M&G (Lux) Global Sustain Paris Aligned Fund Investment Philosophy

The value of a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. The views expressed in this document should not be taken as a recommendation, advice or forecast.

A focus on the long term

We only invest in companies that we would be happy to hold for at least a decade, through multiple economic cycles. Rather than fixating on whether we believe a company’s stock price will go up in the next few months or years, we focus on its ability to consistently generate value over many years.

“Competitively advantaged and growing companies will work for us as investors by creating continuous and compounding value.”
 

This long-term approach, combined with the focus on quality and highly attractive entry points, means that the fund tends to have a low turnover rate, with expected holding periods matching our investment horizon. This long investment horizon feeds into everything from stock selection to portfolio construction, and the set-up of the team.

Seeking quality companies

Compounding is key to building long-term investment returns, and competitively advantaged and growing companies will work for us as investors by creating continuous and compounding value. This doesn’t mean that we focus solely on defensive and highly stable companies. We believe high-quality companies, which are well-placed to fend off competition and generate value, can be found across industries – even those that are inherently more volatile.

Our team of experienced analysts performs in-depth due diligence on stocks before they are added to the watchlist, and on an ongoing basis. They analyse companies’ business activities, whether they possess an edge over competitors, the sustainability of that advantage, the quality of management and company culture, and how the company can generate a return on invested capital, among others.

The team operates with a ‘no pitch’ principle. Rather than analysts pitching stock ideas to the fund manager for immediate inclusion in the portfolio, an emphasis is placed on patience, objectivity, collaborative effort and thorough debate. Stocks are reviewed with an eye to invest only if the time and price are right (see below).

The importance of valuation

Alongside fundamental research, the team also dedicates considerable resource to company valuations. We build elaborate scenario-based valuation models, forecasting a range of potential future outcomes, and how these may affect the company’s financials over time. While this isn’t an exact science, it allows us to arrive at an estimate of what we believe to be the intrinsic value of the company, while also providing a useful exercise in identifying the cash flow sensitivities of internal or external factors that may affect the business going forward.

This significant work on company valuation plays an essential role in the decision to invest in a new stock. We look to invest in companies when there is a large margin of safety, between the current stock price and what we believe to be its intrinsic value. When we make the rare decision to add a new stock to the portfolio, this discrepancy will be the result of an identifiable degrading of investor sentiment around a company or industry – a short-term dynamic that should revert over time.

Buying a stock when the current price is much lower than the intrinsic value should also reduce the risk of losing money. This is also known as a margin of safety, and the approach is very different from speculating about shorter term stock price movements.

A smooth risk and return profile

The M&G (Lux) Global Sustain Paris Aligned Fund is a concentrated fund, usually holding fewer than 40 stocks. Despite this, we aim for the fund to demonstrate a relatively low level of volatility, broadly in line with its benchmark – not by mirroring the sectoral makeup of the benchmark, but by focusing on fundamental diversification. We aim for stock-specific risk to be the main contributor to overall risk, with style, factor or country risk playing a smaller part.

The fund is well-diversified across geographies, structural trends and end markets. We also invest in companies operating with differing business models, which we categorise as either ‘Stable growth’ or ‘Opportunities’. The former demonstrate a strong competitive edge and a proven track record of producing stable earnings at stable or increasing returns on capital. The latter sit in corners of the market where business risk is considered higher, but offer significant probability-based upside potential.

“We aim for the fund to demonstrate a relatively low level of volatility, broadly in line with the benchmark, by focusing on fundamental diversification.”
 

Unlike many high-conviction portfolios, position sizing is determined more by risk characteristics than by conviction. We aim to take relatively larger positions in companies that we deem to have less risk, and smaller positions in those where we foresee a wider range of potential outcomes. This ensures that more stable companies and riskier stocks can both provide smoother contributions to overall risk, and allows the fund manager to keep overall risk in check without hampering the ability to pursue alpha in the market.

Sustainability and Paris alignment

The fund integrates sustainability considerations in the investment process in several ways. Potential investee companies will need to demonstrate good governance, and do no significant harm. Companies must, for example, adhere to the United Nations Global Compact, and we avoid investing in industries such as tobacco, gambling and fossil fuel extraction.

The fund also aims to align with the Paris Agreement on climate change. Rather than carrying out a passive strategy of mostly focusing on portfolio emissions metrics, we aim to improve real-world outcomes. In other words, how our investee companies are contributing towards the aims of the agreement. We look for companies taking action to either reduce their own emissions, or providing solutions for others to do so.

We furthermore aim to demonstrate additionality as investors, by engaging with companies to push for continuous climate strategy improvements. These include climate disclosures, target setting, governance and monitoring.

We use carbon intensity as a framework for company inclusion in the fund. Companies with a carbon intensity greater than 50% of the benchmark must have set or committed to science-based targets, and we aim to keep portfolio emissions (Weighted Average Carbon Intensity) at least 50% below the benchmark (the MSCI World Index).

About the team

The team is headed up by John William Olsen, the manager of the M&G (Lux) Global Sustain Paris Aligned Fund. John William has managed the fund since joining M&G in 2014, and has employed a very consistent investment framework since he began running global equity funds more than 20 years ago. His team consists of nine analysts and deputy managers, alongside dedicated specialists in areas including engagement and reporting. The team also receives additional support from M&G’s central team of analysts, each specialising in different sectors, and its fast-growing Stewardship and Sustainability team.

Figure 1: Team structure

The main risks that could affect the fund are:

• The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.
• The fund holds a small number of investments, and therefore a fall in the value of a single investment may have a greater impact than if it held a larger number of investments.
• The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment.
• Investing in emerging markets involves a greater risk of loss due to greater political, tax, economic, foreign exchange, liquidity and regulatory risks, among other factors. There may be difficulties in buying, selling, safekeeping or valuing investments in such countries.
• Investing in this fund means acquiring units or shares in a fund, and not in a given underlying asset such as building or shares of a company, as these are only the underlying assets owned by the fund.
• Further details of the risks that apply to the funds can be found in the fund’s Prospectus.