Keystone Positive Change 24 May 2023
Disclaimer
This is a non-independent marketing communication commissioned by Baillie Gifford. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Keystone Positive Change Investment Trust (LON:KPC) has dual objectives of having a positive impact on society and generating high long-term investment returns. The investment strategy is a highly active, high-conviction approach, which sees the managers, Kate Fox and Lee Qian, identify companies with exceptional growth potential. Each company must also have a positive impact on society, which is analysed and interrogated as seriously as the investment opportunity.
The past 18 months has seen the fastest US rate hiking cycle in modern history, and this has led to a significant sell-off in many high-growth companies. Kate and Lee report that this is leading to some exciting opportunities opening up, with companies with exceptional growth potential trading at undemanding valuations. They argue that the discipline required by a weaker economic environment and higher funding costs should lead to the best companies being able to take market share and strengthen their competitive positions, and the managers expect the next few years to provide excellent opportunities for active stock-pickers.
An interesting distinguishing feature from many global equity portfolios is the ability to invest in unlisted companies, although these make up only 5% of the portfolio at the current time. This allows the managers to gain exposure to some exciting businesses when their fastest growth is still ahead of them, and opens up industries which are little represented in public markets (see Portfolio).
As growth strategies fell out of favour last year, KPC’s shares fell onto a wide Discount, which is currently 16.2%. Notably, the discount has actually widened slightly this year, even though the NAV has outperformed global indices, with growth strategies outperforming as a peak in interest rates seems to have neared.
Many investors are concerned about the impact of their investments and want their money to contribute to achieving a better society. In our view, KPC has peerless credentials in this regard. Impact is written into every investment decision and given equal weight with investment outcomes. From an impact or ESG perspective, KPC would likely improve any portfolio.
From an investment perspective, we think it looks extremely interesting at this point in time. Buying assets when they are out of favour can lead to excellent returns, and growth stocks have seen a significant sell-off over the past 18 months which could represent an opportunity. In the case of KPC, the wide share price discount to NAV offers an extra potential source of returns.
Growth stocks could come back into favour, which would help KPC. However, the managers make a good case that this is not the only route to outperformance. Their strategy centres on identifying companies providing solutions to critical social and environmental problems, and critically those companies which are likely to prove successful in generating long-term profits from these solutions. In an environment of higher debt costs and a weak economy, the strongest companies stand to gain market share and consolidate their leading positions. As a result, if the team have picked the right stocks, this environment could provide the potential for alpha generation.
Bull
- Unquestionable commitment to affecting positive social change, in line with ESG themes
- High return potential from highly-active approach
- Makes use of closed-ended funds’ advantages: gearing, unlisted investments and mid-cap companies
Bear
- Volatility brings underperformance potential
- Exposure to growth factor and rising interest rates could lead to periods of underperformance
- All impact or ESG propositions bring with them some subjectivity and selectiveness in which goals to pursue