Fund manager Dirk Hoozemans recently took part in a podcast interview with journalist Marije Groen for Fund News, in the Netherlands. The discussion centred around why the fund focusses on small and mid-cap sustainable businesses, at a time when most investors are still getting behind corporate giants like Apple, Amazon and Alphabet.
The Triodos Pioneer Impact Fund is one of the few funds which focuses on small to medium-sized companies. Can you elaborate more on the criteria you use to select companies?
The Fund is one of the few truly global small and mid-cap impact investment funds. What we often see from our peers are country or region specific funds compiled by specialists in the likes of Asia, Europe, or the US, so being global makes the Triodos proposition different. The way we identify suitable companies is through our seven transition themes, which include for instance Sustainable Food and Agriculture, Sustainable Mobility and Infrastructure, Circular Economy and Renewable Resources, so we pick companies that are linked to those themes and are significantly contributing to them through the products or services they offer.
What would you say is the advantage of investing in small and mid-caps?
There are a few. Typically, these companies have their growth ahead of them instead of behind, unlike Apple or Amazon, which in our view are winners of the past. We’re looking for the winners of the future. Often within smaller companies you can also find so called ‘pure plays’, meaning a company provides a single product or service that’s a solution to one of the societal problems that we want to see solved (challenges that we face?). And finally, our analyst team can have a true research edge diving into fundamentals, as these companies are often overlooked by Wall Street or City analysts.
How would you say Triodos Pioneer Impact Fund is different from other equity funds?
We run a fairly concentrated portfolio; we’re not an ‘all you can eat buffet' and we aren’t focused on all sectors, but focus on solutions instead . It’s basically about making choices that are not ratings-based and hence backward-looking but rather forward-looking and truly looking under the hood of companies to determine their value.
You mentioned regions earlier, and Japan – are there any future winners to be found out there?
Yes, there are. The Japanese stock market is a relatively cheaper stock market choice than, say, the US or Europe, and furthermore there are top-down initiatives, such as a new governance code. This includes the creation of more diverse and independent boards. Moreover, from the bottom-up, more and more Japanese companies are embracing the UN Sustainable Development Goals (SDGs) in their corporate strategies – all of which we’re looking to benefit from.
Typically, small and mid-caps don’t tend to report back on ESG (Environmental, Social and Governance) factors, so how do you gather your information?
It starts initially by picking up the phone - that’s when we start to engage and try to get to the ‘nitty gritty’, especially in light of the Triodos minimum standards, which are among the strictest exclusion standards in the industry. If a company meets those, typically we can move from engaging for information to engaging for change We try to influence company financial disclosure and also be a steering guide in corporate strategy and action, aiming to unlock more financial and societal value.
Performance and outlook research from the Global Impact Investing Network (GIIN) states investors can expect market average returns in addition to impact - how do you balance impact, risk and returns?
It’s a tough one, especially in 2021, but the answer mainly lies in running a small, concentrated portfolio that is fully diversified. We also do sanity checks to make sure we’re not too heavily weighted to any one sector or region. Furthermore, we can diversify not only over themes, but also within them, so for instance within Renewable Resources there is wind, solar, geothermal power but also water, and in Innovation for Sustainability there’s for instance cyber security and semiconductors, so we are exposed to completely different industry drivers within those themes.
There is a lot of attention on green recovery plans in Europe and the US – are these helping investors? How do you look at the new Sustainable Finance Disclosure Regulation (SFDR) and what effects do you expect from it?
The recovery plans will definitively be a boom for small to mid-sized companies, not only for getting new technologies, but bigger companies with gaps in their portfolio will start looking at these companies as acquisition targets. SFDR is interesting, as it’s designed to steer more capital towards green investment, but it will also generate more greenwashing and investment products declaring themselves as ‘green’. As an industry, we still have some way to go to get uniform, reliable data to help in that respect. We are proud that all Triodos funds align with Article 9 of SFDR.
Final question, what will be the biggest challenge for the Pioneer Fund this year?
It will be navigating the macroeconomic environment of expected rising interest rates due to higher inflation expectations. Typically, a small mid-cap fund has is exposed to the growth factor and growth sectors tend to be left behind in rising interest rate environments, which is when traditionally interest-rate sensitive sectors such as the financial services sector and energy do better. The fund is not exposed to these, but should the value factor continue to do well we aim to adjust the portfolio accordingly.
As with all investments, any money invested in the Triodos Pioneer Impact Fund is at risk. Past performance is not a guide to future returns, and currency risk may also affect the value of an investment. This interview does not constitute financial advice.
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