Quality and Sustainable Investment: Chicken or Egg

Published on
5 November 2024
Read time
3 minute(s) read

Quality and sustainable investment are closely intertwined, with certain studies even suggesting that three quarters of the outperformance of ESG strategies can be directly attributed to the quality factor1. However, although the correlation is significant, the causal relationship between the two does not appear to be clearly established. At Carmignac, we firmly believe that quality and sustainable investment are two sides of the same coin that mutually strengthen each other in a virtuous cycle.

The need to define quality

For over 20 years, Mark Denham, co-manager of the fund, has asserted that long-term performance relies solely on the ability to select companies with the best prospects. These companies, which Mark refers to as 'quality', must meet specific criteria:

  • They must be able to generate high and stable profits over time, which they can
    reinvest to sustain their growth trajectory.

  • They must also have a positive impact on the environment and society.

This conviction has been quantified through a detailed investment process. Over time, this process has been enriched by adapting to the increasing availability of extra-financial data. However, the initial philosophy of excluding the worst-performing companies and rewarding the most promising on financial and extra-financial criteria has remained unchanged.

Quality and sustainable investment for the benefit of:

The financial solidity of our investments
Our definition of the quality factor focuses on companies with high and sustainable margins. This characteristic assures us that these companies are capable of improving their revenues and maintaining profitability over time. As a result, they are better equipped to navigate through economic cycles and make investments to ultimately securing future growth.
By adopting a sustainable approach, companies can improve their use of resources, resulting in lower costs and greater profitability over the long term. Similarly, by investing in the development of human capital, companies can improve their productivity. These attributes make companies more competitive and thereby improve their profitability.

L'Oréal

The company has successfully decoupled its growth from its negative impact on the environment, reducing its absolute emissions by 91% compared to 2005, while increasing its production volumes by 45% and maintaining its operating margin between 15 and 20%.
Business sustainability
On top of profitability, our strategy focuses on companies that reinvest their profit to create new business drivers. The objective is to identify companies that can efficiently utilize their profits to fund internal or external projects. To assess this aspect, we utilize the Holt CFROI ratio, which allows us to uniformly compare the return on capital of all companies.
We believe that only companies that take account of their impact on all their stakeholders can outperform the market over several decades. This is precisely why we choose to exclude the most polluting companies from our investments. Additionally, we actively engage with the companies we invest in to ensure that their ongoing efforts align with our values.

Demant

The other Danish health giant is a global group that specializes in hearing care. Its remarkable growth has been driven by numerous innovations since 1904. We are committed to supporting them in improving their governance and encouraging them, like their products, to listen more closely to their investors.
Risk reduction

Quality companies generally have healthy balance sheets, stable cash flows and lower debt levels.
Moreover, they possess ample resources to invest in and adapt to evolving market conditions, such as emerging technologies, regulatory changes, and shifting consumer expectations. Consequently, they face a lower risk of their business model becoming outdated or obsolete.

Sustainable investment helps investors assess the risks associated with a company's future performance, by considering its environmental, social, and governance practices. We utilize our proprietary START tool to analyze these risks. By doing so, we strive to minimize our exposure to non-financial risks that may impact a company's profitability.

Schneider Electric

The company contributes to the security of electricity supply for the grid and buildings, and offers services to optimise their energy efficiency. The emissions avoided by their customers have tripled over the last 3 years, reaching 440 mtCO2e, higher than France's carbon footprint in 2023 (385 mtCO2e – territorial emitted).

A strategy that combines quality and sustainable investment

FP Carmignac Global Equity Compounders is an equity fund that has capitalised on the process established by Mark two decades ago. This sustainable fund, launched 4 years ago, offers a distinctive approach by investing in quality companies across the developed world. As an all-round fund, it is distinguished by:

Concentrated exposure to quality companies across developed countries42 portfolio holdings
A clear and coherent sustainable framework, enabling you to have a clear understanding of your investments100% of our investments are aligned with the UN SDGs (ex-cash)
Reducing greenhouse gas emissions < 50% Carbon emissions than its benchmark
Total transparency on both the financial and non-financial dimensions of the portfolio3 ESG reporting at your disposal
Exposure to companies capable of generating high returns on their investments23% Return on equity of the fund compared to 14% for the MSCI World
Outstanding long-term performance+70% vs 79% for the MSCI World over the last 5 years
A recognised sustainable approach
1Bruno G, Esakia M, Goltz F, Honey, I shrunk the ESG alpha: Risk-adjusting ESG portfolio returns. Scientific Beta Publication, April 2021. Source: Carmignac, Bloomberg, at 30/09/2024. The composition of the portfolio may change over time. Trademarks and logos do not imply any affiliation with or endorsement by the respective entities. Reference to a ranking or award does not constitute a guarantee of the future results of UCIS or the manager.

Past performance is not necessarily indicative of future performance. Returns may increase or decrease according to currency fluctuations for equities that are not hedged against currency risk. Performance is net of fees (excluding any entry fees charged by the distributor).

FP Carmignac Global Equity Compounders

A global, high-conviction equity fund for long-term investorsDiscover the Fund page

FP Carmignac Global Equity Compounders A GBP ACC

ISIN: GB00BMGLBK75
Recommended minimum investment horizon
5 years
Risk indicator*
6/7
SFDR - Fund Classification
Article -

*Risk Scale from the KIID (Key Investor Information Document). Risk 1 does not mean a risk-free investment. This indicator may change over time.

Main risks of the fund

Equity: The Fund may be affected by stock price variations, the scale of which is dependent on external factors, stock trading volumes or market capitalization.Liquidity: Temporary market distortions may have an impact on the pricing conditions under which the Fund might be caused to liquidate, initiate or modify its positions.Discretionary Management: Anticipations of financial market changes made by the Management Company have a direct effect on the Fund's performance, which depends on the stocks selected.
The Fund presents a risk of loss of capital.

