Introducing the Castlefield B.E.S.T Sustainable UK Opportunities Fund

We’re pleased to announce that our UK Opportunities Fund has transitioned to a sustainability mandate as of 1^st November 2019. This now means that all of our single-strategy equity funds are under the B.E.S.T Sustainable banner, enhancing our offering for investors who wish to reflect their values through their investments. In this blog we’ll outline some of the changes that have been taking place and what it all means going forward.

Prior to this change, the fund was managed with an unconstrained mandate. This meant that we were not forced to hold any stocks or sectors simply because of their index weighting. This allowed us to seek out undervalued companies irrespective of their size and focus on total returns rather than have a target yield. The investment process focused on companies that can grow their revenues, have the ability to expand margins, and are fundamentally undervalued relative to their cash flows or embedded asset value. In the past this has resulted in a bias towards medium-sized companies which tend to be more domestically-focused than their larger peers. Volatility has been lower than the UK market index and the valuation of the fund’s holdings has been lower than the wider market. These are characteristics that we aim to keep after the transition.

The fund now has an explicit sustainability mandate and is included in the Castlefield B.E.S.T Sustainable Fund Range. The B.E.S.T Sustainable process applies a ‘blended’ approach which combines negative screening principles whilst also considering positive sustainability trends and companies which are involved in developing and delivering sustainable products and services.

The B.E.S.T methodology, Castlefield’s proprietary investment review system, has already been well integrated into the fund’s research process. It is a responsible investment process, as defined by the UNPRI (UN Principles for Responsible Investment), which incorporates criteria to assess both financial and non-financial attributes that we think can affect long-term investor returns.

•  Business and Financial: What kind of returns or performance target does the investment aim to achieve?

• Environmental and Ecological: What is our assessment of any environmental claims?

• Social: Does the investment aim/claim to have a positive social influence and if so, how?

• Transparency & Governance: Is the company or fund open with investors?

In addition to this, the new mandate will also utilise the B.E.S.T Sustainable Screening Policy, which excludes a number of industries and business activities. The policy document detailing which business activities we screen for and how we apply these screens can be found on our website. An External Advisory Committee made up of client representatives and experts in ESG (Environmental, Social & Governance) and sustainability research was formed in 2018 to provide oversight to the B.E.S.T Sustainable range and has been heavily involved in the development of this policy. The combination of the screening policy and B.E.S.T assessment lead us to exclude any investments which we believe exhibit poor risk/reward profiles or would result in exposure to industries which do not fit with the fund’s mandate.

The fund’s mandate may have changed but our commitment to responsible stewardship has not. Across the B.E.S.T Sustainable Fund Range we continue to vote on all holdings and to engage on environmental, social and governance issues where we see the opportunity or need. We are also signatories to the Stewardship Code and members of several investor collaborations that press for change within the corporate sector.

During the transition there has been some portfolio turnover with the fund replacing holdings which do not fit with our screening policy. This has involved trading activity at the sector level as well on individual, stock-specific concerns. As an example, we sold any holdings in resource-related industries and no longer have any exposure to the Oil & Gas or Mining sectors, amongst others. Disposals based on stock-specific issues have included irresponsible marketing of nutrition products in overseas markets. In all cases, we have drawn heavily upon our own in-house research to identify and assess company activities or characteristics where we have concerns. Holdings have been replaced by new investments where we have likewise used our in-house research to identify positive business attributes that also meet our stringent screening criteria.

One of the new holdings is Avast, the global leader in the consumer cybersecurity market. Avast’s highly-rated software protects users from attacks such as ransomware (used for extortion), identity theft and socially engineered malware (designed to covertly collect consumer information). The business operates a “freemium” distribution model with a basic version of the software available for free and more advanced versions requiring a paid subscription. The business model is highly cash generative as subscriptions are paid upfront. Cybersecurity is an attractive long-term growth market with threats becoming increasingly sophisticated and growing public awareness of risks online. This provides Avast’s core business with a tailwind, while the company is also targeting additional growth opportunities such as protecting smart home devices and developing its offering to small-to-mid-size businesses.

One further example of a new fund holdings is Impax Asset Management, who specialise in investment strategies relating to the transition to a more sustainable global economy. Impax currently manages £15.1bn across a range of listed equity, fixed income, thematic and real-asset strategies for institutional and retail clients. Key investment themes include Water, Sustainable Leaders, Real Assets and Sustainable Food. Impax has delivered consistently good investment performance and they continue to grow assets under management as investors become increasingly conscious of ESG considerations.