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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 "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

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.

"Our 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."

After 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 screens.

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."


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