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The Chicken or The Egg; Quality or Sustainability

Based on the goals of quality investing and sustainability one may conclude that they are mutually exclusive. However, on closer inspection that is not necessarily the case.  Sustainable investing is not just good for the environment...

There has been much debate in the investment industry over whether sustainability stands alone as a unique investment factor or whether it is embedded in other investment traits such as quality.  There are many who argue that quality and sustainable investing really are one in the same or at the very least, overlap with each other significantly.  For Curran and our clients this is truly exciting.  You know we have always put quality investing at the center of our investment philosophy and in our Core Growth strategy, sustainability too.  It is our belief that the Curran Core Growth strategy is sustainable as a byproduct of its investment philosophy which invests in only the highest quality companies.     

At Curran we define a quality company as having high returns on shareholder equity, low levels of debt and invariably high earnings quality.  Sustainable investing incorporates an investor’s values whether it positively impacts a cause, social change, or a company’s policies and actions.  Based on the two criteria, one may conclude that the two (quality & sustainability) are mutually exclusive.  However on closer inspection that is not necessarily the case.  With greater research tools and better reporting, we now know that quality companies tend to be more sustainable than their peers.   Quality companies are generally more profitable and therefore evidence suggests they incorporate processes, policies and benefits that are considered best in class.  As a contrast, a highly indebted company that is struggling to be profitable will have more immediate concerns such as meeting payroll and fulfilling its creditors’ obligations.  Needless to say a company struggling to remain in business may not share the same commitment to employee training and benefits than a more profitable, high quality company does.

Excited by the implications of quality and sustainability going hand in hand, we want to examine the thesis further and measure whether we can make the claim that Core Growth strategy reflects the spirit and aims of sustainable investing.  Often the first step in measuring sustainability is exclusionary, meaning investors exclude industries that do not align with their values.  These industries may include: adult entertainment, alcohol, defense, gun manufacturers, fossil fuels, gambling and tobacco companies.  The Core Growth portfolio does not hold positions in any of these industries and has generally avoided them throughout the strategy’s history.

Measuring the strategy based on ESG (environmental, social and governance) factors by nature is somewhat more subjective relative to stating factually that we do not own defense or gun manufacturers in the portfolio.  However, utilizing sustainable research, we can score the portfolio based on these criteria and it scores significantly better than the S&P 500 companies.   The following are some of the features where Core Growth scores significantly better than the S&P 500.

        Environmental:

  • Resource Use – portfolio companies use less natural resources
  • Environmental Management – taking it one step further portfolio companies have the mechanisms and policies to manage and ensure efficient use of energy and natural resources 

        Social:

  • Product Access –  portfolio companies provide access to products and services for disadvantaged communities
  • Employment Quality – portfolio companies score high marks for employee satisfaction and working conditions

        Governance:

  • Earnings Quality – earnings quality is high for our portfolio companies and reflects the financial health of the company
  • Capital Structure – portfolio companies use of leverage is prudent and encourages a focus on long term decision making

Sustainable investing is a nascent field but one that we have adopted at Curran.  We believe that it will be of growing interest and importance for investors.   We have always put our focus on investing in the highest quality companies and now have the ability to evaluate our companies beyond traditional financial measures.  As it turns out, the Core Growth portfolio measures well for sustainability which confirms what we have always believed, that quality companies are also sustainable businesses.

It is important to note however that Core Growth’s sustainability is a byproduct of our investment philosophy and process that Tom has developed and been managing for over 20 years.  For investors that want to put a greater emphasis on sustainability to align with their values, we have developed an investment strategy which incorporates environmental, social and governance factors as well as their impact.   In the coming months we will be sharing more about the strategy and sustainable investing at Curran.

Feel free to contact your Curran Relationship Manager or a member of the Curran Investment Committee with any questions.   

Sincerely,

https://static.twentyoverten.com/5a4258bbacdea1742455dc1d/lcyhGyDmsIx/1554930607886.png

Kevin T. Curran, CFA
 President & Chief Investment Officer

Curran Investment Management® is Defining Quality®

Please check with your Curran Wealth relationship manager,
 
or contact Curran Wealth Management if you have any questions.  
 518.391.4200
info@curranllc.com

The material contained in this article is for educational and informational purposes only.  The information herein is considered to be obtained from reference sources deemed reliable, but no representation or warranty is made as to its accuracy or completeness. It is not, and should not be regarded as “investment advice” or construed as a “recommendation” or an offer to buy or sell a security.  CIM, LLC does not provide tax or legal advice.  No one connected with CIM, LLC can ensure tax consequences of any transaction.  The information contained in this article may not apply to your personal circumstances.  Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation.