Sustainable equity funds are often associated with solely investing in expensive ‘growth’ companies. This is unfair, believes Maximilian Anderl, manager of the UBS Equity European Opportunities Sustainable fund. His fund has recently undergone a ‘rebrand’ by adding the word ‘sustainable’ to the end of its name. The investment strategy remained unchanged after the rebrand.
“We have had our own ESG team since 2016 and have been taking ESG criteria into account ever since,” explained Anderl. Only this was not yet reflected in the name, and a fund with a clear sustainable profile automatically attracts more attention. “It is virtually impossible to be commercially successful these days without paying attention to sustainability”, the Austrian observed.
The name change of the UBS Equity European Opportunities Sustainable fund does not mean that sustainability has immediately become the axis around which the fund, which has existed since 2004, revolves. “The main purpose of ESG screening is to identify the rotten apples among European companies. In this way, we are left with a universe of companies that behave well,” said Anderl. About a third of the companies are rejected in advance because of ESG criteria.
After the rebrand, the inflow into the 572 million euro fund has indeed risen sharply. Over both the past three and five years, the fund has done (much) better than its benchmark, the MSCI Europe Index.
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A company can end up in the UBS Equity European Opportunities Sustainable fund portfolio in two ways.
Anderl explained how it works: “We have our own valuation model for companies based on expected cash flows. For each company, we simulate a number of negative and positive scenarios for the share price. If the upside of the positive scenarios is much larger than the downside of the negative ones, we give the green light. In a second step, we then carry out an ESG analysis. If the company also scores sufficiently on that, then we can invest”, Anderl explained. “But it may also be that our ESG team draws our attention to a company that scores very well in terms of sustainability or that is in the process of improving its ESG profile. If the financial analysis is also correct, we can get in on the action.”
A glance at Anderl’s fund portfolio gives a very mixed picture. Among the fund’s five largest considerations are a few companies with a pronounced ESG profile, such as the Portuguese utility EDP Renovaveis, which gets all its energy from green sources. But also for example the Danish brewer Carlsberg, which most investors will not immediately associate with sustainability, has a prominent place in the portfolio.
Flexible
This mishmash of companies has everything to do with Anderl and his team’s investment strategy. Whereas many investors have switched to expensive ‘growth’ or ‘quality’ in recent years, the Austrian does not want to hear about it. “The distinction so often made between growth and value is nonsense. A growth company can be a good investment if the market underestimates its potential growth, just as a low-rated company can be a good investment in certain circumstances.”
As his fund’s name suggests, Anderl said he looks for stocks that at any given time have the most upside potential relative to risk. Overly strict sustainability criteria quickly push a fund towards a certain type of (growth) companies and sectors, which does not sit well with a flexible investment philosophy.
Although the fund manager describes himself as a stock picker, this flexible approach does mean that to a certain extent certain macro-economic developments can also be taken advantage of. Such as the recent rise in interest rates. “We have therefore increased our exposure to banks, for example, to slightly below benchmark levels, but I don’t see us going hugely overweight in this sector as the long-term outlook for the sector remains unfavourable.”
Underperformance
Anderl may have a flexible investment style without dogmas, but he is definitely not an opportunist. “If we buy a company, we always do it for at least two or three years. So we never enter a company if we expect an outperformance of only one or two quarters.”
As a result, his fund only benefited sparingly from the low quality, high beta rally that followed the rollout of corona vaccines, first in the US and then in Europe. “Our fund does well relative to the market when investors are risk-aware. For example, we had a strong outperformance in the first three quarters of last year.” In 2019, when investors were also euphoric and European equities posted gains of more than 25 per cent, the fund did worse than the market, just like this year.
Fund facts:
Max Anderl has 21 years of experience in the industry. He has worked in the Concentrated Alpha team since its inception in 2004. Since 2011 he has been head of the team and lead portfolio manager. He has worked at UBS AM since 2000. The fund has €572 million under management as of 31 May 2021. UBS AM in turn manages €954 billion on the same date. The UBS Equity European Opportunities Sustainable fund shows a return after costs Ytd 1, 3, 5 years of: 9.4, 30.3, 40.0 and 54.3 percent respectively.