3D five star fund Triodos Sustainable Pioneer: the 3D Investing perspective

During Good Money Week Blue & Green Tomorrow launched 3D Investing’s 5-Star rating system which allows advisers and investors to pick out the best of the best from the socially responsible investment universe. To find out more read the B&GT Guide to Sustainable Investment or visit 3Dinvesting.com. Today we take a look at the Triodos Sustainable Pioneer Fund.

Triodos is known as a real pioneer in sustainable investing, chiefly through its banking operations. This fund invests in small and medium sized companies that fall into one of four themes – sustainable energy, medical technology, environmental technology and corporate social responsibility pioneers. The quality of the social research, transparency of communications and the ethos of the fund are second to none.

Although the fund is a relatively recent launch in the UK, it has been available in the Netherlands since 2007. Since launch in the UK, performance relative to its benchmark has been average, although over the longer term, the original share class has underperformed the composite index. We have a very high level of confidence in Triodos and the fund provides exposure to smaller/mid cap global companies in four key areas. The quality of the research, level of transparency and thematic approach, combined with a decent fund management team make this a five star fund.

Investment Strategy & Fund Composition

This is a smaller companies fund, wholly focused on four themes. The first of these is healthy people which includes companies offering solutions for health care issues, such as medical technology, drugs aimed at curing diseases in developing countries, clean drinking water and innovative health care. Other relevant activities include medicines based on natural ingredients and organic food production.

The clean planet theme embraces environmental technologies aimed at combating pollution and cleaning up the earth including companies that specialize in recording environmental pollution and energy consumption. The climate protection theme covers clean energy, energy efficiency and LED lighting, whilst the CSR pioneer theme largely relates to packaging companies (that use a high recycled content) and organic food retailers.

Two thirds of the fund is invested in North America with the majority of the remainder in Europe.

Ethical Approach & Suitability

Minimum ethical standards are applied to the fund, and in particular, coal, nuclear energy, unconventional gas and oil, and components of weapons are avoided. However, the wholesale focus on the four social and environmental themes (see below) is what distinguishes the fund. Each holding has to derive at least 50% of its revenues from one of the prescribed activities. There are no contentious holdings and the fund is likely to prove ethically desirable for the vast majority of investors.

Sustainability analyses are also used to enter into a dialogue with companies. In order to stimulate companies to improve their sustainability performance, Triodos Sustainability Research uses this dialogue to raise awareness, convince others and to motivate change.

The fund has no contentious holdings.

SRI Capability & Management

Triodos is known for its ethical banking operations in Western Europe but it has been developing its investment management offering to include listed equity investments since the early 1990s. The fund is offered by Triodos Bank direct to its retail customers and is advised by Triodos Investment Management, a wholly owned subsidiary of the bank that is now responsible for €2.6 billion in assets under management. It is one of the leading exponents of sustainable, thematic investing, with a wealth of expertise and resources at its command. Triodos constructs the investment universe from which its chosen fund manager selects stocks and is particularly rigorous in assessing companies and understanding the concerns of investors. The level of transparency is exceptionally high with all stocks being profiled, and not only those held, but also each potential investment in the investment universe. Furthermore, the engagement activity is fully documented by way of engagement and proxy voting reports and these are not just confined to corporate governance, but look at other wide ranging ethical issues.

Social Impact

All of the fund is invested in companies that have a direct social or environmental benefit giving it the highest rating. All of the underlying investments represent the purchase of shares in quoted companies and capital is not, by and large, directly enabling new social or environmental initiatives. However, the fund does finance some smaller innovative companies and capital invested does continue to finance socially beneficial companies. Key social impacts are in line with the themes of the fund, that is, healthier people, climate protection and a cleaner planet.

Risk Management

The fund is well diversified with more than 60 holdings. The average market capitalisation is lower than comparable funds, which would generally indicate a higher level of risk, and this is borne out by a level of volatility that is a little higher than other global thematic funds. Investments are held in local currencies and this risk is unhedged.

Transparency

Triodos is exemplary in the level of transparency and communication of its engagement and investment strategies. The reasoning for inclusion of each holding is made publicly available, as are the results of any sustainability analyses and dialogue with companies. Triodos actively seeks to improve the sustainability performance of its holdings through active dialogue and it benchmarks company performance on a range of sustainability issues to identify areas of strength and weakness. Triodos then aims to convince investee companies of the need for change and will work with them to achieve this.

Financial Performance & Management

The fund is managed by Delta Lloyd, a boutique fund manager in the Netherlands. Delta Lloyd adopts a distinctive style, generally investing in 25-35 companies in which it holds substantial positions and has a close relationship.
The objective is to invest in shares which the manager considers to be worth 30 – 50% more than the current market capitalisation, giving them a valuation safety margin. In the case of the Triodos Fund, more stocks are held to reduce stock specific risk. The fund is measured against a composite benchmark comprising clean energy, environmental, healthcare and small company indices. Sterling share classes were only established in the UK in April 2013, but the fund has a track record going back to 2007, since when the fund has performed largely in line with the composite benchmark.

In accordance with the Financial Services and Markets Act 2000, Blue and Green Communications Limited does not provide regulated investment services of any kind, and is not authorised to do so. Nothing in this magazine and all parts herein constitutes or should be deemed to constitute advice, recommendation, invitation or inducement to buy, sell, subscribe for or underwrite any investment of any kind. Any specific investment-related queries or concerns should be directed to a fully qualified financial adviser.