Discussing Volatility, ESG and the role of Infrastructure in a diversified portfolio

Funds Management

by Carolyn Herbert

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Transcription of Finance News Network Interview with Redpoint Investment Management Portfolio Manager, Alex Stephen

Carolyn Herbert: Hello I’m Carolyn Herbert from the Finance News Network and joining me fromRedpoint Investment Management to talk about the Global Infrastructure Fund is Portfolio Manager, Alex Stephen. Alex, welcome back.

Alex Stephen: Hi Carolyn, great to be here.

Carolyn Herbert: Volatility has become more of a mainstay when talking about markets. How do you see this volatility playing out?

Alex Stephen: You’re absolutely right, so it has seen a return to a high volatility environment in the last 12 months. And it’s really been driven by some specific events in the market. So first off we had the oil price crash, then we had concerns over Chinese growth and really the last one was in June when we saw the UK shock global markets, by deciding to leave the European Union. All that’s really meant is a spike up in volatility for global markets and the long-term trend over the last five years has been 10 per cent. This year it’s spiked up to 15 per cent volatility.

And our Fund has actually protected our investors against that spike. So the volatility in our Fund has moved from only 9 per cent to 10 per cent, so considerably less than the overall market. In regards to the future outlook, we still see uncertainty in the markets. There’s a diverging interest rate environment. So the US is still talking about increasing the cycle, whereas we’ve seen the UK, Australia, Japan still actually cutting rates. So it’s really a divergent view on the landscape and that creates uncertainty. So our belief is that by investing in the stable companies that we have, we can give a decent return to our investors with a better yield.

Carolyn Herbert: You mentioned yield and protecting investors. So what do you look for when picking stocks and has this translated into returns?

Alex Stephen:Our overall goal is to own a globally diversified portfolio of stocks. And we look for companies that have strong cash flow, quality earnings and that have the potential to deliver those in a stable fashion, over the long-term. We look for companies that deliver good income, so yield well. And we also look to exclude companies, or down weight companies that actually are too highly leveraged. So they’re carrying too much debt.We believe that in a rising interest rate environment, those companies are going to underperform.

As we go on to the performance of our portfolio, we’ve been delighted that we’ve outperformed global equities by a long way this year. So global equities to the end of June has performed just 0.25 positive of a per cent, whereas our Fund has performed 11.4 per cent positive. So that’s an excellent return for our investors and it just shows the benefits of investing in a stable, and less volatile asset class.

Carolyn Herbert:ESG (Environmental, Social and Governance) was something that came up last time you were here. Has your view on ESG changed and what factors do you need to consider?

Alex Stephen: Our view is that ESG is highly important when looking at companies and how well they’re run, and how well they deliver against their long-term risks. We really look at three key factors when we analyse companies. The first is Governance measures, how well is the company set up to control its staff and control its risks.And we look at the Board structure of the company, we look at how well diverse on a gender diversity basis it is. And also, how well the mix is of independents against incumbents,on that Board.

Secondly, we look at shareholder rights. How important is the shareholder in the company’s view, how do they look after their shareholders? Then we look at social factors. How well does the company look after its people - its employees, what’s its health and safety record? And then more broadly, what’s its human rights record?

And lastly, we look at environmental issues. How well is the company treating the environment, are they reducing their emissions -so their carbon exposure? Are they reducing their resource usage? So how much water are they using for example and how much they’re decreasing that by. And then lastly is product innovation and how well they’re adapting to new technologies, coming to market. For instance new power, things like renewable energy sources, how well are they adapting to those?

We believe that all those things have a key, reallypart in companies’performance going forward, and all are a very important part of our investment process. So we look to ask companies via our data sources, those hard questions. And we give companies a ranking based on how well they score on those, and then we construct our portfolio around them.

So companies we really like at the minute, in Australia we like Transurban Group (ASX:TCL). More broadly across the world, we like National Grid (LON:NG) in the UK and we like NextEra Energy Inc. (NYSE:NEE) in the US, which is a renewable energy company. And by putting companies such as these good high quality companies into our portfolio, we believe will return a better outcome for our investors at a more stable return for them, as well.

Carolyn Herbert: Alex Stephen, thanks for the update.

Alex Stephen: My pleasure.


Carolyn Herbert

Finance News Network
Carolyn joined FNN in August 2015 as the Head of News and also presented the Market at Midday and the Market Wrap. With more than five years of broadcast journalism experience, Carolyn has worked as a finance anchor on the Sky News Business channel and as an anchor and reporter for ABC News. She is also a qualified corporate lawyer specialising in IPOs, takeovers and mergers and acquisitions.