IMPACT investment funds can be an important source of diversification in an equity portfolio because of their focus on small and mid-caps – and a tendency towards holding over very long time-frames, says Regnan’s Tim Crockford.
Crockford leads Regnan’s London-based impact investing team, which aims to find listed businesses well-placed to solve the world’s biggest environmental and societal problems.
Typically, these are companies with market capitalisations in the US$1 billion to US$10 billion range.
“Ultimately, as an impact investor you are managing on three dimensions rather than two,” says Crockford.
“It’s not just about risk and return, but also about the positive impact of companies bringing something good to the world.
“As a result, from a strategic asset allocation lens that gives you something very different from what you get with a traditional listed global equity allocation.
“The first level of that differentiation is that it gives you exposure to those smaller and mid-cap companies.”
That’s especially important in 2023 because smaller companies are trading relatively cheaper than their larger counterparts in an inversion of normal patterns driven by the market’s appetite for US mega-cap tech stocks.
“You would normally expect to pay a premium for small companies because they tend to have higher growth rates,” says Crockford.
“But something has changed across 2022 and smaller caps are now trading at a lower PE multiple than large caps.
“These kinds of abnormalities in markets can persist longer than you expect them to persist, but things eventually mean revert — they rarely become the new normal.”
Crockford says impact investing also offers investors a way to hold growth stocks at an earlier stage than in a traditional portfolio.
The Regnan Global Equity Impact Solutions Fund aims to buy companies at a point when they are seeing a tipping point in demand for their product or service.
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Regnan Global Equity Impact Solutions Fund
“What we do is try to identify businesses where growth rates are starting to tick up,” says Crockford.
“Like it or not, human beings find it very difficult to forecast growth rates that are increasing and compounding.
“That tends to make the market myopic and short term — analysts are trained to take the past and extrapolate that in the future.
“We look for these inefficiencies across our investment universe of environmental and social solutions providers and seek to take advantage of them.
“These are companies that have the potential to grow into large caps over the very long-term holding periods that we have for them.”
The longer time frame of impact funds is another differentiator from a traditional equity allocation.
“This is a generational opportunity,” says Crockford.
“This is not the FOMO trade of the next six months. This is about finding companies with a structural tailwind for the next decade and beyond.”
As industry, consumers and governments invest to make the world more sustainable, winners will emerge over the next decades from the companies that supply the products and services to enable this, Crockford believes.
To find them, investors need to broaden their horizons beyond the top end of the market.
“We’ve been looking under stones that have not been turned over for a long time to find names that have been forgotten about in areas in markets that have been forgotten.
“This is about identifying individual businesses that have differentiated technology, differentiated services and a differentiated way of doing business.
“That gives them a moat. That gives them the ability to deliver this impactful environmental or social solution in a way that the peers can’t match.
“The fact that they are small now? Look the winners of the last market cycle – we didn’t refer to them as ‘big tech’ back in 2008.”
Tim Crockford leads Regnan’s Equity Impact Solutions team and is senior fund manager of Regnan Global Equity Impact Solutions Fund. Tim previously managed the Hermes Impact Opportunities Equity Fund after co-founding the Hermes impact team in 2016.
Regnan is a responsible investment leader with a long and proud history of providing insight and advice to investors with an interest in long-term, broad-based or values-aligned performance.
Building on that expertise, in 2019 Regnan expanded into responsible investment funds management, backed by the considerable resources of Pendal Group.
The Regnan Global Equity Impact Solutions Fund invests in mission-driven companies we believe are well placed to solve the world’s biggest problems.
The Regnan Credit Impact Trust (available in Australia only) invests in cash, fixed and floating rate securities where the proceeds create positive environmental and social change. Both funds are distributed by Pendal in Australia.
Find out about Regnan Global Equity Impact Solutions Fund
Find out about Regnan Credit Impact Trust
For more information on these and other responsible investing strategies, contact Head of Regnan and Responsible Investment Distribution Jeremy Dean at email@example.com.
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