Fund manager's letter - Michael Topley
Michael Topley, Head of Sustainable Portfolio Management at Barclays Private Bank outlines our sustainable investment philosophy
It’s easy to feel exhausted by the scale and severity of the sustainability challenges we face as a planet. So dominant is the zeitgeist that terms such as ‘ecological grief ’ are being used to describe the guilt many of us feel about our meat consumption, or how often we travel or buy new clothes. This feeling of concern is worsened by dramatic headlines about rainforests burning or the societal impact of the Covid-19 pandemic.
But against this backdrop, there’s hope from what we believe to be the most powerful tool we have for tackling the many daunting challenges we face – artificial intelligence (AI).
The power of intelligence
We’re entering a new golden age, driven by the increasing power and cognification of artificial intelligence. This technology is already causing massive challenges to certain business models, while creating incredible return potential and some of the greatest barriers to entry ever seen for others.
Our vision of AI’s future is often defined by 1980s action movies, but a super-smart, humanoid T-1000 that will threaten our job security is unlikely to be the path we follow. Instead, AI will likely be closer to our experience of the internet – an ever-present and unobservable power we can tap into to make things smarter. This may be mundane, such as ensuring correct prescriptions are sent out, or in the realm of the extraordinary that we cannot yet imagine.
But what’s important is that AI isn’t insidious. Over the coming years, it will drive change across all aspects of our lives, from healthcare to energy efficiency to how we feed ourselves.
Sink or swim
AI may contribute US$15.7trn to the global economy by 2030, PwC predicts1. From an investment perspective however, it’s important to not be complacent. While many great opportunities are borne from AI, it will also cause creative destruction to many traditional business models. Outdated is the traditional investment delineation of value versus growth.
What differentiates businesses today is those that can adopt and embrace these technological advancements, and those that can’t. The harsh reality is that many that can’t will go to zero. High street retail is an early victim, as high cost and increasingly outdated businesses are replaced by the far more appealing power of individually targeted ecommerce2.
Transport is also starting to see this disruption, where the future of the world’s largest car brands may be far less certain in an era of autonomous taxis (do you care if it’s a Toyota, BMW or NIO that picks you up?). The same destruction will be seen in nearly every other industry. As Schumpeter’s “gale of creative destruction” blows ever stronger, sustainability-focused active management has never been so important.
With this in mind, it’s with great pleasure that we present our first sustainability report for Barclays Private Bank’s sustainable strategy. We launched this strategy just over a year ago to help clients maximise risk-adjusted return through a portfolio of businesses that supports global sustainability.
“ The sustainability issues we face as a planet offer some extraordinary opportunities to the companies that are helping to address them, and to us as investors.”
A disciplined focus on quality
Being only one year in, it would be remiss to comment on the strategy’s performance given the long-term time horizon of our investments. That being said, every client who has been invested in the strategy since its start is comfortably above the benchmark and the UK peer group.
At a high level, the strategy simply looks to invest in very high quality businesses that we hold over the long-term. We actively manage our investments, analysing individual stocks before picking a concentrated portfolio of the world’s best businesses, while diversifying the portfolio appropriately across asset classes and the supply chains we invest in. Given our long-term outlook, we rarely change the portfolio’s holdings. This allows our investments to benefit from the power of compounding, while keeping trading costs low.
We view quality businesses as those with high and reliable cash flow returns and high growth in capital, driven by intellectual property and/or barriers to entry. This means our investments typically generate plenty of cash, are able to reinvest that cash back into the business, and often have leverage levels well below the wider market. It’s this balance sheet robustness that protects your portfolio’s capital over time.
With this investment philosophy embedded into our culture, we then integrate a three-stage impact assessment process to ensure that our clients’ portfolios are invested in responsible businesses that are aligned to the UN’s sustainable development agenda.
Great challenges with extraordinary opportunity
In this report, we look at how the businesses we’re investing in are providing solutions to several sustainability challenges. While we do not target particular themes in our investment portfolio, the sustainability issues we face as a planet offer some extraordinary opportunities to the companies that are helping to address them, and to us as investors. In this publication, we look in more detail at: the transition from traditional to precision agriculture; improving healthcare outcomes; and dematerialisation. In particular, we look to emphasise the opportunities that artificial intelligence and advanced technologies present to each of these challenges.
Through combining a strong investment philosophy with a rigorous assessment of a business’ sustainability characteristics, we believe we’ve built a strategy that should allow us to enjoy strong risk-adjusted returns while helping to improve global sustainability. We’re grateful that you’ve partnered with us on this journey, and we look forward to a long and rewarding relationship with you.
Head of Sustainable Portfolio Management, Barclays Private Bank
Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.
You could get back less than you invest. Adding leverage to your portfolio may amplify returns in a rising market, but will amplify losses in a falling market
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