Shares of companies that are good for the world often manage to strengthen their competitive position at the expense of unsustainable companies. Their growth potential is often still underestimated by the market, according to Hendrik-Jan Boer, senior portfolio manager of Neuberger Berman’s Global Sustainable Equity strategy.
Boer and his team joined from NN IP at the end of last year and since then have managed a global and European sustainable equity strategy in managed accounts. Two investment funds are also expected to be launched in March.
‘What our team did for NN IP will be continued but on a bigger platform and with more resources,’ says Boer. ‘We are aiming for a concentrated portfolio of a select number of future winners for which we do not want to pay too much in the end.’
The team does not try to find the most attractive companies in a specific sector on the basis of a traditional sector classification. ‘With such an approach, you do not take sufficient account of the economic shifts that are visible in all markets,’ Boer says. ‘You can select the best oil company, but it still has to deal with disruption. The competition is now coming more from wind and solar energy.’
Fourth industrial revolution
Consumer sectors have also been disrupted, he notes, by the rise of Amazon and e-commerce. ‘And players like Adyen, Mastercard and Visa are turning the financial sector upside down. In short, you see enormous disruption and shifts everywhere, not only because of technological developments but also because of changing consumer behaviour. It’s not for nothing that people talk about the fourth industrial revolution.’
Boer is looking for companies that have shown that they can deal well with this kind of fundamental change. ‘They should already be making a fantastic return thanks to strong market positions and specific characteristics that are very difficult to copy. Only companies that operate sustainably can maintain this position over time. This means that they do not harm society and are preferably even good for the world.’ According to Boer, these companies have the wind in their sails in the long term, while non-sustainable companies face more setbacks due to legislation and increasing sustainable consumer behaviour.
The team then looks at the strength of the trends and the extent to which prospects have been factored into the market. ‘Our experience is that the market seriously underestimates the potential returns of these sustainable winners in the long term. And we make good use of this,’ says Boer. In its sustainability screening, the team excludes companies in advance. These include a large part of the fossil fuel industry, all weapon producers and the gambling industry.
‘Even more important is that we stay away from companies that are involved in structural controversies and that do not show the willingness to solve this. This has made a significant contribution to the outperformance of our strategy over the years of around 2 %-points per year compared to the MSCI World since the start in 2004. In our experience, organisations that handle sustainability well actually strengthen their competitive position. We expect to continue the positive results of our approach in the coming years.’
Tesla bubble
From the global universe of over 12,500 stocks, only a group of 350 stocks remains after the top-down and bottom-up analysis. The best 40-60 ‘high conviction’ stocks are included in the portfolio. At the moment, the portfolio contains only 40 names, including Microsoft, Netflix, Visa, Bakkafrost, Adyen, Moody’s and SolarEdge.
‘Many of these companies are just at the beginning of new market developments and are growing very fast,’ says Boer. The average revenue growth of the holdings in the portfolio in recent years, for example, has been more than three times the average growth of the global market.
According to Boer, such stocks are quality companies. Not so much by traditional yardsticks such as a high return on invested capital and high profit margins, but based on their performance and ambitions in the field of sustainability and the durability of their business model.
A lot of money is flowing into sustainable ETFs and investment funds too. But Boer is not afraid that this will push up the prices of all sustainable companies and thus depress future returns. He does warn against excesses though, such as those involving Tesla.
‘Tesla is simply a car manufacturer that has to make large capital investments’, notes Boer. ‘If you correct for the company’s creative accounting methods, the returns on invested capital are not good. Perhaps in a positive scenario they could at some point get to the level of return of a quality player in this industry - such as BMW - but it remains a capital-intensive and highly competitive industry with relatively low returns. So why should investors pay so much for it? Tesla really will not become the new Apple. Competition is increasing rapidly and eventually the electric car market will become a commodity.’