Over the years, Funk and co-manager David Powell have differentiated the portfolio by combining familiar growth names, such as Microsoft, Alphabet and Amazon, with less well-known companies that aren’t on many investors’ radar screens. Many of the latter group are solid, steady growers.
Ball Corporation, the world’s largest producer of aluminum cans, fits into that category. Unlike plastic, aluminum is infinitely recyclable. It’s also lighter weight, easier to recycle than glass, and uses less water in the process. Funk says Ball, which has consistently delivered mid-single-digit revenue growth and low-teens earnings growth per share, is in a good position to take market share from both plastics and glass packaging manufacturers.
Recent additions to the portfolio include Bio-Rad Laboratories, a globally diversified manufacturer of life science and clinical diagnostic instruments, software and services. Its technology is used for early diagnosis of disease, notably in oncology. Bio-Rad also provides products used in food and water safety testing, as well as quality control to improve laboratory performance.
Another recent addition, Nike, has been in the portfolio in the past. “We believe this is a great time to own it again because for the first time in recent memory, the company should be able to grow revenue and margins simultaneously,” says Funk. Nike’s increased shift to direct-to-consumer sales, cost reductions and pricing power should help improve margins while a new product mix and gains in market share have the potential to boost revenue. Even though the company has a new CEO and could use some improvement on the ESG front, Funk believes Nike “has evolved from approaching sustainability as reputation management to a more proactive view of sustainability as a source of innovation and growth.”
An Evolving Label
Funk’s introduction to the connection between responsible business practices and profits came when she was an undergraduate chemical engineering major in the 1990s doing a summer internship at a paper recycling plant. Her work on a project to conserve water during the recycling process sparked the realization that by saving water the company was also boosting its bottom line.
Funk’s first job out of college was working as an environmental engineer helping large industrial companies comply with emissions regulations. She got a rude awakening. “I was the last person any shift manager or business leader wanted to see or spend time with,” she recalled in a 2015 TEDx Talk. “I was nothing but a cost sink.” After working at investment consulting, venture capital and institutional investment firms in environmental evaluation, she joined green-centered Winslow Management Company in 2007. That company was later acquired by Brown Advisory in 2009.
Despite being an early ESG adopter, Funk admits the label is still evolving. A sustainable investing style isn’t as specific or readily definable as, say, investing in a specific sector, or in growth or value stocks. Those who employ it often use different yardsticks for sustainability, or put a higher value on one measure than another. A company that one analyst considers sustainable may get the thumbs-down by another.
To add to the confusion, a growing number of investment companies, including Vanguard and BlackRock, now incorporate ESG criteria into their investment process without specifically labeling their products as “sustainable.” With so many players on board, it could be argued that the increasing reach of ESG criteria into mainstream investing lessens the need for mutual funds that put sustainability in the forefront of their profiles.
Funk says that, like credit ratings, ESG ratings are a subjective evaluation that does not fit a “one size fits all” criteria. Some screeners prioritize a target company’s transparency and disclosure, while others look more at a company’s environmental or social track record. Investors need to look at what’s behind third-party ESG ratings to decide which ones align most with their priorities. “Ratings, whether you’re looking at mutual fund rankings, credit ratings or ESG grades, should not be viewed as an end point,” she says. “We look at them as a launch point for research that spurs subsequent questions and more digging for information.”
She adds that unlike many investment managers who incorporate sustainability into their evaluations, her firm puts them front and center. “We were doing this long before third-party sustainability ratings and standardization criteria came into effect,” she says. “For us, sustainability is not just an overlay or an add-on. We turn over more rocks and dig deeper to find out how a company’s strategy, operations and prospects for growth connect with its sustainability practices.”