That said, the strategy exists to identify and invest in businesses that are addressing – or can be persuaded to address – any number of the numerous sustainability challenges facing the world. While our approach is generally positive, we do begin with acts of omission. Our first step in narrowing the investment universe is to avoid companies with damaging or unsustainable business practices such as tobacco, alcohol and weapons manufacturers, as well as avoiding businesses that:
- Explore for, process, refine, and/or distribute coal, oil and/or gas
- Produce and/or transmit electricity derived from fossil fuels
- Transmit natural gas
Once we’re past exclusions, we operate on a philosophy of invest and improve. Companies that make a positive contribution to society and the environment, and do so while maintaining a strong financial position, are chosen through a highly robust, disciplined investment process. We work hand-in-hand with BMO’s Responsible Investing team, looking for competitive advantages, long-term growth drivers, sustainability characteristics and a proven management team that’s capable of execution. From a field of approximately 5,000 equities, we create a watch list of 80 to 100, and invest only in a carefully risk-weighted balance of 30 to 50 names.
Part of our philosophy is to hold these investments for the long term, trusting their compound earnings growth to provide a more attractive return profile over time. Even through extreme volatility, we stay disciplined. Whilst the recent market weakness has created opportunities that we have taken to initiate positions in high quality businesses at more attractive valuations, we do so in a discipline way, and expect our portfolio turnover to remain in the 20-30% per year range.
In recent months, the market has rebalanced toward areas in which our strategy was already overweight, such as health care. Many of our securities have benefitted from this rotation, though it’s important to note that our rationale goes beyond the short-term coronavirus bump. When we look at health care, we see a sector supported by secular tailwinds such as aging demographics, obesity and insufficient public sector finances. We see an opportunity to invest in those trends and, most of all, we see room for the private sector to bring innovation within the space.
Consider Thermo Fisher Scientific, a manufacturer of medical instrumentation for laboratories across North America, which began working on diagnostic tools to reduce coronavirus testing times. Or CSL, another business in the portfolio, that’s collecting blood plasma samples from recovered COVID-19 patients to help develop treatments, or perhaps a vaccine. Even one of our industrial gas holdings, Linde, is finding ways to help, by continuing to provide oxygen used by hospitals for treating infected patients. Across the strategy, we’ve seen positive results from an overweight exposure to health care and high conviction stock picking.