Fees

ISIN: GB00BMGLBK75
Maximum subscription fees paid to distributors
0,00%
Redemption Fees
0,00%
Conversion Fee

-

Ongoing Charges
0.90%
Management Fees
0,82% EXT
Performance Fees

-

Footnote

Performance

ISIN: GB00BMGLBK75
FP Carmignac Global Equity Compounders23.122.6-19.021.0
Reference Indicator19.822.9-7.816.8
FP Carmignac Global Equity Compounders+ 26.8 %+ 5.8 %+ 12.9 %
Reference Indicator+ 26.2 %+ 8.7 %+ 14.5 %

Source: Carmignac at 31 Oct 2024.
​Past performance is not necessarily indicative of future performance. Performances are net of fees (excluding possible entrance fees charged by the distributor).

Related articles

Marketing communication. Please refer to the KID/KIID, prospectus of the fund before making any final investment decisions. This document is intended for professional clients.

This material may not be reproduced, in whole or in part, without prior authorisation from the Management Company. This material does not constitute a subscription offer, nor does it constitute investment advice. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. This material has been provided to you for informational purposes only and may not be relied upon by you in evaluating the merits of investing in any securities or interests referred to herein or for any other purposes. The information contained in this material may be partial information and may be modified without prior notice. They are expressed as of the date of writing and are derived from proprietary and non-proprietary sources deemed by Carmignac to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Carmignac, its officers, employees or agents.

Past performance is not necessarily indicative of future performance. Performances are net of fees (excluding possible entrance fees charged by the distributor). The return may increase or decrease as a result of currency fluctuations, for the shares which are not currency-hedged.

Reference to certain securities and financial instruments is for illustrative purposes to highlight stocks that are or have been included in the portfolios of funds in the Carmignac range. This is not intended to promote direct investment in those instruments, nor does it constitute investment advice. The Management Company is not subject to prohibition on trading in these instruments prior to issuing any communication. The portfolios of Carmignac funds may change without previous notice. The reference to a ranking or prize, is no guarantee of the future results of the UCIS or the manager.

Morningstar Rating™ : © Morningstar, Inc. All Rights Reserved. The information contained herein: is proprietary to Morningstar and/or its content providers; may not be copied or distributed; and is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

Access to the Funds may be subject to restrictions regarding certain persons or countries. This material is not directed to any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the material or availability of this material is prohibited. Persons in respect of whom such prohibitions apply must not access this material. Taxation depends on the situation of the individual. The Funds are not registered for retail distribution in Asia, in Japan, in North America, nor are they registered in South America. Carmignac Funds are registered in Singapore as restricted foreign scheme (for professional clients only). The Funds have not been registered under the US Securities Act of 1933. The Funds may not be offered or sold, directly or indirectly, for the benefit or on behalf of a «U.S. person», according to the definition of the US Regulation S and FATCA.
The risks, fees and ongoing charges are described in the KID (Key Information Document). The KID must be made available to the subscriber prior to subscription. The subscriber must read the KID. Investors may lose some or all their capital, as the capital in the funds are not guaranteed. The Funds present a risk of loss of capital.

The Funds’ prospectus, KIDs, NAVs and annual reports are available at www.carmignac.com, or upon request to the Management Carmignac Portfolio refers to the sub-funds of Carmignac Portfolio SICAV, an investment company under Luxembourg law, conforming to the UCITS Directive. The French investment funds (fonds communs de placement or FCP) are common funds in contractual form conforming to the UCITS or AIFM Directive under French law.

  • In France, Luxembourg, Sweden: The risks, fees and ongoing charges are described in the KID (Key Information Document). The KID must be made available to the subscriber prior to subscription. The subscriber must read the KID. Investors may lose some or all their capital, as the capital in the funds are not guaranteed. The Funds present a risk of loss of capital. The Funds’ prospectus, KIDs, NAV and annual reports are available at www.carmignac.com, or upon request to the Management.

  • In the United Kingdom: the Funds’ respective prospectuses, KIIDs and annual reports are available at www.carmignac.co.uk, or upon request to the Management Company, or for the French Funds, at the offices of the Facilities Agent at BNP PARIBAS SECURITIES SERVICES, operating through its branch in London: 55 Moorgate, London EC2R. This document was prepared by Carmignac Gestion, Carmignac Gestion Luxembourg or Carmignac UK Ltd. FP Carmignac ICVC (the “Company”) is an Investment Company with variable capital incorporated in England and Wales under registered number 839620 and is authorised by the FCA with effect from 4 April 2019 and launched on 15 May 2019. FundRock Partners Limited is the Authorised Corporate Director (the “ACD”) of the Company and is authorised and regulated by the FCA. Registered Office: Hamilton Centre, Rodney Way, Chelmsford, Essex, CM1 3BY, UK; Registered in England and Wales with number 4162989. Carmignac Gestion Luxembourg SA has been appointed as the Investment Manager and distributor in respect of the Company. Carmignac UK Ltd (Registered in England and Wales with number 14162894) has been appointed as a sub-Investment Manager of the Company and is authorised and regulated by the Financial Conduct Authority with FRN:984288.

  • In Switzerland: the prospectus, KIDs and annual report are available at www.carmignac.ch, or through our representative in Switzerland, CACEIS (Switzerland), S.A., Route de Signy 35, CH-1260 Nyon. The paying agent is CACEIS Bank, Montrouge, Nyon Branch / Switzerland, Route de Signy 35, 1260 Nyon.

The Management Company can cease promotion in your country anytime.
Investors have access to a summary of their rights in English on the following links: UK ; Switzerland ; France ; Luxembourg ; Sweden.