RLAM’s head of sustainable investments Mike Fox discusses how the rise of millennials will impact his asset allocation
Being socially responsible and moral has been ingrained in Royal London Asset Management head of sustainable investments Mike Fox from an early age. “I am a child of Star Wars, where the good guys won in the end. I was brought up with this mentality that doing the right thing will lead to a better result.”
“I joined an industry where it doesn’t believe that. It believes if you do the right thing then you get a worse result. To some extent, I have spent the last 14 or 15 years working away to disprove that philosophical and moral oddity, and to bring sustainable investing to a broader universe and church of people.”
Starting his fund management career at the Co-operative Asset Management team that was eventually acquired by Royal London, Fox says his early jobs were the first threads in the journey towards becoming a sustainable investor. Having joined as an investment analyst, rising to be an assistant fund manager, then ultimately a fund manager at Royal London, social responsibility and governance has always been Fox’s specialism.
Being socially aware
Leading a team of six, including a mixture of corporate governance specialists, environment and social specialists and financial specialists, Fox says it is a fully integrated team that all sits and works together rather than being at opposite sides of the office or having research outsourced.
“Working in this section of finance, there is a lot of stuff that needs to be figured out. We need to think about climate change, taxation and energy transition, not just balance sheets.
“Being in London is helpful, but the biggest trick to managing these funds is to be very socially aware. We read constantly. I have been asked how we come up with ideas, but we are more about looking at the problems then finding the companies who have the solutions to them.”
Historically, environmental, social and governance investing has been met with scepticism in the industry, with many believing returns are not always great. However, strategies are not always so different to any other equity or fixed income fund. The suite of five funds under the sustainable investing umbrella at RLAM seeks to invest in companies that are well positioned to benefit from products and services which aim to help solve major environmental and social challenges and manage their ESG risks better than the average company.
Profit from sustainability
Research recently published by the team at RLAM found that, based on data from the past five years, investing sustainably can outperform the market. It created an index from the FTSE 100, based on 54 companies which passed RLAM’s sustainable investment criteria. This returned 10.2 per cent a year over five years, compared with 9.5 per cent for the FTSE 100. The sustainable index outperformed the regular FTSE in 36 of the 60 months.
General interest in ESG funds has shifted in recent years, and Fox believes this mainly has to do with the demographic changes in the economy. “I have spent most of my career talking about the baby boomers but the past two years it has been all about the millennials’ strategy. I think ‘millennial’ is at risk of being a term that is very overused but that being said, I think every generation has its value,” he says.
“When I came out of university, the big debate was nuclear power and weapons. Then 15 years ago was all about animal testing, and now it is about sustainability and understanding the provenance of products such as the environmental effect, low carbon and others. There is a certain characteristic to these demographics that is important.”
In 2015, millennials became the single biggest demographic in the US economy and will continue to be so for the next 25 years, so Fox says the accumulators of assets for the rest of his career will be very different to the people who were the accumulators of assets in the previous 30 years.
“What is fascinating for this industry is the decumulators of assets, the baby boomers, will be giving their assets to the millennials and they have a very different product requirement. You can see it in the supermarket, or in the valuation of companies like Netflix versus ITV, Spotify versus HMV.
“These demographic shifts have very powerful influences in a whole range of industries,” he adds. “It would be very strange if it didn’t start to impact asset management.”
Easy to set up a business
Given demographics play a large part of the fund’s strategy, the £406m Royal London Sustainable World Trust’s asset allocation may not come as a huge surprise to many. Its top two holdings are Amazon (4.1 per cent) and Microsoft (3.8 per cent), two of the largest technology companies in the world of which millennials are very familiar. But just how economically and environmentally sustainable is Amazon?
“Amazon has two businesses – cloud computing and online retail – both of which we think are environmentally friendly and socially positive. Amazon has become a platform for other businesses, so they can do their delivery, warehousing and marketing for you. It is economically beneficial. It is a lot easier these days to set up a business than it has ever been.
“For development, Amazon is very positive. But it has barely got started. If you think about cloud computing, it is a potential $2trn (£1.4trn) industry, and there is still less retail online than on high streets. We are still at the early stages of these transitions so from an investment prospect it is very interesting,” Fox adds.
“I have worked in fund management houses that run all market funds and I have witnessed funds that invest across all the market. My personal opinion is sustainable investing is the most interesting and most value-added manifestation of fund management and that is why I’m involved in it.”