David Palmer, chief executive of Epworth Investment Management, the Methodist Church’s investment manager, tells portfolio institutional about ethical investing, how charities are evolving and why the Archbishop of Canterbury is a trailblazer when it comes to engagement.
What does an investment portfolio look like when it is consistent with Christian ethics?
It will be names and asset allocations that you recognise. At the end of the day, we are an investment manager and performance is important.
We are a value-based investor. Growth at a reasonable price is our mantra. Companies that will be here in 10 years’ time, in 20 years’ time, we don’t worry about shortterm fluctuations. It is the long-term returns that we are focusing on.
The names in our portfolio will be familiar to you. The key thing is what we don’t invest in because of our ethics. It is things that do harm to God’s creation, to our bodies. Tobacco is an obvious example of things that we exclude, as well as companies making excess profits from alcohol.
We wouldn’t mind a retailer selling beer or a brewer with limited sales, but if hard spirits were a large part of their sales then we would not invest in them.
John Wesley [the founder of the Methodist church] was around when gin was causing terrible problems in our society. So he was anti-drink because he could see the harm it was doing. In general, we are not against drink but if there are excessive revenues been sought for hard alcohol then we will not invest.
We have a nuanced policy on defence stocks. We recognise that we need to defend ourselves in times of warfare, but we would not invest in platforms that are for aggression rather than defence. We don’t invest in nuclear. We are a unilateral disarmament church.
You are a practising Christian, is that important in doing this role?
It is why I took it on. Not only are we an investment house that disinvests from tobacco stocks, but we also recognise that there are many companies in bad areas that behave well, and in good areas that behave badly. It is not just a question of invest or disinvest, it is helping those companies to improve their practices. That engagement work as well as the investment work is why I am here.
The motivation is that we are doing more than just an investment house.
We try to make a difference, to bring God’s work to the investment world. What an opportunity. How many people can make that claim?
First and foremost we are an investment house. We are here to make good investment returns for our clients. Bringing about better behaviours in society is part of our mission statement as well.
What changes have you made since becoming chief executive in 2017?
We have a robust methodology that we have used for many years.
My colleagues were unwilling to back themselves in the past. Since I joined we have become much more convinced about our approach. In our UK equity portfolio we had 121 stocks a few years ago; today we are at 71. We are now backing ourselves more.
We have a core conviction approach, so we have life-long conviction stocks, the big broad stocks that manage our risks. We are a low-risk portfolio. We get alpha and added value through our conviction stocks.
So our methodology is the same as it was two, five, 10 years ago, but now we have more conviction stocks.
In other words, we are backing ourselves more and it has produced some good returns.
In the past 12 months, in a falling market, we are up almost 3% against our benchmark. That is an exceptional year and we will not repeat that, but over five years we are up against our benchmark.
So given that we have that performance, the ethical exclusions and the engagement is a marvellous story. I am proud to work with a team like this.
Have you prepared your portfolio for the volatility that many expect?
We stick to our knitting. We are long-term investors; we ignore the short-term aberrations that politics can bring us. So, are we seeing fundamental changes in our portfolios? No.
If we see economic trends that we need to follow, of course we will, but we are not trading out of stocks. We are in companies that will be here in 10 years’ time.
We are long-term investors. You are not seeing wholesale changes in our portfolios because of Brexit. We are buying strong balance sheets and secure cash-flows.
You also manage capital for other faithbased charities. Tell me about that?
Amongst the faiths that we act for, we have Catholic, Baptist, United Reformed Church and some Anglican clients.
Our ethical investing is driven by our Christian values, so we have a natural fit with the faith sector.
It might sound like a narrow sector, but in the couple years that I have been here it is extraordinary the assets that are available in the faith sector.
What we have through our Christian investing is a set of values that are visible, are transparent and not just faith investors are interested in. Our market is the ethical investment area in the charity sector. We start with the faith sector and it has a natural expansion into other charities that like those values.
What fees are you charging?
In the affirmative funds, I believe that we are probably the cheapest among our peers. In the new funds that we are launching we are going to be in the middle of the range. Being the cheapest limits your ability to invest by backing yourself. So we are increasing our fees. On the UK equity fund we are 55 basis points.
Your portfolios only feature cash, equities and fixed income. Why no alternatives?
We have a new sub-class coming in the UK, which is multi asset. That will have small allocation to alternatives.
Scheme rules allow us to have a number of alternatives. We are thinking infrastructure and property.
We are on a development range here. I would love to have absolute-return vehicles, risk-adjusted vehicles in the fullness of time. We will start with a global equity fund and a multi-asset fund. In our evolution, absolute-return vehicles are just down the road.
The charity sector does seem to be changing and there seems to be more demand for these types of vehicles. We need to recognise that and bring them into our portfolio.
How is the charity sector changing?
There has been much more awareness of the whole risk-targeted world in the past five years. A lot of investment consultants are now looking at risk-targeted rather than return-targeted approaches and that is seeping over to the charity sector. It is not a strong influence yet, but it is starting to gain some momentum.
How much scrutiny do you put your investments under due to your ethical stance?
This is where we are hopefully strongest. When we do the due diligence questionnaire for a large charity we always come out strongly on the ethical analysis. You can go to our website and ask us what our ethics on a particular issue? How did you come to that conclusion?
You may not agree with it, but at least you have transparency. Why did they make that decision? Why did they invest here and not there? So our well-argued, theologicalbased approach is set out in black and white. So, on the ethical side we always come out strongly.
Where we have had challenges on the due diligence questionnaires is on our coverage, our investment proposition. We have had a hole in our global equities. We had one equity fund, which was predominately UK with some global. So that was a hole that we are going to fill with our new fund launch in two months’ time.
