The 8 stocks Martin Currie likes to play this irrepressible market theme
What is increasingly less up for debate is the amount of money being committed to sustainability. It’s a huge opportunity, which has developed quickly and will likely be a megatrend well into the future.
This is a view shared by Will Baylis, co-Portfolio Manager for the Martin Currie Sustainable Equity Fund. Baylis shares portfolio management duties with Naomi Bant.
“I think the underlying foundation for sustainability is now metres thick, whereas I think if you'd asked me this question even five years ago, it was probably inches thick”.
As he puts it, “this is not a ‘do no harm’ strategy”, rather it’s about finding ASX-listed companies that we assess as doing more good than harm – what we call net benefits - embracing the energy transition taking place, and trying to come up with solutions within the lower carbon world.
A little bit of background
The Martin Currie Sustainable Equity Strategy morphed from an old Martin Currie fund that was around for two decades prior. That product was “very vanilla”, and together with Franklin Templeton, the Martin Currie team decided that, “based on client interest and the fact that we as an investment team had been integrating ESG for well over a decade into our investment process… that we would actually build it into an actively managed Sustainable Equity fund”, said Baylis.
The birth of the fund
As noted above, Martin Currie Australia has been focusing on ESG for over a decade and has been making proprietary assessments on ESG, over that period as more and more research has shown that these characteristics can add value for investors.
Furthermore, focusing on these factors means avoiding investing in companies that Martin Currie Australia believes will be left behind.
For such an example, Baylis points to Whitehaven Coal (ASX: WHC) which only produces coal. As the world moves away from its coal dependency, companies providing solutions, such as renewable power generators like Meridian Energy (ASX: MEZ) and Contact Energy (ASX: CEN), may in Martin Currie Australia’s view, fare better over the longer term.
Whilst numerous funds focus on sustainability, one unique element of the Martin Currie Australia fund is the development of what it calls “carbon value at risk” – a way of marking down or marking up our assessments of the value of a company to the portfolio based on its carbon footprint.
“We think that is somewhat unique because we explicitly penalise the asset value of a company if it's got high emissions, or give a company a positive score if it is helping to reduce emissions”.
“Furthermore, we combine the carbon value at risk with a value style philosophy, which is embedded in our investment team. We believe that we are one of the few sustainability- AND value-focussed funds in the market”.
"We are value investors at heart. We expect a positive, not a negative return to fair value based on discounted free cash flows. The attraction of this fund is you're still getting a value philosophy, while most Sustainable labelled funds invest using a growth style.
It appears to be good timing as well. We’ve all seen what has happened to growth over the past few years and Baylis thinks the current trend of normalisation will continue.
“Value has started to come back to the fore as bond rates have normalised and as we see what I call normal economics, coming back to the fore, because I think we've had very abnormal economics in the last 10 years”.
As well as the carbon value at risk, Martin Currie has developed proprietary scoring across UN SDGs, modern slavery, governance, and a host of other factors relating to ESG.
“It's all our proprietary work and we believe it's going to add long term returns to investors”.
When asked why sustainability will be a sustainable trend, Baylis is practical.
“The starting point in my opinion has got to be with government and regulator. If you think about governments and regulators, they are never giving up on this. In fact, I would argue governments and regulators are only going to amplify all the issues around sustainability”.
“If you go and shop in Kmart and you buy garments there, they are much more explicit about where they source their garments from and they will give warranties and guarantees that they haven't been using slavery or underage workers to produce these garments. Consumers are caring a lot more about where their products come from”.
"And that's fascinating and it gives us a lot more confidence that all the work we've done internally will be well worth it and in our view this theme won't go away," he adds.
“BHP (ASX: BHP) have now been very public about scope three emissions, and that they are working very hard with steel companies to actually try and reduce their emissions, and even develop what they call long-term green steel, which means a reduced reliance on met-coal.
“That's a big trend and a really interesting trend”.
Baylis adds that BHP has set aside US$4 billion of shareholder capital that they're putting to work to focus on energy transition e.g. “green steel”, whilst “Fortescue (ASX: FMG) is even more extreme to the extent they're taking a lot of shareholder capital and putting it into Fortescue Future Industries”.
The second big trend Baylis identifies is the biodiversity trend. “A lot of companies now are thinking about what biodiversity policies they need and how they are going to measure biodiversity risk?”
Baylis points to Stockland (ASX: SGP) as a company that has thought about how it can enhance biodiversity when a new community needs to be built, particularly for first home buyers and immigrants.
The third trend is modern slavery. Martin Currie Australia has surveyed approximately 200 companies and collected a wealth of data on how they are addressing the risks of modern slavery. And whilst the term slavery may be a foreign concept, there are real-life examples at home.
“What's interesting in Australia is that there is a risk of modern slavery in contract labour in agriculture. Woolworths (ASX: WOW) and Coles (ASX: COL), which source fresh foods, have to be very mindful of who's picking the food”, says Baylis.
And finally, another trend we are all familiar with is getting plastic out of the supply chain and, in particular, supermarkets.
“Coles announced that they're now going to try and phase out the sale of plastic bags by 2030. When you and I are going to buy tomatoes, so often they’re wrapped in plastic. That's also got to be phased out”.
What are the opportunities?
Baylis was not shy in sharing some of the stocks he and his team like right now. Below is brief summary of the names he spoke to, with Worley his personal favourite - please note that what follows are all direct quotes from Baylis.
Worley (ASX: WOR)
The one that I really like at the moment, albeit it's had quite a strong share price run, is Worley. Worley is an engineering design company. It looks at solutions for largely oil and gas companies and how to reduce carbon emissions. The CEO of Worley is passionate about sustainability and about energy transformation.
