Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

We talk a lot here at Fidelity about the need to diversify your portfolio across different geographies, asset classes, sectors, investment styles, and so on. But have you ever thought of diversifying across different ‘themes’?

Thematic investing involves delving beyond the confines of certain sectors or geographies and instead looking “diagonally” across markets for structural drivers and macro trends that have the potential to deliver sustainable returns over the long term.

Portfolio manager, Bertrand Lecourt, aims to capture two such themes through his Fidelity Sustainable Water and Waste Fund.

As the name suggests, Lecourt looks for companies involved in water and waste management globally. And, as you’d expect, he’s very excited about thematic investing. He sees it as “a different way of looking at the world. Usually you look at a sector or geography. Here, you look diagonally - not just at an industry, but at something that lasts for a long, long time.”

At first glance, the two themes may seem like an odd combination. Fortunately, my colleague, Tom Stevenson, recently caught up with the manager to understand the thinking behind his strategy.

Why water, why waste, and why both at the same time?

In the eyes of the manager, water and waste are inextricably linked as “two components of who we are.”

As he explains: “There is no economy without water. But even if you have water, you need to have waste management so the economy can keep on going. The two have had the same long-term drivers for thousands of years and they also have the same solutions. The two together is something that lasts and has a long-term benefit to society.”

That last part is central to what Lecourt is trying to achieve. Tom asks him what the fund’s “sustainability” label means to him and how it affects the way he invests. Lecourt explains that there are two ways he thinks about companies’ sustainability levels.

First, he looks for companies “that do their job well”. For him, being environmentally responsible, contributing positively to society and demonstrating strong corporate governance are all prerequisites.

But he also asks himself what his companies do to society in general. His two themes naturally draw him to sustainability-orientated companies - he explains that “these water and waste companies have a very big impact not only on the economy but also a big social and environmental impact.” He points out also how many water and waste firms are local employers that add value to their communities.

As many investors are coming to realise, long-term drivers focussed around sustainability no longer serve just to tick ethical boxes, they also reflect the way the world is changing and where its future lies. Water and waste management are investment themes which are likely to stand the test of time - helping to make this fund “sustainable” in both an ethical and financial sense.

High conviction matched with diversification

The fund aims to hold between 35-50 (currently 47) holdings, meaning it’s a relatively concentrated portfolio. But, in Lecourt’s eyes, the fund’s thematic approach means taking high conviction positions in fewer companies does not add undue levels of risk.

He explains how there’s little correlation between his stocks’ performance - the performance of a water company in the US, for example, will not resemble that of a Chinese waste company. As such, he feels that 35-50 names “have the capacity to add value in the portfolio, but also are different enough to provide diversification.”

And just as Lecourt sees little correlation between his stocks, he feels the fund can add a level of diversification against most investors’ other funds. Simply put, his team “invest in companies which people don’t own or have forgotten”.

He focusses on small to mid-cap companies which tend to fall outside the remit of larger sector or geography-based funds. He explains how these companies “were forgotten for the last six months” as COVID-induced volatility saw investors sell out of his companies and move to the supposed security of safe haven assets.

As such, he feels that now presents an exciting opportunity for his fund. While many investors sold out of his companies, their “fundamentals are still very strong, All the long-term drivers are still very much at play.”

What’s more, he feels his fund encompasses themes only likely to grow in prominence as we emerge from the pandemic. Higher levels of corporate interest in sustainability and increased government investment in infrastructure projects have driven added focus on water and waste management.

For thematic investors, uncovering long-term, sustainable stories like these is key - as Lecourt puts it: “when you think about water and waste, it’s a story of us as human beings.”

More on Fidelity Water and Waste Fund

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. The Investment Manager’s focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus.  No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials.  The status of a security’s ESG credentials can change over time. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics Covered

ESG investing, Funds, Global

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