that you I i it did perform very robustly that value buyers meant that it it wasn't too disadvantaged in style terms. Even if it still did have that headwind from perhaps not being able to invest in certain areas of the economy that did well,

Speaker 1:
uh, like oil. Um, and it it actually, you know, performed very well over that period. It was in the top quarter over the year, whereas most sustainable funds were sort of positioned in the 4th 3rd quarter because of both of those impacts I've already talked

Speaker 0:
about and you run it with a keen value bars. But what are some of those themes that are really running through the portfolio?

Speaker 1:
Um, well, I mean, I I think they they have themes from 22 sides. So I mean, we we have, you know, four specific themes to the fund. I think within the European market, uh, two of those are particularly prominent and one is on in terms of sustainable solutions. And there it can be of a variety of different factors.

Speaker 1:
Um, but it you know, in terms of decarbonisation have companies which are understanding about their climate footprint and looking to reduce it often, funds that have adopted science based targets and quite strict science based targets, um or or, you know, are very positively involved in, uh, introducing new products which will, uh, reduce the impact on the economy Areas like, uh, renewables. I I suppose you have a big, uh,

Speaker 1:
area where where the fund is involved is in terms of health and safety. And there, you know, it will invest in will span from pharmaceuticals, uh, to life science companies, uh, to general health and safety and and specific areas like water, where these fees come across quite strongly

Speaker 0:
and you touched on value. But value is often associated with defence and you touched on oil. But defence

Speaker 0:
of tobacco companies as well do you find that then sustainability is quite hard to marry that idea with value.

Speaker 1:
Well, of course, when the price of energy went up, uh, exposure to companies involved in renewables or involved in energy transition actually performed particularly strongly because clearly with not only the high oil price, but that feeling of, um, uncertainty over supply. Um,

Speaker 1:
there was a desire to move away from for, or an accelerated structural shift away from fossil fuels towards more environmentally friendly areas to the market. And there, you know, the fund really does have a lot of exposure from renewable energy production from with names like, uh, green coat renewables, which does wind farms,

Speaker 1:
uh, which is very heavily involved in the switch over from fossil fuels into renewables and and really a company which behaves very responsibly as well. I mean, you're looking at a company that has not only invested in a large solar panel production facility in

Speaker 1:
Europe to supply, um, its needs for, uh, growing its renewable energy solutions. Um, which does remove a lot of supply chain risk because otherwise you may may be sourcing a lot from China, but has also now gone and open to second plant of, you know, state of the art latest technology, most efficient sort of panel production in America as well, uh, to companies involved in the grid. And that might be companies like s and which actually supply the cabling.

Speaker 1:
Uh, but also sort of on more on the grid edge to, uh, companies like Landis and gear, which do does electronic metering, an area where we are likely to see a lot of expansion in demand. Not only, uh, because we want to learn more about the grid as it becomes less stable. Maybe because of, uh, the introduction of renewable energy, but also, you know, increasing charging points for E. V s and other applications.

Speaker 1:
Um, and and and you know, also the supply of equipment into those areas. So that might be companies like Merson, which you know supplies into a whole range of different, um, companies involved in this area from being part of the solar and wind supply chain to be involved in the grid to increasingly becoming involved into larger electric vehicles. Because as energy intensity increases, you need higher quality equipment. And then Merson is very well positioned to take advantage of that.

Speaker 1:
Um, but but also, you know, more generally in terms of supplying into, uh,

Speaker 1:
the electrification of the economy, which would be a company like reel, which does electrical equipment distribution, for example,

Speaker 0:
yes, staying there with performance. And with the European peers so away from sustainable funds, How did it look up against other European funds?

Speaker 1:
It did outperform. So I mean, I think generally within the market as a whole, there was a growth bias. You expect that after an extended period where growth had been outperforming,

Speaker 1:
Uh, whereas my phone was not only on what the value side having a value orientated process, but actually it biassed towards value had increased markedly over the previous few years simply because, as somebody who invests from a stock pick picking fundamental point of view, companies which tended to be in that value area had become progressively cheaper and

Speaker 1:
which had sat in more growth areas of the market had become progressively more expensive. And I suppose also influenced by the fact that I did want quite a large cyclical exposure, uh, during 2022 because I always felt that as we came out of covid, we were likely to see a very strong rebound in the economy, which indeed happened. And I wanted to be able to take advantage of that.

Speaker 1:
Um, and those companies have been, you know, particularly heavily sold off. I would say during the height of covid people

Speaker 0:
watching this will hear value and sustainable two, maybe disparate ideas. How do you marry those two quite different concepts together?

