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Investing Ideas: AXA UK Sustainable Equity fund manager on Games Workshop, reducing carbon emissions and FTSE 250 opportunities
Mouthy Money meets top investment fund managers to get insights into the ‘what, how and why’ of the key companies they invest in, plus important long-term themes and trends investors need to know. This week, AXA UK Sustainable Equity.
In our first instalment, we meet Nigel Yates, lead portfolio manager for the AXA UK Sustainable Equity Fund, at AXA Investment Managers, a fund that recently adopted the ‘Sustainability Improver’ label under the FCA’s Sustainability Disclosure Requirements (SDR) regime.*
How does AXA UK Sustainable Equity Fund invest?
We invest in high quality companies with above average growth characteristics that are demonstrating a clear and credible commitment to reducing their carbon emissions to achieve net zero emissions by 2050.
The investment approach centres around investing in companies who have strong long-term growth potential by utilising our People, Planet, Progress thematic overlay to identify companies that are enabling a healthier, greener, more advanced society.
Attractive end markets alone is not enough, however.
We seek out companies that have the ability to deliver growth year after year as a result of their strong business model, culture of innovation and customer focus.
We term this durable profitability and it is at the centre of our investment analysis.
The aim is to have a balanced, diversified portfolio of sustainable growth companies with a low turnover approach and a focus on long-term active company ownership.
Where are you seeing opportunities?
Right now, in our view, the valuation and growth opportunities feel most apparent in the more domestically orientated FTSE 250 Index.
‘Higher for longer’ interest rates have meant companies in sectors such as Real Estate and Building Materials are trading at valuations not seen for many years.
We are terming this the ‘lost decade’ and it includes high quality companies solving environmental and societal issues where demand has been held back by short-term economic uncertainty.
The fund is exposed to Marshalls, Grainger and Genuit where we feel there is the potential for strong recovery.
If the Government can free up planning or if interest rates are able to be cut faster than the market currently expects, these companies could be in demand once again with investors.
What makes you decide to buy into a stock?
This comes down to following the process highlighted earlier. The science is identifying the right companies with growth opportunities and financial metrics such as strong balance sheets, high levels of recurring/repeating revenue and strong cash generation.
We also use our own proprietary methodology for screening companies with the appropriate carbon reduction policies and ESG practices that meet our sustainability objectives.
The art comes from our interactions with management and the valuation we are prepared to pay for the business. We will not invest until we have met the senior leaders of the business and get entirely confident that they can deliver on their growth plans.
We look for businesses with a culture that prioritises a ‘customer first’ mindset and, of course, innovation is crucial.
When all these factors combine with an exciting valuation, we will invest but until it does we are quite happy to remain patient watching from the sidelines.
Tell us about recent changes to the portfolio?
Two companies that have met the criteria described above and have been added to the portfolio are Games Workshop and XPS Pensions.
Games Workshop (GAW) is an unusual company. It is run very much like a family business with a very long-term mindset. Shareholders are treated as less important than their hobbyists (customers), which of course they are!
The result is a business with wonderful financial metrics – growth, high margin, high return on capital employed (ROCE) all resulting in strong cash generation. I think most importantly however is the fact that it feels like Warhammer is on the cusp of becoming ‘mainstream IP’.
It takes a long time to scale a hobby properly. As the number of players grows so does the enjoyment of the game. This gives them pricing power and an ability to expand their monetisation opportunities. GAW has proven an ability to grow sustainably over the last 10 years and the next 10 could be even more fruitful for the business.
There is also lots to like about XPS Pensions which is a specialist pension consultancy offering advice and administration services to UK trustees and pension schemes. It has high levels of recurring income, an inflation-linked fee model, low client attrition, a well-diversified client base and regulatory change continues to be a strong driver of new business.
The market share opportunity within the pensions industry is significant and the adjacent insurance industry could offer another material growth runway in the fullness of time. The level of opportunity for this business could sustainably deliver double-digit revenue growth over the medium-term.
What is your highest conviction view right now?
In our view the market is very short-term focussed right now. Benefit of the doubt and consistent execution seem to count for nothing if a company can’t in the short term disprove a market fear.
This applies right now to Trainline which is the leading independent rail and coach platform selling tickets to millions of customers worldwide.
The recent Government announcement of a ‘Great British Railway’ ticketing website and app to rival Trainline’s offering has caused investors to panic. This is despite the last government developed App being the infamous ‘Track and Trace’ one developed during Covid.
In the fullness of time, it is likely that Trainline’s superior technology and customer focus will ultimately prevail but in the meantime, patience is required.
My fear is that the valuation disconnect with the fundamentals of this business may not go unnoticed and another Great British technology success story is lost before it reaches its full potential.
What do you think of efforts to boost the UK stock market?
I think some of the performance and valuation differential that the UK stock market has experienced relative to other international venues is related to capital flows.
There has been the much-publicised decline of UK pension allocations in favour of pursuing ‘US exceptionalism’.
I’m sure reversing this has been thought about in depth by the UK Government as a healthy stock market is essential to a prosperous domestic economy, which provides the necessary tax revenue to fund essential public services.
Whilst some of the solutions to resolve this might be complicated there are a number of things that can be done in the meantime.
If the Government does nothing else but provide economic stability and remove barriers to invest, such as regulation and ponderous planning decisions, then this will provide a more desirable background to attract capital flows back into the UK market.
What do investors get wrong about your asset class?
The perception of the UK is that it is an old economy, defensive market. There are however lots of high growth, high quality companies with digital first business models.
We also lead the world in corporate governance practices which provides plenty of opportunities for a UK-based sustainable fund.
What is the best advice you could give to an investor in your fund?
Patience is the key attribute that an investor in the stock market must have. Markets tend to underestimate the power of long-term compounding because of a structural focus on short-term earnings.
The best returns come from compounding but compounding by its very nature takes a while, so it’s easy to ignore. Our approach remains centred on owning good quality businesses that can reinvest and compound their returns over time.
I remember when I first invested in RELX, I wanted something that could consistently grow despite the economic conditions. At the time, it was considered by the market as being slightly dull. History has shown that was wrong!
We as an industry are guilty of trying to find the best performer in any given year. However, the best companies to own in my experience are those that deliver solid (not best) returns year in, year out.
FUND SNAPSHOT: AXA UK Sustainable Equity Z Acc
- Fund size: £66.09M
- Ongoing charges: 0.84%
- 5-year cumulative performance: 27.55%
- Since launch: 98.82%
TOP 5 HOLDINGS
- AstraZeneca 5.55%
- London Stock Exchange Group 4.28%
- RELX 3.87%
- Compass Group 3.33%
- HSBC Holdings 3.29%
TOP 5 SECTORS
- Financials 22.37%
- Industrials 18.31%
- Health Care 14.19%
- Consumer Discretionary 13.99%
- Technology 9.61%
Figures correct as of 28/02/25.
Past performance is not a reliable indicator of future results.
Companies shown are for illustrative purposes only and may no longer be in the portfolio later. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities.
*Please visit AXA’s Fund Centre where further information is included in the Consumer Facing Disclosure (CFD) Document which outlines the Fund’s sustainability approach – https://funds.axa-im.co.uk/en/adviser/fund/axa-uk-sustainable-equity-fund-d-accumulation-gbp/#documents