As a member of Dynamic’s Value Equity team and a founding member of 1832’s ESG Investment Committee, Portfolio Manager Eric Mencke has been on a mission to deliver an active and transparent approach to sustainable equity investing. We recently sat down with Eric to get his perspective on the limitations of ESG scores and why the time was right to launch Dynamic Sustainable Equity Fund.
There’s a wide range of ESG products on offer, mostly passive. Why should investors and advisors choose Dynamic Funds for sustainable investing?
Eric: From our perspective, focusing on high ESG scores and blindly buying the highest-rated business could result in a crowded trade and poor risk-return dynamics. Further, many ESG products out there take what we consider to be a passive approach, whether mechanically excluding entire sectors or simply buying companies with high ESG scores. We don't believe either approach is effective in allocating capital to help solve society's challenges or in delivering performance for clients.
At Dynamic, we believe in taking an active approach that goes beyond simply investing in companies with high ESG scores. We identify the companies that are at the forefront of developing a sustainable economy and those transforming themselves, and we do this long before passive ESG scores reflect the progress being made.
What sets Dynamic Sustainable Equity Fund apart from other ESG products?
Eric: Aside from the active management component, I think our experience and track record set us apart. Our team, which includes myself and portfolio managers Don Simpson and Rory Ronan, oversees about $7.5 billion in assets under management across a variety of mandates, with a particular emphasis on North American equities. We’ve worked together for nearly two decades, so we have that experience in the industry and have managed investments through a variety of market cycles.
Secondly, we believe our bottom-up process lends itself well to finding businesses that are making the right decisions for the long term. Company management can't hide anymore from addressing sustainability. Building sustainable businesses is all about thinking long term.
Lastly, we've heard from investors and advisors that many products are ambiguous about their approach to ESG. We're deliberately addressing these challenges by being fully transparent about our thematic approach and the type of companies we're looking for. We believe that investing across five key investable themes provides significant opportunities for diversification, risk management, and adding value, which is a huge advantage.
Dynamic Sustainable Equity Fund invests in five key investment themes derived from the U.N.’s Sustainable Development Goals. For a given theme, the Fund will invest in companies that are categorized as leaders, enablers or have an improving story within the sustainable landscape.
Key sustainability themes:
Key sustainability themes:
Key sustainability themes:
Sustainable energy generation
Efficient consumption of energy
Responsible consumption and waste management
Sustainable industry, infrastructure and communities
Good health and well being
Renewable power, alternative fuels, carbon capture and storage, energy infrastructure
Electric transportation and supporting infrastructure, cleaner industrial production, efficient building design and construction, real estate redevelopment
Consumer products and packaging, logistics, waste management companies
Telecommunications, infrastructure companies, utilities, real estate
Efficient and equitable food supply, healthcare, and wellness companies
Let’s talk about the timing of the fund’s launch. Why is the Fund being launched in 2022?
Eric: We recognize that ESG investing has been around for a while, but we wanted to build our ESG infrastructure and resources properly. Our approach was to take our time and be authentic to who we are. Our active approach has to be incorporated, and our approach to ESG has to reflect how we're investing. It’s crucial to highlight that ESG is embedded in our fundamental research process and portfolio construction.
We felt 2022 was the right time. This isn’t an opportunistic fund. We think this is a core long-term offering for clients.
What does your investment process look like?
Eric: In a nutshell, it's quality first, and valuation second. I think that focusing on quality companies lends itself well to sustainable investing, and the particular emphasis on aligning with proven management teams.
In my experience, strong management teams aren’t typically focused on the short term to make their quarterly numbers. They're looking out three to five years, making good long-term decisions, especially regarding sustainability, which is good for the company, as well as the planet.
I have owned almost all, if not all, of the businesses in Dynamic Sustainable Equity Fund, over the last few years, in my other North American mandates. I think it shows that our bottom-up, quality focus is adept at identifying companies that are doing good things from a sustainable standpoint.
Can you give us a quick snapshot of the Fund? How would you describe it?
It's a core diversified fund of high-quality North American equities, with a target allocation roughly of 70% U.S. and 30% Canadian securities, although we may deviate from that based on current market opportunities. Expect a concentrated portfolio of 35 to 40 names.
With this Fund, we are taking a positive inclusionary approach to sustainable investing. The Fund targets high-quality issuers that are doing something beneficial for the environment, society, and their stakeholders, and have a focus on long-term capital appreciation.
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