Eyeing Sustainable Investments Amidst Market Turbulence

While Mirova enjoys strong long-term results, market volatility thus far in 2022 has of course presented performance challenges. Investors have been confronted with lagging recovery from Covid in certain sectors, rising inflation, sharply spiking energy prices in select regions and its impact on consumption and the economy – particularly in European exposure to the financial sector.

European exposure overall has been harder hit by greater impact on energy prices and proximity to Putin’s invasion of Ukraine. Quality and growth stocks, two biases we have in our portfolios, have underperformed the broader market in this period as well. Economic uncertainty has led to volatile markets, and we expect this volatility could continue until we have a higher level of visibility around the persistency of inflation, monetary policy, and the resulting impact on global economies.

Yes. While markets may be efficient in the long run, they can be fairly inefficient in the short term, presenting opportunities for patient long-term investors. Volatility can create opportunities to leverage disconnections that may emerge between short-term price and long-term value.

Portfolio positions may be initiated or increased for attractive company opportunities that promote sustainability – including electric vehicles and autonomous driving – provided valuations and qualitative factors like culture and management strength remain attractive. Other possible investments may include financial sector companies positively exposed to the demographic transition through aging populations’ needs for savings via insurance and asset management products.

Firms that actively promote sustainability issues also include those expanding consumer financial access by fully digitizing their product lines. We would also look for qualities like strong customer relations and a defensible franchise.

Quality companies that exhibit forethought in their sustainability efforts are compelling opportunities. This includes car manufacturers that are investing in electric vehicles and committing significant investment to the retooling of factories or stepping up software efforts to support their business development visions. We also support digitalization of our economy/society – such as telecom companies enabling innovations in areas like Internet of Things (IoT) and automation through the buildout of 5G.

Mirova’s investment approach focuses on four key attributes. Two of these components in particular – a long-term view and a high-quality bias – can enhance a portfolio’s ability to weather market volatility. Let me provide context:

• A multi-thematic focus allows our team to identify companies positively exposed to long-term environmental, demographic, technological, and governance trends; and in doing so, select themes that we believe will drive economic growth going forward, and diversify our portfolios around these economic drivers accordingly.
• Our high quality bias results in portfolios that hold companies with strong, visionary management teams that reinvest in their business, and create high quality revenues. Management of sustainability risks and opportunities is a key consideration in our assessment of quality.
• Our long-term ownership perspective, with an average 8-year holding period, allows for exploiting market inefficiencies that arise from the stock market’s bias toward periods of less than a year.
• Finally, Mirova’s high conviction approach allows the team to consistently adhere to our investment process.

Overall, we believe a long-term approach that focuses on building a diversified portfolio of high quality companies and fully integrates sustainability considerations can allow portfolio managers to smooth out quarter-to-quarter volatility that is tied to economic cyclicality. To address unexpected volatility, when assessing valuation, the team models a range of potential outcomes to allow for a comprehensive understanding of risk exposure.

Human behavior can lead investors to want to buy when others are buying and sell when others are selling. In the words of Warren Buffett: “Be fearful when others are greedy, be greedy when others are fearful.” We expect volatility to continue until we have greater visibility about economic conditions like inflation and interest rates, and the duration of the war in Ukraine; it could take several quarters before we have more clarity on these issues.

During periods of underperformance, a manager may be more likely to challenge assumptions and stress-test valuation models. At Mirova, we have done this work and we feel our portfolios are well positioned today to outperform for the long term, with high quality companies with strong fundamentals trading at very attractive valuations.

I do. Interest in ESG investing across the industry is reflected in the trajectory of growing assets in the US, and Mirova has benefited from that growth as well. Mirova’s approach, strong team and philosophy, complemented by our credibility as sustainable investing thought leaders, has led to interest among not only ESG-focused investors, but also those seeking traditional equity strategies.

Our Global Sustainable Equity strategy enjoys an 8-year track record, while the International Sustainable Equity strategy has just hit the critical 3-year mark at the close of 2021. Both funds have delivered strong performance vs. both peers and benchmark.