The AB Sustainable Global Thematic Fund obtained overall a score a little bit over the average, thanks to AllianceBernstein’s effort to commit to their sustainable initiative. Its portfolio is quite good, but still has some faults, such as its tolerance for investing in companies that are not held accountable for having a clear sustainable rating. Overall, the fund needs to make their vision of sustainability more precise, as this would make them more likely to target better sustainable investment.
The AB Sustainable Global Thematic Fund is part of the AllianceBernstein mutual fund and represents $2,279.3 million invested across 59 holdings. The fund invests in a combination of equities of developed and emerging-market companies, diversified across industries. As of the 30th June 2021, the fund is investing in a broad spectrum of sectors from Information Technology (30.17%), Industrials (20.15%), and Healthcare (18.46%) to Financials (12.92%). It targets equities according to sustainable investment themes that are broadly consistent with achieving the United Nations Sustainable Development Goals, such as health, climate, and empowerment. More than half of their portfolio is invested in the United States (58.28%), while the rest is mostly directed to European countries and Asian emerging economies (such as Japan or India). The fund’s management tends to balance the fund among newer companies and more established companies, and across small-cap, mid-cap, and large-cap firms.
Let’s have a closer look at their portfolio by analyzing the top 10 holdings. This includes LabCorp (2.89%), SVB Financial Group (2.59%), Waste management (2.37%), MSCI (2.30%), Flex (2.27%), Danaher (2.23%), Lumentum Holdings (2.20%), Apollo Hospitals Enterprise (2.14%), Aptiv (2.14%), and Trex (2.14%). The portfolio has an overall ESG risk rating score of 18.5, which is a low and fairly satisfying score for a so-called sustainable fund. Most of their assets are invested in companies with a low ESG risk rating but are simultaneously poorly ranked among the companies of their industry. This indicates that there exist other companies in the same industries with better sustainable performance. The tolerance of the fund for average results regarding ESG criteria is noticeable when looking at SVB Financial Group or Trex, which are rated, respectively, 29.1 and 23.7. Finally, what struck my attention is that AllianceBernstein classifies Aptiv as part of the Consumer Discretionary industry and Trex as part of the Industrials industry, yet Sustainalytics categorizes these companies in the Auto Components sector, which is far from being a sustainable industry. Overall, the AB Sustainable Global Thematic Fund makes some efforts to invests in fairly responsible companies but lacks comprehensive commitment to its sustainable goal.
The fund has created a two-step approach to identify potential sustainable investments. To select sustainable investment opportunities, they combine a “top-down” thematic approach and a “bottom-up” analysis of individual companies. We will now dive into the detail of their investment strategy. First, the ‘top-down' approach consists of defining sustainable investment themes. The fund’s investment teams have identified three large buckets of opportunities: climate, health, and empowerment. To define and clarify these themes, they have outsourced their definition of sustainability by focusing on the 17 UN sustainability goals, divided into 169 sub-goals. The next step was to identify which of these goals deal with pure policy initiative (not very investible) and which of those fits with private capital initiative. Indeed, if there is some role for private capital, there is a role for the AB Sustainable Global Thematic Fund as an investor. By doing this, the focus narrowed down to a little more than half of the sub-themes, and each company in which the fund invests has to fit at least in one of the selected themes.
The second step corresponds with the “bottom-up” analysis, during which the management team focuses on prospective earnings growth, valuation, and quality of company management. It also evaluates the company’s exposure to environmental, social, and corporate governance (“ESG”) factors. It emphasizes company-specific positive selection criteria over broad-based negative screens in assessing a company’s exposure to ESG factors. Overall, for a company to fit in AB Sustainable Global Thematic Fund’s portfolio, it not only has to fit into the themes, but also fit into the risks and the return exigency over the long term.
I like that the fund uses a two-layered investment strategy, which comprehends a company-focus filter. Yet, what matters is which company fits the requirement when rated. Indeed, a fund can have a very interesting screening and rating process, but if lacking exigency, they would invest in companies that perform only average in sustainability goals. For instance, the AB Sustainable Global Thematic Fund invests at least 80% in equity securities of issuers that are assessed positively for sustainable investment themes, which leaves more or less 20% of the fund’s assets invested in potentially unsustainable companies. Their tolerance is deceiving, as 100% of the portfolio should fit into the sustainable policy. Combining the analysis of their portfolio and the description of their screening process, I feel like, despite the fund’s efforts to work with the UN sustainability goals, they have tailored the definition of sustainability to fit in with efficient capital return, when it should be the other way around.
The fund is managed by AllianceBernstein, a global asset management firm providing investment management and research services worldwide to institutional, high-net-worth, and retail investors. It has approximately US$686 billion in assets under management as of April 25, 2021, and is 64% owned by the French insurance conglomerate, AXA. The firm manages US$16 billion in Portfolios with Purpose which represents a low percentage of their total assets, however, it is an activity going through a rapid expansion. Moreover, the company took different ESG initiatives, such as an ESG research platform, a Sustainable Employee Wellness Group (EWG) or the ESIGHT platform where AB investment teams access and shares proprietary information about corporate ESG practices. AllianceBernstein’s commitment to sustainability is interesting and provides examples of a firm-wide initiative that makes mindsets shift.
The AB Sustainable Global Thematic Fund is under the management of Daniel Roarty, who has accumulated 28 years of experience in Finance. He joined AllianceBernstein in 2011 as global technology sector head on the Global/International Research Growth team and was named team lead in early 2012. In 2013, he was appointed Chief Investment Officer of AB’s Sustainable Thematic Equities team. Roarty previously spent nine years at Nuveen Investments, where he co-managed both a large-cap and a multi-cap growth strategy.
In a 3-minute video, Daniel Roarty describes the screening process of the AB Sustainable Global Thematic Fund, while explaining that « companies that are tied to sustainable investing challenges are attached to big financial opportunities. » I believe that this philosophy is an interesting bridge between return and sustainability, as indeed financial corporations have to understand that our generation is expecting a sustainable return and that our money will be directed to actors that achieve these goals.