Worley believes that by 2026, 70% of their work in progress will be what they call sustainable. Now they do embrace the notion of going from coal, to gas, to renewables. When they talk about sustainability by 2026-27, they include gas in the mix.
Worley give examples such as Occidental, which is a large US oil major, literally taking carbon out of the atmosphere, and then storing it via carbon sequestration (pumping it and storing it underground).
Worley's a global company, it's listed in Australia, and it's starting to become a really good performer for us.
Pilbara Minerals (ASX: PLS)
Pilbara Minerals by its namesake has a lithium mine in Western Australia in the Pilbara. Pilbara has been very successful in developing this lithium mine. They're supplying 9% of the global supply of lithium, which probably isn't well understood by people.
Pilbara is a company that is generating huge cash flow at the moment, with $2.7 billion of cash on their balance sheet. Zero debt. They're currently aiming to produce just under 500,000 tonnes of lithium spodumene. They think they can get to a million tonnes with two expansions. Pilbara also have a joint venture with POSCO where they're looking to produce lithium hydroxide, which is the next stage of lithium processing for a battery.
While we understand that rare earth mining has some negative impact, we see that facilitating lower carbon emissions through electrification is a net benefit to society. Having a lithium company in the portfolio, which has got no debt, lots of cash and is going through an expansion looks really attractive for us.
EBOS Group (ASX: EBO)
EBOS is a New Zealand company, which is a large pharmaceutical wholesaler. It supplies pharmacists largely in New Zealand and Australia, although it’s also made a life healthcare acquisition in Asia.
EBOS is all about trying to manage the cost of healthcare and we think is actually a really well-run company and does a lot of public good in terms of wholesale distribution of pharmaceutical goods.
Lynas (ASX: LYC)
Lynas is a rare earth company, one of the very few rare earth companies outside China. It has significant operations in Australia and it’s also very passionate about facilitating the electrification of motors and appliances.
ALS Limited (ASX: ALQ)
ALS tests commodities for mining companies and a lot of its testing at the moment is in metals of the future, whether that be nickel or copper. It does a lot of core testing. It also does life science testing whereby it tests food products.
Medibank (ASX: MPL)
We own Medibank. A lot of people say, "But hang on, Medibank's had this big cyber scam. How could you own that? How can that be sustainable?"
Well, we rated the management of highest quality well before this incident. And we think its management is still a quality one. In other words, management and the board have managed this cyber event really, really well.
Medibank doesn't just insure our health, it's involved in health services. It's trying to reduce the amount of time you and I spend in hospital. It's trying to maximise the time, if we had an accident, we rehab at home. It's trying to lower healthcare costs.
Fisher & Paykel Healthcare (ASX: FPH)
They are global in terms of supplying masks and hardware for respiratory illness. And we've had meetings with surgeons in the US where they've described how good and how versatile and how flexible the Fisher & Paykel product is.
IDP Education (ASX: IEL)
IDP Education introduces students to universities, not just here, but also in Canada and other jurisdictions. It also provides training in English language. It also provides services for students to find accommodation. And it's a major player in immigration, particularly in this country, but also in countries like Canada. IDP Education has offices in approximately 30 countries.
The role of the fund and key facts
Baylis states the role of the fund “is very much targeted at people who are in the accumulation stage of their life rather than the retiring age of their life".
"The role of the Fund is that we aim to outperform the index. It's benchmarked against the S&P/ASX 200 but we are saying to investors that if you measure for material ESG risks, such as governance, carbon value at risk, biodiversity risks, and modern slavery risks and balance for the net benefits, we think that's going to add to your long-term expected return on stocks in the fund, and by definition, the portfolio”.
The fund typically holds 35-40 positions (36 at the time of discussion with Baylis) and has risk parameters that allow it to be plus or minus 6% index weight in any one stock, and plus or minus 11% in any one sector.
The fund benefits from not only Baylis and co-portfolio manager, Naomi Bant's wealth of experience, but the full might of the Martin Currie Australia team.
"The insights for the fund come from our team of analysts. We're a 17-member team. Within the team we've got ten fundamental analysts and two quants who've in total had on average 22 years industry experience", says Baylis.
experience has seen the fund rated by Zenith and Lonsec, ahead of the typical
three-year performance hurdle. The fund also has a five-star Morningstar
An active pathway to a Sustainable future
The Martin Currie Sustainable Equity Fund (the Fund) is designed to serve investors who are seeking to maximise returns over the longer term. The Fund invests in companies that have been assessed using MCA’s proprietary “Active Ownership” approach and ratings framework to have more favourable assessments for “Sustainability Risk”, “Net Benefits” and “Sustainability Pathway” and “Shadow Carbon Cost”.
Welcome to Livewire, Australia’s most trusted source of investment insights and analysis.
To continue reading this wire and get unlimited access to Livewire, join for free now and become a more informed and confident investor.
Read more from Undiscovered Funds
An exclusive series dedicated to unearthing some of Australia's up-and-coming funds.
- Exploiting inefficiencies in the energy and resources sectors
- Get 8% pa net yield from rated bank bonds that beats stocks and property
- Finding 1-in-100 mining stocks and why now is the time to be hunting for them
- Why Coolabah Capital's Christopher Joye thinks the "mother of all default cycles" has started
16 stocks mentioned
1 fund mentioned
1 contributor mentioned
My passion is equity research, portfolio construction, and investment education. There are some powerful processes that can help all investors identify great opportunities and outperform the market, and I want to bring them to life and share them...
Please sign in to comment on this wire.