Speaker 1:
Well, I I think part of it is that we've been a long established firm and we have a very robust and comprehensive, um, screening approach our responsible and sustainable screening, which exists across a lot of our fund range. And there, I think, you know, it allows us maybe a bit to invest in a wider variety of companies because we do have that faith and trust in in that process. But also I'd say that although there are some areas of the market we can't invest, there are a wide variety of

Speaker 1:
different areas of the market which are available to us. And I think that, you know, there's plenty of opportunities to get good quality value companies which may have similar exposures to some of these growth companies but are not on those very high ratings.

Speaker 0:
So areas like renewables,

Speaker 1:
I guess indeed, yes. So maybe it's not buying the ones which are always in the headlines, which are very well known. Uh, but looking maybe further down the supply chain or into

Speaker 1:
medium sized companies where you can find good companies with the similar sort of exposure to, uh, long term structural trends, but which are still trading on very reasonable valuations.

Speaker 0:
And when we talk about screens, uh, is exclusion probably the wrong word? It's more about what you can invest in rather than what you can't invest in?

Speaker 1:
Uh, we I mean, our our screen process is three separate elements. The first is the sort of old, more ethical side, too,

Speaker 1:
where there are certain areas of the economy where we feel that, you know, they do environmental or social harm where we won't invest. So oil production companies aren't an area we would invest in, and similarly, some areas like alcohol production, uh, tobacco, Uh, as as well as other issues for companies where we won't invest in a company for animal testing unless that's for medical purposes. Uh, so there's that element

Speaker 1:
to it, but that that's fairly easy to apply. Uh, what, perhaps, is more complicated and where, you know, having our in house responsible and sustainable expertise is important is on the positive screens. It's not only considering what sort of area of the economy companies may operate in, but also how those businesses are what are run, how they deal with their environmental risks. Uh, their social risks shall we say, their reputational risks from supply

Speaker 1:
issues, for example, um, but also ensuring those companies do have very strong corporate governance

Speaker 0:
and energy security and energy transition that their big them, especially across Europe. How do you tap into that into the portfolio? Well,

Speaker 1:
I I I do think there are plenty of opportunities across a whole range of companies to do that. Obviously, the most obvious area may be renewable energy generation. So there you can get that both by the utilities and by specialist players which may operate in

Speaker 1:
wind power generation, for example. Um, there's generally the trend towards towards electrification. Uh, so more money is gonna be have to be spent on the grid on, um,

Speaker 1:
uh, other grid edge applications and similar areas to that. And indeed, you know, in terms of electric vehicles as well. And there's a whole range of companies that you can invest in there uh uh from players who who might be a cable manufacturer for for the, uh, grid, um, to companies supplying into wind and solar power generation so, or

Speaker 1:
equipment generate, uh, equipment, where often those companies are often in quite a volatile area and may not be the sort of companies we want to invest in. But if you move further down the supply chain there are definitely good opportunities in companies trading on very reasonable, uh, valuations there. Um, so you know it. It's a whole range of different opportunities we can invest in

Speaker 0:
and along the sustainability journey. A lot of the talk now is about the circular economy. Is that a theme that you're quite plugged into in the portfolio as well?

Speaker 1:
Yes, certainly. I mean, we we've looked very closely at this and where we can take advantage of that. I mean, it's something that we look for all the companies we invest in to really look to move towards a circular economy. But there are some sort of more specialist areas which have more involvement in that kind of area. And one area we we we found to be, you know, quite exciting really is cardboard boxes, which doesn't sound the the the most exciting area. It sounds very value orientated area of the market, but as well as you know, very strong cash flow generation.

Speaker 1:
Uh, there it's. It's an area which is benefiting from the switch away from disposable plastics, which of course, plaguing our environment and especially the oceans to moving towards biodegradable recyclable alternatives. Um, and there, you know,

Speaker 1:
as well as having positive macroeconomic trends in terms of the rise of e-commerce, which drives growth for those sorts of products. It's also benefiting from the switch over from disposable plastic packaging to paper based packaging, paper based alternatives in supermarkets, where I'm sure as you're walking around the supermarket, you'll probably noticed that more and more of the products you buy now come

Speaker 1:
in paper packaging rather than plastics. And whilst each single opportunity is very small overall, that this general shift is actually increasing their structural growth rates by zero and a 00.5% to 1% per annum. This is actually a very good driver in terms of a sector which traditionally has been seen as mature and not growing. Um, and and you know,

Speaker 1:
from that you can, over time deliver, I think superior, uh, economic returns. So,

Speaker 0:
taking a step back, of course, you invest in Europe. What's your outlook looking like? It was a tough year last year, but how do you think the backdrops changed and what can you see over the next sort of 12 months or so?

Speaker 1:
Um, I I think it continues to be a fairly tough outlook, or at least a very uncertain outlook in Europe. I mean, obviously, we've had the pressures placed on Europe from the war in Ukraine and the the energy crisis, high energy bills and now increasingly higher food bills as well. But it's it's not all doom and gloom. And I think actually, it's quite good in some ways for value based, uh, companies. Uh, you know, we're still seeing virtually full employment across Europe and indeed in the UK.

