Sydney-based Perennial Value Management is launching an actively managed Australia and New Zealand small cap ESG ETF. It’s the first active ESG ETF to hit the Australian market.
The eInvest Future Impact Small Caps Fund (Managed Fund) (IMPQ), which began trading today, will attempt to outperform the S&P/ASX Small Ordinaries Accumulation Index.
IMPQ’s investment strategy involves looking at small and mid cap companies in Australia and New Zealand that meet certain basic size and liquidity requirements. It then applies an ESG screen that weeds outs companies that make 10% or more of their revenue from fossil fuels, alcohol, tobacco, weapons, forestry, gambling and junk food.
“We’re really trying to have zero but the 10% is just there in case something comes out of left field,” Damian Cottier, the fund’s portfolio manager, told ETF Stream.
“We know these companies fairly well and we don’t expect any surprises.”
IMPQ then takes a value approach to picking and weighting stocks, which looks at several characteristics including valuations, balance sheet strength and net cash position. Valuations are measured by price-to-earnings, price-to-cash-flow and dividend yield.
As is common for value-minded ESG funds, the valuation metrics aren’t too strictly enforced. This way the fund can dodge the common problem where the companies with the best value scores are carbon intensive or sin stocks.
“It’s not always the case, but it is one of the reasons that we don’t have a strict valuation criteria in this product is to make sure we get a good diversified spread… [of] true to label ESG friendly companies. [ESG and value investing] are not mutually exclusive but it is one of the reasons we’re not as strict.” Mr Cottier said.
The fund will hold 20 – 70 stocks, at any time, but will target around 35. The target asset allocation will be 0 – 10% cash and 90 – 100% equities. Cash may be held to satisfy redemptions; the fund does not operate in-kind creation-redemptions, like passive Aussie small cap ETFs can. (Most creation redemption for passive ETFs in Australia occurs in cash anyway.)
IMPQ can use derivatives but only in limited contexts, such as managing currency interest rate risk. Derivatives will not take up more than 10% of the fund’s assets, the PDS indicates.
The fund will charge a 0.99% fee and a performance fee of 20% as well if the index is beaten (before fees).
Asked what some of the fund’s stock picks would likely be, Mr Cottier said Meridian Energy (MEL), a Kiwi state-owned enterprise, would likely feature. He liked that the company created its energy from renewable hydro power and thought it was protected by barriers to entry.