Case study of Aberdeen Standard Focused Sustainable Australian Equity Fund
Aberdeen Standard Investments (ASI) recently renamed and restructured its Aberdeen Standard Australian Equities Fund into the Aberdeen Standard Focused Sustainable Australian Equity Fund – a concentrated all-cap fund that invests in 20 to 35 ASX-listed companies identified by ASI as sustainable leaders and improvers in managing ESG risks and opportunities. ASI managing director Australia, Brett Jollie, and head of Australian equities, Michelle Lopez, discussed the changes with Industry Moves and why it was just ‘the right thing to do’.
What was behind your decision to launch the fund?
Brett Jollie: It was fairly straightforward, it was a client-driven decision. Our investors are seeking to align their financial futures with their personal values.
We believe ESG factors are financially material and lead to better risk return outcomes for investors. Companies incorporating ESG are better long-term custodians of our clients’ capital and it’s very important to us. By putting ESG factors at the heart of our investment process we believe we can generate better outcomes for our clients.
Michelle Lopez: First and foremost, it was the client demand but we’ve actually seen a massive shift in the last 12 months, and I’m not sure if this was a structural change that COVID-19 accelerated (a terminology we’re hearing a lot of these days).
I think institutional is well ahead, nowhere near ahead as what Europe and the US is, but still institutional is ahead of wholesale but the conversations that we’ve been having on the wholesale front have really shifted in the last 12 months so that client demand is a lot more prominent today than what it was 12 months ago.
Why did you decide to change your existing fund to this fund as opposed to keeping your existing fund and launching a new SRI fund?
Brett: It’s an incredibly competitive universe the Australian equity universe. We felt that this provided us with the best opportunity to take to market immediately a strategy which would benefit our clients.
What makes this fund different to other ESG and SRI Australian equity funds?
Michelle: There are three key factors of differentiation.
- The first filter is an extension of what we do, which is the identification of sustainable leaders and improvers and that’s the fundamental bottom up analysis that aligns with a number of our other funds as well. What is different for this fund is that there is a minimum threshold. So, we assign ESG quality scores of one to five…and for this fund there is a threshold of three from an ESG quality score.
- The second filter, which is the highly differentiated filter, is we’ve got a proprietary ESG house score. So, this house score is developed by our central ESG team…and it really identifies the companies with potentially high or poorly managed ESG risks. It uses more than 100 internal and external data points to provide an assessment of the company’s ESG health. That score gauges both the operational and the governance factors and it really helps us assess the financially material ESG issues that can affect an investment’s value. So, this fund excludes companies with the highest ESG risks that are identified by this score.
- The third filter is really around binary exclusions and this is more common practice within the industry. As you would expect we can’t own fossil fuel companies, we can’t own gaming companies.
Is this going to be your flagship Australian equity offering now?
Michelle: It will be one of. So, we still have the small cap portfolio which is a flagship for us as well and the ex 20 which is a mid-cap so this will be the third.
In the transition did you have to change many of the holdings?
Michelle: We did. As you can imagine with a large cap fund, we owned the likes of BHP, Rio Tinto, Woodside, Aristocrat. Those names had to be sold out and then, because it is now an all caps, we found the best within small caps and mid-caps and put those into this portfolio as well. And when I say the best, it’s taking that SRI lens [to find] which are the leaders, which are the ones we identified as the improvers, because again that’s where we feel that companies can get a rerate.
What was the feedback you got from investors in the old fund transitioning to the new fund?
Brett: We’ve had quite positive feedback. Because there hasn’t been a huge change, the benchmark is the same, the universe has broadened, it’s a larger universe so it adds to the alpha potential and it aligns with most people’s values.
Michelle: I think there is now an understanding that this doesn’t come at the expense of returns. In fact, you’re able to deliver a better risk return for clients, whereas previously there was a bit of a trade-off conversation being had. I find with my conversations with clients that that’s no longer the case. And for me that’s a clear indication that the tide has turned on this.
Brett: We firmly believe that our engagement and active management unlocks the alpha potential within high quality companies that are well positioned to lead and benefit from the transition to a sustainable world. So, we can provide ESG beta as well as genuine ESG alpha.
And we also believe it’s the right thing to do while achieving our clients’ long term financial gaols.