The Magnificent Seven – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla - are the biggest US technology companies and market leaders in various technology domains. Together, they make up around 30% of the S&P500 and 20% of the MSCI World. Over the past five years, all seven have posted ongoing strong returns, driving 49% of the S&P 500's total gains in the first half of 2024.
Divergent portfolio
The strong rally in the Magnificent Seven, the seven US big-tech stocks, has partly passed the fund by, admits Arjan Palthe, portfolio manager of Triodos’ Global Equities Impact strategy. “This is the consequence of being invested only in Nvidia. The other six simply do not meet our impact criteria and our minimum standards. Take Tesla, for example. In terms of impact, the company would fit nicely into our portfolio, but with the excessive remuneration for top executive Musk and the efforts to keep labour unions out of the door, it does not meet our minimum standards.”
Many dark green Article 9 funds have lagged the market for these reasons, says Palthe. “Yet this is relative, as we do go from one all-time high to another. And this year, the portfolio’s performance is in line with the index again. Moreover, the occasional lower financial returns are offset by the positive social and environmental impact, which to us as an impact investor is as important as achieving financial returns. This notion is also growing among pension funds, given their increasing interest in our strategies.”
Investors in the fund will see a diverging performance against the broader market from time to time, according to Palthe, as the portfolio deviates 95% cent from the benchmark. “For example, the big tech stocks make up around 20% cent of the MSCI World index, whereas financials, which we hardly invest in, make up close to 15%. So comparing our portfolio to this is not very useful. The track record of our strategy goes back 20 years, and over this long period the returns are reasonably in line with the benchmark.”
Smaller ESG risk
Despite the fund's concentrated portfolio, Palthe says its risk diversification is adequate. “Although we obviously exclude certain sectors such as fossil industries, we have a good spread across sectors and across countries. We also aim for a neutral investment style, divided between growth and value stocks.”
With a Beta of around 1, the fund is no more volatile than the market despite its concentration. Palthe believes that impact investing need not involve more risk anyway. “By conducting thorough fundamental research and including past and present controversies, we can reduce ESG risk. In larger portfolios with hundreds of stocks, this is much harder to map.”
Impact on the stock market
Many believe that impact can be made mainly through private equity and small caps. Public large caps are often active in various activities, with both positive and negative impact. That is why, according to Palthe, it is important to make the positive impact of companies measurable. “We use external ESG data for this purpose. Our own team of ten analysts analyses a company's positive impact based on this data. As a lower threshold, at least one-third of products or services must have a positive impact on society. At portfolio level, this threshold is 50% and currently it is even more than 60%, compared to 22% for MSCI World.”
In addition, engagement is an important pillar in our investment process. “Because we usually invest in a relatively small number of stocks for a long period, we know the companies very well. At least once a year, but typically more frequently, we speak to the management, and we find that they see us as a serious interlocutor. While we have one-on-one conversations with companies to discuss ad-hoc sustainability topics and alignment with our minimum standards as well as financial and strategic topics, we also follow a formal engagement agenda. This agenda includes such topics as climate change and target setting and remuneration, which we discuss with companies on a regular basis.”
The beauty of large caps, concludes Palthe, is that when they make a positive change with their activities, it has an immediate and huge impact. And with regard to financial returns: indices are at an all-time high.”