Strength in screening and selection

The arrival of COVID-19 brought about tremendous economic impact, uncertainty in outlook, and massive market volatility. Yet Triodos Pioneer Impact Fund has outperformed its benchmark by some 7% in the first half of 2020.  Fund Manager Dirk Hoozemans explains that the strong performance is due to a carefully screened and selected portfolio of sustainable companies, and that what you do invest in matters just as much as what you do not invest in.

“In general, we select companies with sustainable business models, solid management teams and strong balance sheets; and these have proven to be more resilient, less risky and less volatile during the market downturn. When the pandemic hit in March, there was an abrupt halt to economic activity due to immediate lockdowns, which coincided with a crash in oil prices. As unemployment rose and consumption ground to a halt, governments had to step in, announcing massive monetary and fiscal stimulus plans. Central Bank bond buying programs put downward pressure on interest rates, which was reflected in poor performance of banks and insurers stocks; and as oil prices collapsed, energy companies suffered too. Since Triodos Pioneer Impact Fund doesn’t invest in traditional hydrocarbons there was no exposure to oil prices, and as there are also very few financials in the portfolio, the fund was not affected by weak performance from banks and insurance companies.”

Hoozemans himself is not a benchmark thinker: “Yes, it’s market practice to compare funds with benchmarks, but I don’t wake up each day to take the benchmark as my starting point for building a portfolio. That would mean automatically anchoring with the winners of the past rather than those of the future. All the team’s portfolios are built completely benchmark agnostic.”

Markets strong, but economy struggling

The market has recovered quickly, but it also seems to have decoupled from reality, and according to Hoozemans, risks are mounting.

“Continued strong performance in the S&P this year is led by just a handful of stocks, while the US stock market was already expensively valued compared with other markets. On a geopolitical level, there is massive uncertainty in international relationships and trade, for instance between the US and China and in relation to the timing and impact of Brexit, plus a US election in November. We are not expecting high unemployment and economic weakness to abate anytime soon either. The economy is fragile and GDP growth expectations might prove to be too optimistic. We don’t think the economy will see the V-shaped snap back economists are hoping for, but rather a more protracted recovery trajectory,” he says.

Building greener economies

Despite meagre economic developments, it’s not all doom and gloom according to Hoozemans: “As economies and societies start to emerge from lockdown, governments are focusing on how to build greener, more sustainable economies. There is also clear societal awareness that we need to look at the world differently, and that we need to finance the world differently. Many companies have proven to be good corporate citizens during the pandemic as well, putting worker safety and continuity of income before profits, which is something we have not seen in previous times of crisis.”

He also says that sustainably motivated investors like Triodos Investment Management are well-positioned to play their part in the economic reset: “Sustainable investment funds  are seeing  inflows outpace those of traditional funds, and stocks of more sustainable companies have begun to command a premium in equity markets. Companies with good ideas and those that behave responsibly are being rewarded.”

When asked how Triodos Pioneer Impact Fund will contribute to building a greener economy the fund manager says: “We will continue to invest in green and sustainable businesses and industries. A lot of our investment is focused on alternative energy, alternative methods of transportation and on sustainable food and agriculture value chains, as biodiversity and food quality have proven to be quite important during the pandemic. The fund continues to focus on strong corporate governance, also in diversity and inequality issues, which have recently gotten their fair share of attention too. It takes time to create the change we need to see, but if we want to emerge a more sustainable economy, we need to rethink and act now. It’s time to walk the talk.”