Morphic Asset Management is launching the Morphic Ethical Equities Fund Limited (MEC), a new ethically screened global equity LIC.
Morphic combines ethical screens with an investment strategy focussed on growing wealth over the long-term by generating returns in excess of the benchmark over a full investment cycle, at below market levels of risk, according to the fund manager. Morphic’s key players have a long history of ethical investment, with co-founder and Managing Director Jack Lowenstein having previously worked for Hunter Hall from 1997 to 2011.
“The challenge is to get the good returns and not compromise the ethical screen,” Lowenstein said. “That involves quite a lot of complexity, but we are a long short manager. We strip out all exposures to what we don’t like, and invest in those we do.”
Morphic said it will use a similar investment process and strategy for MEC to that of its other managed fund, the Morphic Global Opportunities Fund (MGOF), and add the ethical screen on top. Since inception in August 2012, the MGOF has earned investors a compound annualised return of 17.3%, Morphic said.
“Basically, our view is that there is a long-term tailwind to help us,” Lowenstein said. “We are pretty confident we’ve reached peak coal demand, and we’re close to reaching peak oil demand. At the same time, the technologies for producing oil are getting better and better, but that means that the returns from investing in hydrocarbons are getting worse and worse; the price is going down and the competition is intense because demand is falling. There’s a generation of investors, not necessarily young, and they are more and more focused on this critical point that whether they’re young or old they can sense that the world is getting more and more polluted … And they don’t want to live in or leave a world that is poorer, polluted and disorderly.”
While MEC will invest in some mining stocks, it will also invest in alternative energy. Lowenstein said.
“One of the risks from an investment perspective, if you ban investment in fossil fuels, and if the price of oil goes up, fossil fuel stocks rise and your performance will struggle in comparison,” he said. “That’s why we’ll keep in touch with alternative energy, which also does very well when oil goes up. That’s the way we’re handling that.”
MEC will also feature a long/short strategy, although shorting won’t be prominent part of the fund, Lowenstein said.
“Basically, the way it works is that in order to make sure we have no exposures, even indirect exposures, we get one of our prime brokers to create a basket of stocks we’re not allowed to own and we short that, which permits us to buy more of the good stuff,” he said. “We think the capacity from time to time to short things that you don’t approve of, that are also overvalued, is a good one. Our track record at Morphic is that we have a deeply embedded risk culture, with low volatility, and one way we achieve that low volatility is through a long/short strategy.”
MEC will be managed by Morphic Asset Management, and the initial public offering opened on March 13th for Australian and New Zealand investors. The joint lead managers are Taylor Collison and Morgan Financial, while Macquarie Equities is co-manager.
Westpac’s fund incubation business Ascalon Capital Managers owns one third of Morphic Asset Management, and Ascalon will invest $5 million in the IPO. LIC pioneer Geoff Wilson will also invest $1.1m and will be introducing MEC to shareholders in the Wilson Asset Management LIC stable, Morphic said.
MEC seeks to raise up to $220 million, and can accept over-subscriptions for a further $55m. The issue price is $1.10 per share. An option allowing investors to buy another share at $1.10 at any time before November 30th, 2018 will be issued for every share taken up in the Offer.
MEC’s offer period is expected to close on 19 April 2017. Trading on the ASX is expected to commence on 3 May 2017. The Board of MEC will include Independent Directors Joanna Fisher (Chair), Mark Forstmann and Virginia Malley.
Rachel Alembakis is the publisher of The Sustainability Report a weekly digital publication that provides reporting into Environmental, Social and Governance (ESG) issues related to companies listed on the Australian Stock Exchange.