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September 13, 2005
A Next Generation SRI Strategy: The Henderson Industries of the Future Fund
by William Baue
By extending to its entire portfolio a focus on ten sustainability industries, Henderson has
conceived of a novel approach to socially responsible investing.
SocialFunds.com --
When Henderson Global Investors transformed
its Ethical Fund into the Industries
of the Future Fund this spring, it launched what may constitute a "next generation" in socially
responsible investing (SRI) strategy. The strategy itself--focusing on ten sustainability "themes"
or industries--is not so new. Henderson Head of SRI Business Development Mark Campanale first
wrote about the concept a decade ago, and the legacy fund overweighted its portfolio in these areas
30 percent. What is new is committing an entire portfolio exclusively to sustainability-focused
companies diversified across multiple industries.
 "You've got green funds and healthcare funds
and water funds and clean energy funds, but when you go for just one theme that's hot, if it falls
over, you don't have the ability to retreat," Mr. Campanale told SocialFunds.com. "What we've done
here is build a really balanced, multi-thematic approach that spans from high-growth areas, such as
renewable energy and medical technologies, to more defensive areas, such as transport, organic
food, water, and social property."
Other industries amongst the ten themes include
environmental improvement, knowledge (such as educational goods and services), quality of life,
resource efficiency (such as products and processes that reduce energy consumption), and safety.
What prompted the shift to a full commitment was a transition last spring in fund managers
to Tim Dieppe, an in-house replacement who upped concentration in the themes to 50 percent by
year-end 2004, 75 percent this spring, and 95-plus percent now.
"I was allowed the
mandate to change, because we felt we've really missed out on the benefits of these themes by not
focusing on them entirely," Mr. Dieppe told SocialFunds.com.
Indeed, seven of the ten
industries significantly outperformed the MSCI
World Index in a backtest over the one, two, three, five, seven, and ten-year periods ending
December 31, 2004. The other three industries outperformed the benchmark the majority of the time
in these same periods. The reconstituting portfolio is outperforming the benchmark currently,
returning 16.3 percent over the three-month period ending July 31, 2005, while the MCSI World Index
returned 15.4 percent during that period.
However, financial performance was not the only
(or even the primary) consideration in devising the strategy. The Industries of the Future Fund
also identifies companies with strong social and environmental benefits in a much different way
than most SRI funds, which tend to focus more on corporate social responsibility (CSR) performance.
"What many SRI funds do is take the top stocks of Russell or Dow or FTSE
indexes and screen them using CSR metrics, and that's why so many SRI funds look mainstream,
because of their starting universe--they almost always start from the wrong proposition," explained
Mr. Campanale. "What we wanted to do is make the 'core service' of the company recognizable by
investors as having social or environmental benefits, instead of trying to work out whether
MegaBank A because it is more CSR compliant that MegaBank B."
Started from this
proposition, Henderson discovered an elegantly simple way to identify a starting universe that is
predisposed toward SRI. Bloomberg lists
companies according to multi-tiered industry classifications--for example, one subdivision of the
energy sector is cleaner energy, which is subdivided into solar energy, which further subdivided
into solar cell, solar module, and solar tower manufacturers. After deciding the ten focal
"industries of the future," Henderson then populated a starting universe that did not look like
other SRI starting universes.
"Our research attempted to identify every single nursery
school or educational provider, every organic food business, every renewable energy business, and
so forth, listed somewhere on a recognisable stock market, and found over 4,800 companies," said
Mr. Campanale. "We are not aware of any manager that had investigated the total size of the
universe of core social investment themes, and then built an investment portfolio exclusively from
these ideas."
The Industries of the Future universe is so big because of its global scope.
"A global fund is best positioned to be thematic because you can look across the country
boundaries in these particular industries, which are often global industries themselves," said Mr.
Dieppe. "In renewable energy, for example, you have to look at what is happening in Japan,
Germany, the US, and Canada."
After populating the universe, Henderson applies
quantitative techniques to sift the universe for attractively valued companies relative to their
peers, then sends companies through its own SRI screens.
This winnowing process has
created a portfolio of about 100 companies, primarily concentrated in large capitalization
companies.
"Some 90 percent of the fund is in companies with market cap larger than $1
billion, and if you go to $2 billion, it's 75 percent of the fund," said Mr. Dieppe. "We're very
underweight in companies bigger than $20 billion, which is really the dinosaurs--we do have one or
two, but most don't qualify."
"We're overweight in mid- and small-caps, but not so
overweight that volatility becomes an issue--our large-cap focus mitigates that," he added.
Currently, the fund is not available to US retail investors because it is registered and
regulated in Europe.
"Henderson has an office in Chicago, and obviously we'd love to see
a way in which investors in the US can access these themes," said Mr. Campanale. "We do offer this
approach to US institutions with larger mandates."
©
SRI World Group, Inc. All Rights Reserved.
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