A passion for charity work and a keen personal interest in all things environmental, social and governance (ESG) made Phoebe Stone a natural choice to launch and lead LGT Vestra’s sustainable model portfolio service (SMPS) earlier this year.
Stone has been with the wealth manager for five years and has spent the best part of a decade supporting a variety of charities, from those involved with mentoring homeless people in London to promoting breast cancer awareness in schools and universities, including Coppafeel! and Breast Cancer UK.
“I felt like my life was split between doing a lot of volunteer work, raising money for charity and volunteering in various charity sectors, and the day job. My ultimate dream was to find a way of combining the two passions.”
Stone launched the SMPS in March this year after joining LGT Vestra in 2014 as an investment manager on the core MPS team. Prior to that she was part of the RBS graduate training scheme, during which she rotated around different areas of the business.
Stone’s personal ambition was for investing sustainably, and her decision to launch the SMPS was made easier due to the buy-in from parent company LGT, increasing demand from advisers and significant support from LGT Vestra chairman David Scott, a passionate advocate of sustainability both personally and professionally.
Private banking group LGT is owned by the Princely House of Liechtenstein. It acquired the majority stake in LGT Vestra, formerly Vestra Wealth, in June 2016. According to Stone, LGT brought with it a vast array of experience in the world of sustainability and impact, including knowledge of delivering sustainable solutions to clients and incorporating the UN’s sustainable development goals into products, through to the way the business itself is run.
“They have certain targets as a business around energy and water consumption, and they want to achieve 100% renewable energy usage by 2025 globally. That’s happening at the same time as they’re buying businesses in India and setting up in Thailand. They’re really thinking about their impact on the environment and society.”
Surprise demand
Given this top-down influence, it seems inevitable LGT Vestra would eventually have launched the SMPS, but there also had to be demand from the IFA community. This, says Stone, first started ramping up two-and-a-half years ago.
“It was the first time, certainly in my career, I’d ever had end clients asking their IFAs [about sustainability], and IFAs saying to me, ‘I’m not sure what to do with this request’,” says Stone.
“It’s not an old-school ethical screening-type strategy they want; they just want to do a bit more with their money,” she adds.
“As a result, about two-and-a-half years ago I started collecting information, talked to some IFAs really closely about this and pitched it to our business. And everyone seemed really excited by the idea.”
Stone says interest in the strategies has often been from unlikely sources. “What’s been surprising is the IFAs you’d think would be most entrenched in their way of thinking are often the most open.
“People assume it’s just millennials that are interested in this, when actually people at a slightly later stage of their lives are wondering what kind of world they are going to leave behind. Or, as an IFA, what kind of business will be left behind.”
Stone thinks this attitude will become more ingrained among advisers as IFAs continue the trend of selling their businesses to consolidators, or hand them over to younger generations who want to instil sustainability at the heart of their investment propositions.
Screen test
The SMPS range comprises three risk-rated portfolios – cautious, balanced and growth – with each one targeting a different level of volatility: cautious within a 4-7% band; balanced 5-9%; and growth 8-13%.
In terms of process, LGT Vestra’s central investment committee meets on a monthly basis to generate the top-down house view based on various external data sources. This determines underweight/overweight positions on geography or sector, which apply to both SMPS and core MPS.
A dedicated research team conducts sustainable research and portfolios exclude as standard controversial weapons, alcohol and tobacco. The screening process means the SMPS range is underweight both the energy sector and value stocks, as these businesses tend to be weaker from an ESG perspective.
Funds selected for the portfolios fall into one or more of three categories – sustainable, responsible and impactful – and offer exposure to specific themes, including natural resource scarcity, demand for sustainable infrastructure and improving financial inclusion in developing nations.
Funds are also selected based on their investments in companies with good ESG scores and/or a positive impact, but Stone is quick to point out that the SMPS is not an impact solution.
“We have not gone down that route. Instead we blend green bond and social bond funds with those that have high ESG scores.”
The team conducts in-depth analysis of each and every one of an underlying manager’s holdings to ensure they align with the strategy, for both SMPS and core MPS.
“We would do that even if we were looking at Terry Smith’s Fundsmith, for example. We want to understand that every company aligns to his strategy. If you saw a company that was completely out of line with everything he said, you’d have as much concern as you would in a sustainable portfolio.”
She adds: “What I’m trying to avoid is a fund manager who does a load of ESG analysis but then finds a company where the financial upside is so high that they ignore the fact it’s been polluting rivers or treating their employees poorly. That to me is the definition of greenwashing.”
Active engagement
The SMPS comprises solely active managers because Stone says passive strategies are not yet rigorous enough to truly capture ESG views, for example, including a company because the gender split on its board is good.
“You could have women around that boardroom table who have no say in the company.
“A fund manager that has a strong relationship with the company and is really engaging with it is worth the active management fees in this space.”
Stone’s standout funds include Impax Environmental Markets and Wheb Sustainability, as well as the Threadneedle Social Bond and Allianz Green Bond funds.
“All four of those strategies are publishing the positive impact, so they’re going far to deliver information to the end client on what they’re achieving other than financial gain.”
Stone is not prepared to put a number on the volume of assets the strategies have attracted since launch but she says the speed of traction has been quicker compared with the core MPS.
“It took about five years to really get momentum going in the core MPS, and then you had really strong conversations and a lot of money flowing. It’s taken six months for the SMPS.”
Power to the people
Has this met Stone’s expectations? “I’m quite an ambitious person so it was never going to be a case of, ‘We’re done here, let’s go home’. I probably expected a bit more resistance, uncertainty or hesitation. But from paraplanners to receptionists at IFAs, all the way up to business owners, people have been thinking about how to incorporate this into the central investment proposition.”
In addition to leading on the sustainable portfolios, Stone remains actively involved in the £4bn core portfolio range that comprises six strategies, five risk-rated and one income orientated.
As well as assessing the assets, creating the house view and implementing that into the portfolios, a growing part of her job these days is getting out on the road with members of the firm’s 20-strong sales team and engaging with the IFA community.
She says word from the road when it comes to discretionary fund management (DFM) choices is that IFAs want a limited number of strategic partners rather than endless choice. This, she adds, is a consequence of heightened regulation and due diligence, meaning IFAs are now more discerning in their DFM choices.
“People buy people,” says Stone. “Performance can wax and wane and things come in and out of fashion, but if you have a really strong relationship, both with the sales people and the investment managers, you have a lot more longevity.”
