HEAD-TO-HEAD: BNP Paribas versus Pictet

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INVESTMENT APPROACH

The $3.55bn BNP Paribas Global Environmental Classic Fund is managed according to parameters set by Impax, an asset manager that specialises in opportunities from the transition to a more sustainable global economy.

The focus is on four key areas: clean energy, water, waste management and sustainable food, agriculture and forestry.

The management team try to identify growth companies, but it is also valuation-conscious and will avoid stocks they think are overvalued, according to van Genderen.

Companies are first filtered on the basis that at least one-fifth of their business must be related to environmental activities. Screening and financial scoring, as well as an initial ESG analysis, is performed for idea generation and to guide research resource allocation.

Once stocks are identified, a detailed and structured analysis using a 10-step process is carried out, which includes assessing management quality, regulations, and risks.

Combined with a comprehensive valuation assessment based on discounted cash flow models and various multiples, including scenario analysis, the result is a price target range for each stock. A list of preferred stocks, which according to the team have an upside potential of at least 20%, is then presented for inclusion at a weekly investment committee meeting.

“This is an established and well-thought-through bottom-up process that has been executed with great discipline. While the focus is on stock selection, the team applies top-down views for risk-control reasons in a sensible way,” said van Genderen.

The portfolio is concentrated in 40 to 60 holdings, and the top 10 represent 30% of assets compared with about 20% on average for the sector equity ecology category average, he noted.

The fund is also “characterised by its strong tilt toward mid-caps as nearly half of its assets are invested in this market-cap segment, three times the exposure of its MSCI World benchmark,” said van Genderen.

The environmental focus means that there is little exposure to the communication services, energy and financial services sectors, while consumer-related sectors are also typically underweight. In contrast, the portfolio normally has a large allocation to the industrials sector, typically accounting for 40% to 50% of assets, and there is often a preference for the basic-materials and utilities sectors.

Turning to the Pictet Global Environmental Opportunities Fund, which tops nearly $10bn in AUM, van Genderen noted that the strategy uses a similar bottom-up approach that is applied to all of Pictet’s thematic equity offerings.

The first step in the process is defining the investable universe based on selecting companies with a small environmental footprint. This screening is driven by the distinctive use of a “planetary boundaries” framework, which identifies nine key environmental dimensions.

This investable universe is then analysed for purity, trading liquidity, and share-price volatility to determine initial portfolio weights, which will be adjusted on risk-management factors, according to van Genderen.

“A company score is determined for the most interesting stocks, which can then be considered core holdings,” he said.

Stocks with low initial weights are screened using a proprietary quantitative framework, including valuation, momentum, and operational quality metrics, and, for the top quartile, a company score is established as well.

“These are opportunity holdings,” said van Genderen.

The company score includes fundamental business franchise analysis, management quality, and equity attractiveness (valuation and momentum). Final portfolio construction is driven by the derived weights and is benchmark-agnostic.

“We think the applied bottom-up process is well-structured and repeatable,” said van Genderen.

“It is more ‘mechanical’ and less flexible than the BNP Paribas process, because of the managers’ strict adherence to screening and filtering results,” he said.

The concentration of this 45-60 stock portfolio is relatively high with around 35% of assets invested in the top 10 holdings versus an average of 16% for peers in the sector equity ecology category.

Given the bottom-up approach and benchmark agnostic portfolio construction, sector allocation is a result of stock selection. Like many other ecology strategies, the portfolio of this strategy is tilted toward the industrials sector.

“However, a more distinguishing feature is the fund’s technology exposure, which has been clearly reflected in a consistent overweight in the sector compared with peers,” said van Genderen.

Fund characteristics

Sector allocation:

Source: Fund factsheets, 26 Feb 2021

Country allocation:

Source: Fund factsheets, 26 Feb 2021

Top 10 holdings:

Source: Fund factsheets, 26 Feb 2021

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