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.
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.
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."
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
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."