Multi-sector impact fund: The $15m fund shoring up sustainability

Franklin Templeton’s multi-sector impact fund aims to improve bond value on its sustainability journey, reports Piyasi Mitra.

Franklin Templeton launched the Article 8 Brandywine Global Multi-Sector Impact Fund in December 2022, built on sub-adviser Brandywine Global’s existing multi-sector investment framework.

The fund, designed to invest in the transition to a sustainable and equitable economy, targets debt issuers with the potential to “materially improve their environmental and social practices”. Dynamic sector rotation, downside risk management, a dual approach to macroeconomic and fundamental research and a focus on fixed income active ownership drive the fund’s strategy.

Managing assets worth $15.25 million, the fund has approximately 75 holdings, with almost 55% allocated to corporate bonds as of the end of January 2023. William Vaughan, associate portfolio manager, Brandywine Global Multi-Sector Impact Fund, says: “This fund provides a macroeconomic view of our existing fund – the FTGF Brandywine Global Income Optimiser Fund – by emphasising a holistic view on transition, momentum and impact.”

“Pre-investment engagement constitutes the core of this impact fund. We don’t want to hold a company for years and then be forced to sell it at an inconvenient time.”

Describing the performance as “like for like” so far, Vaughan adds that January was “a strong month”, with the fund witnessing about 4% growth.

Data around the transitional turning points can be complicated, Vaughan admits. “In a deflationary environment, we expect similar performance as our FTGF Brandywine Global Income Optimiser Fund, but with a more concentrated and volatile portfolio for investors.”

A climatology graduate with a master’s degree in carbon economics, Vaughan is among the few fund managers with a dual background spanning science and finance. “We want to help shift mainstream finance more towards overall impact than, say, coming up with a small impact fund focused on already expensive assets like windfarms,” he says.

Shifting the needle
A significant change in the past decade has been the shift in focus from exclusion to best-in-class, followed by a focus on funding the transition now, he points out. “Investors value brown companies becoming greener; hopefully, this would help shift the needle. We are more likely to find value in bonds that are improving on their sustainable journey than ones that are already leaders. It is easy for equities to become more expensive but harder for bonds, due to their cyclical nature,” he says, emphasising that metal, mining, oil and gas companies moving towards a net-zero path will be vital.

Capital preservation and continuous improvement form the crux of the Brandywine Global Multi-Sector Impact Fund. Among the larger holdings focused on decarbonisation are Occidental Petroleum Corp and Cemex. “With the aim to reach net zero in the next five years, Occidental is enabling other industries to support initiatives such as sustainable aviation,” says Vaughan.

As per the Brandywine Global prospectus, after two years of non-performance for corporates and three years for sovereigns, the fund would divest from companies that fail to meet its criteria. “Pre-investment engagement constitutes the core of this impact fund. We don’t want to hold a company for years and then be forced to sell it at an inconvenient time,” says Vaughan.

“Having a cross-border Ucits jurisdiction is hard, and at some point, managers need to draw lines for what they believe in and what their values are.”

The first few meetings with a prospective company are usually effective enough to gauge if the management team is onboard. “Engagement helps us ascertain if prospective investors are willing to spend their capital on environmentally sustainable economic activities through continuous improvement,” says Vaughan.

He also welcomes the Financial Conduct Authority’s move to introduce separate labels in the transitional finance category. “There have been several instances of downgrades from Article 9 to 8 funds across the market. The Brandywine Global fund, though not domiciled in the UK, is open for its investors, making them investment-aware.”

Recently, the French financial regulator launched a proposal demanding double materiality disclosure from funds and integrating climate into fund strategies. Vaughan feels this move is likely to stop splintering between various labels. “Having a cross-border Ucits jurisdiction is hard, and at some point, managers need to draw lines for what they believe in and what their values are.”

A disconcerting act
The USA’s Inflation Reduction Act (IRA) incentivising green investment has been disconcerting for European investors, Vaughan adds. While many European ESG investors may have only traditionally looked at US tech and healthcare as potential investments, the IRA opens up many more sectors to them, which are deploying green capital expenditure (capex). He also explains that windfall taxes will enable Europeans to deploy green capex.

Based on the Brandywine Global fund’s continued engagement with Occidental’s capex deployment, he also estimates that carbon intensity dropping will be critical. “From brown to green capex is where you will get the best bang for your buck.”

He points out that improver strategies, which entail capex deployed and emissions reduced in 18 months, are early emerging trends. “If you stop methane flaring today, the improvement would take a year or longer to become apparent. So, investors shouldn’t expect to see it in the sustainability data right away.”

“From brown to green capex is where you will get the best bang for your buck.”

Carbon reduction will impact big infrastructure industries significantly, but capex use would still be hard to measure, warns Vaughan. “Pure improver types of funds are where most impact is going to happen, and the FCA’s [UK Financial Conduct Authority’s] regulations on greenwashing fit our objectives seamlessly.”

The Securities and Exchange Commission in the US, where Franklin Templeton has a significant presence, is not as concerned about the “greenness” of a product compared to its European counterparts. “Currently, they are more concerned with if your product does what it says it is doing. It is up to investors to decide right and wrong,” concludes Vaughan.

© 2023 funds europe



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