Mitigating long-term risks and exposure to long-term opportunity

By focusing on the three biggest long-term challenges of our times, the AXA ACT People & Planet Fund provides vital diversification for investors in global equity. Portfolio Manager Anne Tolmunen explains why companies delivering innovative solutions to large scale societal problems should be a part of every investment portfolio.

The world is changing, and investors need to face up to the challenges of the future. With our People & Planet Equity strategy, we have put together a different way of building a global equity portfolio with a clear-eyed focus on the risks and opportunities that change will bring.

The challenges are well understood – climate change, biodiversity protection and improving people’s lives – but the potential impacts, both in terms of opportunity and risk, are often not fully comprehended. We believe that markets haven’t fully priced any of this in – neither the extent of the risks or the scale of the opportunity.

Our People & Planet Equity strategy has been created to address exactly this gap. We believe it could help mitigate the risks and seize the opportunities presented by growing global challenges, while directing capital towards innovative ideas that have the potential to create material positive benefits.

Global equities seen from a new perspective

AXA ACT People & Planet Equity Fund is an all-cap, balanced global equity fund, with a portfolio well diversified across sectors, regions and market capitalisation. It aims to be resilient across the cycle by holding a broad set of companies, ranging from cash-generative defensive moats to smaller, faster growing businesses with disruptive business models.

In common with many global strategies, it’s benchmarked against the MSCI AC World Index, but that’s where the commonality ends. It has very few holdings in common with the index, giving it an active share of 94%.

In a world where many global equity funds are closet trackers, with high exposure to the large-cap tech funds that dominate the indices, this makes People & Planet an excellent diversifier against many of the upcoming secular risks – stranded assets, penalties or fines from bad practice, reputational damage, risk to business models or moat from cleaner, fairer or more innovative new models.

Not least among the risks for the finance industry as a whole is the increasing pressure from society at large to play a part in addressing the challenges of the modern world. This is coming from the ground up, from consumers demanding more of the companies looking after their money and from voters looking towards government to put regulation in place to drive change.

Asset managers and institutions need to be able to demonstrate to consumers and regulators that they are meeting these expectations. That’s why we have made visibility and accountability to clients a vital part of People & Planet Equity, through reporting our voting and engagement with companies, company impact metrics – for example, tons of water saved, number of microloans disbursed – and granular ESG disclosures.

We will be improving our reporting to stay ahead of reporting standards – such as the Taskforce on Nature-related Financial Disclosures – as they come into force. This will make sure that we are not just meeting but anticipating regulatory requirements and can demonstrate to end-investors that we share – and are acting on – their concerns.

Asset allocation driven by impact themes could help mitigate against social and climate related risks

With risk comes opportunity

As well as underpriced risks, we also see opportunities that are not fully grasped in the broader market. There is a huge secular investment opportunity ahead of us thanks to our focus on the three most important long-term challenges of our times: climate change, biodiversity preservation and essential social needs. Beneath these broad headings we have further identified key elements where we think investment could be most effective.

The companies we are looking for offer more than just enhanced ESG characteristics. We are looking for companies that provide a net positive contribution to our chosen themes.

We believe that the demand for solutions will grow as the scale of these challenges rises, and that managing them will require continued research and innovation. These are existential threats: a failure to meet them head on could have severe consequences for humanity, and so demand will remain strong.

Similarly, pressure from the regulators and consumers for the managers of assets to help address these problems is driving demand for companies with great products and services. This demand will have a long-term impact on share prices, driving growth.

Do good while earning returns

Our approach is distinct from many of our peers. In terms of climate change, for example, some strategies reduce their portfolio carbon footprint by adjusting sector allocation away from carbon intensive industries to less carbon intensive industries – typically technology - or invest in companies that simply spend to buy carbon offsets rather than change damaging practice.

But this approach won’t create change in the real economy; it’s merely re-allocating resources without spurring real-world change.

Instead, we aim to provide capital to change agents. We have designed our strategy to capture growing and innovative companies, whose impact should increase with time. This means doing a lot of investigative work prior to investing to establish the durability and sustainability of a company’s model.

It also means being patient. Many of the companies we invest in will be at the early stages of bringing their ideas to market, and so the real rewards – both financial and in terms of impact – will come later. We think it’s important to support innovation, and so we tend to invest for the long-term, three years or more, on average. It also means there is the potential to enhance returns when companies reach scale – in our view, patience can yield very real rewards.

A patient approach also means that short-term performance doesn’t totally reflect the potential for returns we see in our current portfolio. As the challenges and opportunities develop, then we believe investors will see the benefits of this patient approach, not only in returns but also in positive impact for the world at large.