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Could Liontrust’s new ESG trust outperform its sustainable funds?

With plenty of fund managers now having ESG offerings, it can be difficult to work out which is the real deal and where best to put your money.

ESG – or environmental, social and governance – has become a buzzword in the investment world in recent years, with plenty of question marks over just how ‘green-friendly’ some companies are and accusations of greenwashing.

However, fund manager Liontrust has built up a reputation as a leader in this growing ESG category, having launched its Sustainable Future funds in 2001 – long before ESG became the latest investment buzzphrase

In fact, recent trading updates have shown its Sustainable Investment fund range has grown to be its biggest by assets under management last year.

Liontrust’s new ESG investment trust will be one of very few environment-focused trusts listed in London

Now the sustainable investment team will launch Liontrust ESG Trust with an initial public offering due this week.

It will go up against rival Baillie Gifford’s recently revamped Keystone Positive Change, which was formerly run by Invesco as a trust with a totally different investment philosophy.

Keystone was at one point run by Neil Woodford protege Mark Barnett, as an equity income-focussed trust, he then passed the reins on to Mark Goldstone. But after a period of lacklustre performance, the trust’s board sought out a totally new direction – and in a sign of the times, opted for Baillie Gifford’s Positive Change fund team.

They seek to invest in companies that make a positive impact on society and the Keystone top ten includes vaccine-pioneer Moderna, electric car maker Tesla, and chipmaker supplier ASML. 

Initially, this boosted returns but Keystone Positive Change, which is run by Kate Fox and Lee Qian, has slipped back recently due to growth stocks suffering, with the trust’s share price down 8.8 per cent in the past six months.

The launch of Liontrust’s ESG trust comes amid rising demand for sustainable investment options. 

Research conducted for Liontrust in December 2020 revealed that 78 per cent of wealth managers and 71 per cent of financial advisers have seen an increasing proportion of their clients investing sustainability over the past year.

Like other funds in its sustainable investment range, ESGT will focus on companies within its themes judged by sustainability, valuation and business fundamentals.

Among its key investment themes are healthcare, transport and energy. One of the companies being considered is robotic surgery company Intuitive Surgical, which has captured 70 per cent of the market.

Liontrust has said up to 10 per cent of the 0.65 per cent management fee will be donated to research on and development of financial instruments that cover the UN Sustainable Development Goals.

ESGT’s total ongoing fee to investors will be 1.07 per cent, but this does not include any platform fees that will be added on top.

Why has it launched an investment trust?

ESGT marks a return to the closed-end fund sector for Liontrust’s trio of sustainable fund managers Peter Michaelis, Simon Clements and Chris Foster, who all joined in 2017 as part of the acquisition of Alliance Trust Investments.

There are very few specialist investment trusts in the ESG field, data from the Association of Investment Companies shows. 

The AIC tracks just three trusts in its Environmental category: Impax Environmental Markets, Jupiter Green and Menhaden Resource Efficiency.

ESGT is the sustainable investments team’s first new product launch since 2014, so why has Liontrust opted for an investment trust?

It says the investment trust structure widens the number of companies it can invest in, to focus on a smaller more concentrated portfolio focused on the ‘highest sustainability.’

This means ESGT will operate with a smaller portfolio of between 25 and 35 companies, compared to the growth fund’s 48.

How to invest in Liontrust ESG Trust

The investment trust is aiming to raise £150m through the issue of new ordinary shares at 100p per share. 

The initial issue is open until 29 June for investors applying for shares through the offer for subscription or intermediaries offer and 30 June for applications for the initial placing.  

Liontrust has authorised the following platforms to accept orders in the intermediaries offer: AJ Bell, EQi, Hargreaves Lansdown, Interactive Investor and Primary Bid.

It has also indicated it will use moderate gearing to enhance its returns. 

Liontrust’s Sustainable Future Global Growth is not allowed to borrow for investment purposes but the new investment trust can borrow up to 20 per cent of net assets. 

How much of this will be used remains to be seen.

‘Given that equities tend to outperform bank lending rates over the long term this makes sense, particularly as borrowing rates are very low right now but it does add additional risk,’ warned Mick Gilligan, partner at Killick said.

The experts seem optimistic about ESGT’s prospects, in part because of the well-established team but also because of increased investor interest.

‘A couple of high profile investment trust launches failed to get off the ground last year, but Liontrust has a few aces up its sleeve,’ Laith Khalaf, financial analyst at AJ Bell said. 

‘The vaccine roll-out has delivered a significant boost to investor confidence, and Liontrust is launching this trust in the ESG space, where we know there is a lot of demand right now.’

The existing Liontrust Sustainable Future Global Growth fund's top ten holdings

The existing Liontrust Sustainable Future Global Growth fund’s top ten holdings

Liontrust’s Sustainable Future Global Growth fund is ranked 15th out of 194 funds in the global sector over a decade, with a total return of 310 per cent, compared to 224 per cent from the MSCI World Index.

However, ESG-focused portfolios tend to focus on growth sectors like technology, which have been underperforming over the past few months.

The market had favoured growth stocks at the start of the pandemic but there has since been a trade into value and cyclical stocks – those that have either been beaten down to a cheap price by the market or that are expected to do well as the economy improves.

‘If economies continue to see strong recovery and inflation concerns fail to dissipate then I would expect value to continue to outperform growth in the near term,’ Gilligan said.

That said the investment trust structure means ESGT could mean the potential for greater returns in the long run.

‘The investment trust structure has a number of features which should help the Liontrust Sustainable Investment team to deliver attractive returns over time, albeit with greater risk than higher Liontrust sustainable future global growth and a higher fee burden in the early years,’ Gilligan said.

‘This trust is likely to tap the market several times in the coming years to help grow the assets, so for many investors there should be future opportunities to invest in a placement of new shares.’