Speaker 1:
Um, and that's, you know, quite a good backdrop for the region in terms of underlying demand. Uh, so we are seeing more more pressure from higher interest rates, and that's putting pressure on in terms of the valuations companies may trade at, um, but also, of course, on their balance sheets. But I think there's still, you know, plenty of opportunities out there for companies that are going to perform well in this environment.

Speaker 1:
Maybe it does mean that as well as looking at on the growth side on the equity side, you do need to take a very careful look at balance sheets because of that, those higher interest rates that are emerging but overall, the demand situation in Europe is still pretty strong. And, uh, you know, I I I think companies continue can continue to perform.

Speaker 0:
And, you know, it would be hard to miss the the news about the banking sector, especially in the US earlier this year. Do you think European investors should be worried about that, or do you think it was quite an isolated incident and

Speaker 0:
we shouldn't be too worried?

Speaker 1:
I I I maybe a bit cautious about saying it's purely an isolated incident, but it does seem to be very specific to US regional banks. Uh, we did see some spread into Europe in terms of Credit Suisse,

Speaker 1:
but I think this is probably a bank which was in an awful lot of trouble to start with. The problems had really arisen on the investment banking side rather than sort of the domestic European banking side. Uh, especially on retail. I think that, you know, of course, we we we had to be very cautious when we suddenly saw this banking crisis emerge.

Speaker 1:
Uh, especially after what happened in 7 2008 with the credit crisis. But I think it's becoming increasingly evident, especially after the last result season that this was really a US specific specific problem. And u European banks, you know, they're very well capitalised. They're probably enjoying the best operating conditions they have any time since the credit crisis.

Speaker 1:
Uh, you know, they they're really in a very good position, and I think that's good for Europe as well. Uh, including versus the U SI mean you would expect of a domestic banking crisis going on in the US. That's not so good for credit in the US or for economic activity, because the supply of credit won't be as good,

Speaker 1:
but in Europe with very solid banks. I think that, you know, in in that sense, it places Europe to in an advantage compared to the US, which is really a position it hasn't been in for for quite a long time.

Speaker 0:
And last question. I ask you, Chris, so growth has had a bit of a rally recently. How would you say to investors, or how would you convince investors to stick with value and make sure for their portfolios are stacked full of it?

Speaker 1:
Well, I I think if you look in the valuation gap between value and growth, in the the market value is really trading very close to its lows over a 10 year plus track record in terms of valuation at a time, actually, when we we see learning surprises for value

Speaker 1:
very positive on the whole, whereas growth looks very expensive, Um, I think that, yes, we've come off the highs where it was it was at a few years ago, but the rally in growth stocks has been really very heavily concentrated into the sort of quality end of the space. Uh, and I think valuations there are are looking very, very high.

Speaker 1:
So I'm, you know, very happy having a very strong bias towards value. Because end of the day you can find companies or dividend yields well above five on PE less than 10, uh, which are actually doing very well in the present environment. So I'm very happy to be invested in value. I'd be a lot more nervous being invested in growth when it's got the headwind of higher interest rates, which tends to put pressure on growth valuations,

Speaker 1:
um, and and the the the valuations do look very, very high and could easily fall back a bit. And it's very dependent on a few. Those few high quality companies which, you know the valuations really are looking very excessive.

Speaker 0:
So, Chris, for people who are watching who maybe aren't too familiar, who are what's really what's their main message?

Speaker 1:
Um, well, I I think you know 11 of the things across it is that we've been deeply involved in responsible and sustainable investment for a very long time.

Speaker 1:
Um, indeed, when when we first started, it wasn't known as responsible or sustainable. Uh, we looked first fund back in 1988. Uh, then it was very much talked about an ethical fund. And then we moved over to maybe a wider approach in,

Speaker 1:
uh, somewhere somewhere in the nineties, shall we say, into being a socially responsible investment firm. And again, that process has evolved more recently to being responsible and sustainable. So I think that that long history, the fact that all of our fund range is responsible and sustainable or impact, uh, really does mean that it it is, uh, an that goes across the company, which I think also comes out of our ownership structure. So as well as being a responsible and sustainable company

Speaker 1:
ourselves. We're owned by a charitable trust ultimately owned by the Benet Trust, which is a charitable foundation which doesn't raise money itself but takes the profits that we make as an organisation on our parent, the Benet Group, and distributes the grants to other charities. And I think that charitable background really does, you know, has drive the ethos through the group and really supplements the sort of responsible and sustainable approach we take as a company.

Speaker 0:
Chris, that's a great place to leave it. Thank you very

Speaker 1:
much. Thank you

Speaker 1:
so