Wed. Sep 23rd, 2020

Sustainability Investing Drives This Putnam Fund's Outperformance

Sustainability Investing Drives This Putnam Fund's Outperformance

Coronavirus fears are clobbering wide swathes of the stock market. But the pullback has also created opportunities for mutual fund investments by managers like Katherine Collins, a helmsman of $4.6 billion Putnam Sustainable Leaders (PNOPX), who weighs valuations in her buy and sell decisions.


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In fact, Collins — whose fund outperformed the S&P 500 in 2019 and in the three, five and 10 years ended Dec. 31, on an average annual return basis — says the recent volatility stemming from investor fears over the impact of the Covid-19 virus has created three types of opportunities.

Mutual Fund Investments: Opportunities Created By The Covid-19 Coronavirus

One opportunity for mutual fund investments is in companies that have escaped major share-price damage despite widespread carnage in the market recently. ))Collins is not free to name recent trades that she has not formally disclosed. But this opportunity would apply to a stock like Everbridge (EVBG), she says, whose software helps organizations survive disruptive events. It was not a holding as of Dec. 31.

A second opportunity is in stocks that she likes long-term, but only at their new, lower valuations. “Whenever you have a company that you think has long-term potential and it’s down 30%, 40% 50%, it’s worth another look,” Collins said.

The third opportunity is in stocks that she has liked and continues to favor, which now trade at much more attractive valuations. Adding to positions in those at lower valuations can increase their potential upside.

Still, Collins sees the recent market volatility in terms of its human toll. “When there is a crisis, you have opportunities to make buys,” she said. “But we don’t ever wish for disruption. Remember, there’s human suffering going on.”

Mutual Fund Investments That Embrace Sustainability

Collins and fellow manager Stephanie Dobson expect strong mutual fund investments to have strong fundamentals as well as sterling sustainability principles. “Our strategy is a combination of excellent fundamentals, reasonable valuation and excellent sustainability practices,” Collins said.

Sustainability practices refer to a company’s ESG policies — for example, its commitment to a clean environment, generous labor relations and ethical corporate governance.

To Collins and Dobson, strong fundamentals and admirable sustainability practices are intertwined. “Companies who are doing a good job on sustainability issues for their own business contexts are likely to also be high-quality companies in other ways and to generate superior returns over time,” Collins said.

BlackRock’s Focus On Climate Change

BlackRock (BLK) is another favorite among mutual fund investments for Collins and Dobson. “The company has built quite a franchise,” Collins said. BlackRock is the world’s largest asset manager.

BlackRock’s size made the firm’s announcement last month that it will make climate change central to its investment considerations all the more important. BlackRock CEO Larry Fink says climate change in the near future will cause a significant reallocation of corporate capital.

BlackRock says it will require more reporting from the companies it invests in. As a result, it will ask for disclosures of climate-related risks and plans for mitigating climate impact.

“This is an example of a sustainability leader,” Collins said. “This is a company that not only manages its own business effectively, but looks to influence its supply chain and customers in a positive way.”

BlackRock’s share price has plunged nearly 25% off its Feb. 20 high. Collins looks at the silver lining. “That’s pushed its yield up over 3%,” she said. And with a price-earnings ratio of about 15 vs. about 21 for the S&P 500, “it’s an attractive valuation for a high-duration, quality growth asset that does meaningful work on sustainability,” she added.

Trikafta Drives Vertex Results

Biotech Vertex Pharmaceuticals (VRTX) is one of those mutual fund investments whose ESG benefit is woven directly into what the company does: make medical treatments. In Vertex’s case, it is treatments for cystic fibrosis (CS), in which thick mucus builds up in lungs and other organs.

Vertex got earlier than expected regulatory approval for Trikafta, its new CS treatment. Thanks in part to the drug’s launch, Vertex reported fourth-quarter revenues five times higher than what Wall Street had expected.

Trikafta corrects a malfunctioning gene to normal activity. It combines three drugs that target the defective gene. “We’re excited about the prospects for Trikafta, a triple-acting version of compounds for cystic fibrosis treatment. And we like Vertex’s focus on true innovation, not me-too imitations. Also, they have a pretty amazing development pipeline. They don’t focus on old-fashioned chemical compounds. Instead, they work from genetic information to get at the root of complex diseases.”

Fidelity National Is A Cybersecurity Play

Collins likes Fidelity National Information Services’ (FIS) provides banking and payment technology and processing services. “Security is a big deal for transactions processing,” Collins said. “FIS systems are more secure and more efficient than legacy systems, which is part of what is fueling the company’s growth.”

That security and efficiency are key sustainability attributes. “They benefit not only FIS customers, but also all the customers’ customers, both individuals and businesses,” she said.

“Every time you use your credit card, the transaction goes through a system’s like FIS’s,” Collins said. “It’s amazing how often that’s compromised or doesn’t go through. So improvements to the system are a key benefit.”

Further, Collins and Dobson like Fidelity’s takeover of Worldpay, a payment processing company. “They’re a strong cash generator,” she said. “And their growth potential is tremendous. A lot of financial systems are antiquated. Also, many are coming up for overhauls or new solutions. FIS and Worldpay can offer value to those customers.”

Collins’ Commitment To ESG In Her Mutual Fund Investments

Collins has long focused on analyzing companies’ financial fundamentals as well as their sustainability principles. She started her career at Fidelity Investments in 1990. In 2009 she went to Harvard Divinity School. “I studied ethics and philosophy, with a goal of applying those lessons to sustainable investing,” she said.

Understanding how mutual fund investments can benefit from prioritizing companies with strong ESG investment principles requires learning to speak two languages that often seem foreign to each other — the languages of business and sustainability, she says. “I wanted to be better at translation,” she said.

She managed several stock funds between 1992 and 1999 and again from 2005 to 2008.

From 2009 to 2017, Collins created and ran an independent investment research firm focused on sustainability issues.

She joined Putnam Investments in 2017. In addition to her portfolio duties, she is Putnam’s head of sustainability investing.

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about personal finance and strategies of the best mutual funds.


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