Martin Grosskopf, lead manager of the $64-million Acuity Social Values Balanced, says that being a socially responsible investor does not put him at a competitive disadvantage. In fact, he cites benefits in terms of risk management.
"We certainly think that an environmental, social and governance (ESG) approach is not detracting from performance," says Grosskopf. "In fact we think we may be uncovering some risks that aren't normally analyzed."
Grosskopf is a director, sustainability research, and a portfolio manager at Toronto-based Acuity Investment Management Inc. In February 2011, the firm was purchased by AGF Management Ltd.
To meet its ESG criteria, the fund excludes companies that earn revenue principally from alcohol, gambling, tobacco or weaponry, or companies that generate more than 10% of their revenue from nuclear production.
Five portfolio managers, including Grosskopf, serve on the investment committee that manages all of the Acuity funds. David Stonehouse, the head of fixed income, is responsible for the bond holdings across all of the mandates, including Acuity Social Values Balanced.
The team meets daily, with each member having industry-coverage responsibilities Grosskopf, who specializes in clean technology, covers part of the materials sector and many of the industrial companies. Acuity also hires third-party specialists to supplement its research.
As growth managers, Grosskopf and his colleagues seek companies with above-peer-group earnings growth at reasonable valuations. They tend to get excited about double-digit growth rates, depending on the sector.
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They also favour companies with strong balance sheets, track records of dividend growth, and sustainable competitive advantages. To make their purchases timely, they try to identify catalysts that will drive the stock price higher over the next 12 to 18 months.
Secure Energy Services Inc. SES, a waste-management company, "is a perfect example of the sector analysis providing a gem for us," says Grosskopf. SES recycles or disposes of waste from oil rigs, and its business is on the upswing.
"The company has very solid margins," says Grosskopf. "It's had a growth rate north of 40% and we think the growth rate for 2012 is likely to be north of 60%. It's still a smaller-cap company, but with a tremendous growth rate and great earnings visibility, and the multiples look cheap." The managers discovered the company before it was covered by analysts.
Grosskopf says the Acuity equity funds generally have portfolio turnover in the range of 100%. But the turnover in Acuity Social Values Balanced is much lower -- "around 40%" -- reflecting the fund's more conservative mandate.
The balanced fund holds 60 to 100 stocks. Its current list of 70 names is skewed toward mid- to large-capitalization companies. About 10% of the portfolio is invested in foreign content, primarily from the United States, in areas such as health care, industrials and technology.
Canadian equities currently represent about 58% of the mandate, or the vast majority of the equity holdings. An individual stock position will be trimmed back if it exceeds 4% of the overall portfolio. Bonds currently represent about 39% of the portfolio and, to minimize risk, consist entirely of investment-grade issues.
Grosskopf, 44, is a graduate of York University who received a master's degree in environment studies in 1994. While at work, he was a consultant to the power industry on environmental issues. After graduation, he joined a large engineering firm as an environmental scientist.
From 1997 to 2000, Grosskopf was a project manager at Canadian Standards Association, involved in international standards and quality management. After studying part-time for an MBA, he received his degree from York's Schulich School of Business in 2000. He joined Acuity in September 2000 as an analyst on the social-values mandate.
During Grosskopf's tenure on Acuity Social Values Balanced, the fund has an annualized 10-year return of 4.5% compared with the median 4.4% in the Canadian Equity Balanced category, as of Dec. 31. More recently, the fund has a three-year return of 11.6% compared with the median 9.2%.
Looking ahead, the new AGF ownership is considered a boost for the social-values mandates. "What is exciting to us in this area," says Grosskopf, "is that AGF has global reach, it's got global resources, and we don't think that this area has ever been effectively marketed. We still think there's tremendous opportunity to grow this segment in the Canadian market."
