Ninety One's newly launched Global Environment Fund enjoyed a stellar 2019, and has seen a boost from the EU's green stimulus. Its co-manager Deirdre Cooper explains how a concentrated approach to the low-carbon transition is delivering results

Environmental Finance: Please introduce the fund and the approach it takes.

Deirdre Cooper: We believe that there is a huge amount of climate risk in global equities, that risk is very difficult to measure accurately and, as a corollary, it's also difficult to divest from. A good way to hedge climate risk is to have an allocation to a group of companies that will outperform in a faster decarbonisation – to companies that are exposed to the most exciting structural growth trend in a market where long-term growth is difficult to find.

So we screen global equities to find companies whose products and services avoid carbon, and undertake extensive fundamental analysis. My co-manager Graeme Baker and I spend a lot of time reading CDP reports, which can be 100 or 120 pages long, and which are not widely read but which can contain vital insights; that helps us to understand those companies better, build better financial models and, ultimately, make better investment decisions.

EF: The fund currently holds just 24 stocks. Why have you decided to pursue such concentrated exposure?

DC: We believe that to invest in a disruptive structural growth area like this you need to be concentrated to generate both alpha and impact. There are likely to be a few winning companies, with strong competitive advantages, that will perform and deliver the lion's share of the value creation.

It's also important from the perspective of impact and engagement. We carry out detailed impact reporting – looking not only at carbon emissions over Scopes 1, 2 and 3, but also reporting on avoided carbon – Scope 4, if you like. We also engage with our companies very closely, meeting them four or five times a year. That is not possible to do if you hold a high turnover, very diverse portfolio.

From our clients' perspective, the strategy blends very well with their existing global equities allocation: we tend to have very little overlap, even with other environmental funds, and less than 1% overlap with the benchmark, which means that we deliver quite a different alpha stream to our clients, which they value.

EF: What sort of companies are you investing in?

DC: There's a common misperception that if you're focused on companies that are going to solve climate change, that's a very narrow universe. However, because our work goes all the way through the value chain, right back to raw materials, we have an incredibly diverse, global universe, and we invest in companies in about 60% of sectors.

One is Nextera Energy, a $100 billion-market cap firm which owns the cleanest utility in the US and which is the largest owner of wind and solar in North America. We see huge structural growth, it's earnings are completely non-GDP cyclical, and it's highly defensive – it has bond-like characteristics.

Another example is Wuxi Lead Intelligence, a market leader in capital equipment for manufacturing batteries for electric vehicles. It's a really interesting example of a Chinese company that is winning not just on costs, but on quality – it can win against Korean and Japanese competitors – its generates a return on equity in the high 20s/low 30s and is delivering 20% annual revenue growth.

Those two companies have huge amounts of carbon avoided but they are very different in terms of their characteristics. This gives Graeme and I a very diverse universe from which to build a very diverse portfolio.

EF: The fund performed strongly in 2019 – how is it positioned for the Covid pandemic and recovery?

DC: The fund returned 42% last year, compared with 27% for the benchmark, and we've been very encouraged by our 2020 performance – we're currently more than 400 basis points ahead of the benchmark.

The first thing we did during the crisis was to run draconian stress tests on all the companies in the portfolio, particularly on the credit and liquidity side. We then reallocated selectively to companies where we knew that, despite likely awful second and third quarter results, offered 50 to 100% upside in our price targets over the longer term.

The fund did respond very directly to some of the positive regulatory news that we've seen, particularly from the EU stimulus package. The fund is doing what it's designed to do: it's supposed to outperform when you see faster decarbonisation. Looking forward, we have a new five-year plan coming in China, where the tea-leaves are looking positive, and a Democratic sweep in the US election could be extraordinarily positive for the decarbonisation universe.

EF: What about the company name, Ninety One – where does that come from?

DC: Ninety One is the former Investec Asset Management, which was demerged from Investec in March. Our name refers to the year the original company was formed. That year saw enormous change – the dismantling of apartheid in South Africa, where the company is from, the end of Soviet Communism, the emergence of the Internet. The company was set up to invest in change and investing in sustainability is merely the latest expression of that.