Partner Content, Belinda Gan, ESG investment director at Capital Group, sponsor of the Funds to Watch spring event, discusses sustainable investing and their portfolio.
Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
Capital Group Sustainable Global Corporate Bond Fund (LUX) takes a global, multi-thematic approach to sustainable investing[1]. It invests across seven sustainable investment themes, identified by Capital Group, which are mapped to the United Nations Sustainable Development Goals (UN SDGs)[2].
The fund seeks to provide over the long term a high level of total return by investing primarily in investment grade corporate bonds issued by companies worldwide, which are believed to contribute positively to environmental and social objectives through their current or future products and/or services. It is a high-quality investment grade corporate bond fund with no active allocation to high yield bonds.
Investment process:
- Fundamental research and credit selection: Proprietary fundamental research – including integration of material ESG considerations – is at the core of the investment process and the starting point for all investment ideas. The fund's 17 sector specialist analysts put forward their highest conviction ideas to be assessed for eligibility[3].
- Eligibility assessment: Investment analysts collaborate with ESG analysts to form a proprietary view on eligibility. The opportunity set includes i) aligned companies: whose core business is currently majority-aligned to the UN SDGs2 and ii) transitioning companies: those transitioning their business to higher positive alignment over the long term, with material near- to medium-term change expected. The ESG Leadership Team and the portfolio manager team have joint responsibility for voting on company eligibility.
- Portfolio construction: The portfolio is built from the bottom up driven by investment analysts who put forward their highest conviction ideas from the eligible universe. The fund's Principal Investment Officer (PIO), Damir Bettini, who has 32 years' experience, is responsible for portfolio construction and selects what he considers to be the best fundamental, bottom-up ideas for the portfolio.
How are you currently positioning your portfolio?
- The fund takes a ‘core' fixed income approach, focussed on identifying idiosyncratic opportunities at a company and sector level.
- Of the seven sustainable investment themes within the portfolio, the largest exposure is to issuers within the financial inclusion, energy transition and education & information access themes[4].
- At sector level, the strategy has an above-index exposure to electric utilities, banking and tech[5].
- Notable issuers include Southern California Edison and Pacific Gas and Electric Co (both in the energy transition theme), as well as Banco Sabadell (financial inclusion theme).
- Early in 2023, relative to the reference index, the strategy had an above-index exposure in credit risk, before the exposure was dialled down to almost neutral as credit spreads tightened from the end of October 2023. Duration remains in-line with index and the portfolio does not have active curve overlays.
Can you identify a couple of key investment opportunities for your fund you are exploring at the moment in the portfolio? This could be at a stock, sector or thematic level.
- Sustainability trends can be powerful, multi-decade drivers of company earnings: To meet global sustainability goals by 2030, the UN estimates there is an annual financing gap of US$4.3 trillion[6]. It will take a wide range of innovative companies to bridge this gap, which presents a large and deep market of opportunity for issuers to develop innovative solutions.
- A global, multi-thematic approach: Investing across multiple sustainable investment themes can potentially help reduce volatility and target more attractive risk-adjusted returns compared to single theme funds. The fund's truly global investment team leverages the full depth and breadth of Capital Group's scale and resources for deep fundamental research.
- Investing in companies transitioning to higher positive alignment to the UN SDGs: Companies making efforts to increase positive alignment are often focused on areas that are currently very costly to address or where technology does not yet exist. These opportunities could be missed by strategies that only use screens to assess current alignment. The investment team believe that providing funding to 'transitioning' companies is critical to help achieve the significant ambitions of the UN SDGs and can unlock a wider opportunity set, with the potential for compelling long-term returns.
[1] Capital Group's sustainable investing products and capabilities are not available to US investors.
[2] Business alignment is assessed according to the UN SDGs but topics, communities and groups not specifically referenced in the UN SDG framework are also taken into consideration. Aligned companies have 50%+ business alignment. Capital Group typically use revenue to assess business alignment but will leverage other metrics if there are more sector relevant financial metrics for a company and its industry. Any references to the UN SDGs do not imply the endorsement by the UN of Capital Group, its products or services, or of its planned activities.
[3] Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.
[4] Based on the underlying strategy. Strategy inception: 28 February 2023. Fund launched: 27 February 2024.
[5] The reference index is Bloomberg Global Aggregate Corporate Total Return Index hedged to USD, which is provided for context and illustration only. The fund is an actively managed UCITS. It is not managed in reference to a benchmark.
[6] Source UN, as at October 2022
Belinda Gan is an ESG investment director at Capital Group
All data as of 31 December 2023 and attributed to Capital Group unless stated otherwise.
