Keystone Positive Change 21 September 2022

Keystone Positive Change (KPC) is one of the leading strategies in the ESG/Sustainability space, offering a clear, differentiated and trackable proposition built around identifying companies which are able to have the largest impact on solving critical social problems. The objective of having a positive impact on society through each of its investments is given equal priority to the more conventional objective of maximizing long-term shareholder return.

KPC’s management contract was taken over by Baillie Gifford in February 2021 and the investment mandate changed to focus on global stock markets with the dual objectives discussed above. However, the Positive Change mandate was launched in January 2017 in the open-ended space. Since launch, the strategy has performed extremely well in absolute and relative terms but 2021 was a tough year, as discussed under Performance.

KPC is managed with a focus on the long term and managers Kate Fox and Lee Qian aim to identify huge financial opportunities in solving serious social problems, looking to identify strong companies which are able to take advantage of these opportunities. Crucially, each company must have a product or service which directly tackles the issue at hand (see ESG). The long-term approach means the trust is highly active and this brings with it volatility in individual holdings and at the portfolio level for which investors must have the stomach. KPC aims to improve on the offer of the open-ended fund by using the closed-ended structure to the full, as we discuss under Portfolio.

As growth stocks have fallen out of favour over the past year, KPC has drifted out to a Discount of c. 13%.

We think KPC should be considered by every investor who wants their money to work towards improving society, as well as generating a return. The strategy for assessing impact and potential impact is clear and easily interrogated by investors, while the commitment to providing information is second to none. The focus is on the long term, which is likely to lead to the greatest impact, rather than focussing on identifying companies which are making incremental improvements.

As for the return potential, the Performance of the mandate since the 2017 launch is instructive. KPC has generated very high absolute and relative returns over the whole period, along with extra volatility. There have been periods of very high outperformance and very low underperformance. This is a likely consequence of such a highly active approach, but it also, in our opinion, reflects the impact of the pandemic which created a highly specific set of circumstances which were first extremely good for the portfolio and then extremely bad. Such extreme outperformance and underperformance may not persist and we note that the target return of the trust is 2% above the annual return of the MSCI ACWI, on a five-year rolling basis.

In the short term, rising interest rates would be a net negative for the portfolio, as would a recessionary turn for the global economy. However, assessing the timing of macroeconomic and political shifts is notoriously difficult, and valuations may already reflect anticipated interest rate rises. The current, wide Discount could then provide an interesting entry point, although the trust is likely to suit only those with a long-term time horizon and a stomach for volatility.