What processes do you go through to ensure that you do not repeat the mistake of the Church of England investing in Amazon?
I have a theory on Justin Welby. He knew exactly what he was saying when he criticised Amazon. It is the world’s largest online retailer and it is deeply flawed. They manage their tax very efficiently and have a lot of low-paid staff. How do we as ethical investors bring about change at Amazon? It is hard
Voting at an AGM is not going to bring about change. Saying something in the press that may cause you personal embarrassment, but gets all of that press coverage and after a couple of weeks Amazon said it is going to change its policy on how much it pays the people working on warehouses.
That speech from Justin Welby caused him huge embarrassment, but it did, arguably, get Amazon to think about what they pay their staff. Isn’t that what Christian’s are supposed to do? Not put yourself first.
For investors to bring about change is incremental, it is hard work. You are not going to see an over-night solution. It is getting CEOs to think about what they are doing. Is it the right thing to do?
What Justin Welby did was highlight a fundamental issue and, in a small way, he brought about some change. Well done, Justin.
So engagement is a big part of your strategy?
It is huge. We are part of the Church Investors Group, which is a collaborative group between the faiths and investors in the UK. We even have people from overseas as part of that group.
There is a voting template that has been agreed by the group, so when we vote in AGMs we have rules on how many women should be on a board or the ratio of a CEOs bonus to their salary? If it is more than 10 times we will vote against the remuneration policy. It is a hard-coded voting policy that we as faith groups adhere to.
We will supplement that by filing motions. The Church of England is a co-filer on the BP motions that are coming up.
Just having our names on the final resolution creates some interest. There might be a story in the press about it. It is not about how many shares we own, it is about the voice that we have. We are privileged as faith groups to have that voice and we will use it where we can.
You wrote to Ted Baker about its CEO’s behaviour. What response did you get?
A nice letter back that said: “Thank you for your letter. We understand your concerns and we are looking into it”.
We never get: “We will dismiss the guy and change our policy.” Every time we get an acknowledgment of our letters, whether it gives us something we want or not, it is signed by the CEO. He probably has not written it, but he has signed it. So he has read it, spent 30 seconds or a minute recognising that there is an issue.
I am not naive enough to think that a letter from us is going to lead to a CEO spending two-hours writing a reply. He has an investor relations body for that, but he has had to sign it and think about it and that is a success for us. [Ted Baker’s CEO, Ray Kelvin, has since left the business following several allegations, which included forced hugging with his staff].
I was surprised to find that you invest in oil and gas companies. Why is that?
As you will be aware, this is a strategy which has been challenged by some in the ethical community.
Our governing body meets once a year and they challenged us consider our oil and gas exposure. Is it compatible with the Paris Accord [to keep global temperature rises below 2 degrees Celsius]?
We are doing a process, the Church of England is doing it as well, that looks at the oil and gas companies in which we invest to see if their cap-ex plans meet the demands of the Paris Accord.
It’s a difficult question because we are talking 30 to 40 years hence. We are talking about a change in their reserves in that time to meet the Paris Accord. So we send a lot of time agreeing a topic model. We are now assessing those companies against that model to see if they meet them or not. Is it compatible with what they are doing with the Paris accord? What is their transition policy? How much of cap-ex will be spent on new reserves?
We are putting those companies through five key tests and a traffic light system against those five tests.
We will report the outcomes to the committee in a year next June. Will it lead to disinvestment? I cannot tell you. We are on that journey.
It is a huge piece of work that we are currently undertaking.
It is a critical issue, particularly for Christians, because of the harm that is being done to God’s kingdom.
There was a report a few months back that said only 1.3% of oil company cap-ex is being spent on cleaner sources of energy. It doesn’t seem a lot.
It is not enough. They have to replace their oil reserves. If they have a long-term future then they have to move away from oil and gas. Shell is perhaps the best at doing that. This is part of our engagement. At what point are you going to have alternative sources of revenue than just oil and gas because at some point that is not going to be enough.
In April, Charity Authorised Investment Funds are being introduced. You are launching them, so what will the benefit be?
This is a new structure that had a lot of consultation around the industry. The previous structure was called Common Investment Funds and was authorised by the Charity Commission, which has done a sterling job but does not have the investment depth to oversee regulated funds.
Now there is a form of duel regulation. The Charity Commission approve them as charities and then the FCA approve them as investment funds. So it brings the robustness of the FCA to charity investment vehicles.
Will it make a difference investment portfolio?
No. It will give investors greater comfort. It has been a long time coming and has been welcomed by industry.
Investing in companies that behave responsibly is all the rage at the moment, but you have been doing it since you started. Are you trailblazers in this area?
This is a boast that I cannot back up with facts, but from the research I did when I joined here, we were the first ethical committee in the UK. Back in 1974, the Central Finance Board was told that the church did not like what was happening in South Africa and was asked if it could find out if any of its investments were dealing with apartheid South Africa. Companies were then excluded on that basis.
We also filed a resolution with Midland Bank calling on it not to lend money to South African-based institutions. It is the first example that I can find of an overt ethical investment committee.
Our first CEO – Charles Jacob – had the idea of the first ethical unit trust. He tried to get them launched in the UK and the Department of Trade and Industry called them Brazil funds, because they were a nuts idea.
So he didn’t get them launched here, but he did get them launched at Friends Provident, where they became stewardship funds which are now known as ethical investment unit trustees in the UK. The concept came from Charles Jacob, so we have a long history of ethical investing.
Is ethical investing mainstream?
It is mainstream. Retail and institutional investors are demanding an ethical overlay and the extent to which they want the ethics. Some will say that it impairs performance, which arguably it doesn’t have to. If you are an investment manager or a trustee you need to think about the ethics of your investments.