Three reasons Royal London’s £10bn of sustainable funds are topping the tables in 2021

The £10bn of sustainable investment funds run by Mike Fox and his team are in top quartile of their respective sectors over the year to date, which the manager puts down to three main reasons.

FE fundinfo Alpha Manager Fox heads up the £3.8bn Royal London Sustainable Diversified, £3.2bn Royal London Sustainable World and £3.2bn Royal London Sustainable Leaders funds with co-managers George Crowdy and Sebastien Beguelin.

All three of these funds are in the first decile of their sector over one, three, five and 10 years. The strong performance in 2021 means that Royal London Sustainable World, which resides in the IA Mixed Investment 40-85% Shares looks to be on track for its 11th straight year in the top quartile.

Performance of Royal London Sustainable World vs sector since start of 2011

Source: FE Analytics

However, the impact of the Covid-19 pandemic and its aftermath means it has not all been plain sailing for the funds. Sticking with Royal London Sustainable World as an example, it has been in the top quartile for 12 of the 21 months since the start of the pandemic but in the bottom quartile for seven of them.

“This has undoubtedly been one of the more volatile times in the history of our sustainable funds,” Fox said.

“Tracing the timeline back to March last year, perhaps only the financial crisis can rival it in terms of the scale and speed of market moves.

“Volatility is the friend of long-term investors, giving them the opportunity to buy more of what they like for less. However, living through it can be a challenge.”

At the start of 2021, some were predicting that funds with a bias to the growth style of investing could be in for a tough time as the world opened up from Covid lockdowns, but Fox gave three reasons why his funds are still outperforming.

The first reason highlighted by the manager was the failure of value investing to take market leadership from the growth style, despite many commentators expecting the economic reopening and inflationary backdrop to be supportive of value.

Over 2021 so far, the MSCI World Value index has made a 19.8% total return, falling behind the 20.2% made by its growth counterpart. The growth index has beaten value stocks in nine of the past 10 full calendar years, according to FE Analytics.

Performance of value and growth indices in 2021

Source: FE Analytics

Fox noted that since the start of 2020, the MSCI World Value index has endured one of its worst periods in recent history with a return of 14.7% versus 55.9% for growth. While there are several reasons for this, he drew attention to one in particular.

“The long-term prospects for those companies and industries badged as growth (technology, healthcare, engineering, chemistry) have accelerated due to the pandemic, and conversely those companies and industries badged as value (leisure, oil, retail etc) have seen their prospects worsen,” he explained.

“Value versus growth is simply a manifestation of the underlying trends in the global economy, not purely a question of reversion to the mean or bond yields.”

Another factor behind the strong performance of the Royal London sustainable funds is their high allocation to technology and the boom in this part of the market.

“The technology sector is a beneficiary of most major trends, such as digitisation and inflation, that we see around us. The pandemic is taking the share of corporate expenditure on technology to new highs: we are all technology companies now,” Fox said.

“Most of the large technology companies trade on higher valuations than they did pre the pandemic, as their earnings have increased, and their long-term prospects have strengthened. Sure, there are always signs of froth in some technology investments, but companies such as Microsoft are still likely to be good investments in the future.”

Finally, the Alpha Manager argued that stock selection has been “key” in 2021. Although an increasing amount of investor cash has flown into index trackers in recent years, Fox argued that “there is a place for both” in portfolios and this year illustrates why.

“What we witness currently is unprecedented levels of disruption at the individual company level, and significant risks/opportunities for those on the wrong/right side of them,” he said.

“This is not an environment conducive to broad exposure across industries, but one which requires defined choices to be made in how to invest. This is, in my view, how it should be. The difference of late is that the benefit of getting these choices correct have been higher than in the past, making the rewards greater for successful active managers.”