In conversation with Amit Nigam, Fund Manager of Invesco Mutual Fund

Can you elaborate on the investment strategy of your newly launched ESG Fund?  

 Investing guided by principles of the environment (E), social (S) & governance (G) is gaining significance during current times. Our understanding of these principles suggests that a disregard of E, S, or G factors by companies tends to manifest as potential risks. 

Consequently, our proprietary investment process has been supplemented, with an overlay of our ESG framework, which attempts to estimate this potential ‘risk’ in companies. The stock selection for our newly launched fund is guided by this ESG framework; wherein, we score the companies on a scale of 1-3 (low risk to high risk, respectively). This fund will invest in those companies which, as per our filters on the score, manage these risks well. 

We intend to have, at all times on an aggregate basis, a weighted average ESG risk score of less than or equal to 1.5 (our investors get to participate in a portfolio of companies that collectively offer the top quartile of our scoring range). 

In terms of look and feel, how will it be different from a typical large-cap fund?  

This fund positioned in the thematic category will invest in stocks based on ESG risk scores, as per our ESG framework. Our proprietary process gives us the ability to score companies across market capitalisations. We intend to utilise this flexibility during the portfolio construct. 

We look to have 30-40 holdings, with up to 35 per cent of the portfolio in mid-cap & small-cap stocks. At all times, the large-cap stocks allocation will be a minimum of 65 per cent (large-cap funds have this minimum at a higher threshold of 80 per cent). The choice of stocks will ensure a blend of growth and value styles. 

What has been your experience in terms of the constituent of eligible companies that may become part of ESG portfolio with regard to sector and category (large, mid & small)?  

Our proprietary ESG scoring process gives us the ability to evaluate the risk score of the companies across sectors and market capitalisations. As we write, out of our categorised (investable) universe of 156 companies, 108 companies are eligible (as per the cut-off ESG scores) for investments in this fund with a mix of approx. 45 per cent large-cap stocks, around 30 per cent mid-cap stocks along with the remaining approx. 25 per cent small-cap stocks. 

At present, we see this framework penalise few ‘old-economy' businesses. We have however ensured, in our process, that if companies in such sectors are making investments to lower these ‘potential’ risks, then we would take cognisance of the same. Further, to align ourselves to our global policies, we have built-in a few baseline sector exclusions, like tobacco, gambling, coal-based power plants, coal mining, etc. 

From the investors' perspective, which type of goal one can allocate to such a fund?  

This is an equity fund and hence, only the long-term goals of investors should be mapped to it. The process of stock selection based on our ESG framework enables a choice of companies with lower potential risks (due to E, S, or G factors). Hence, the objective of better risk-adjusted returns in such portfolios may be expected over the long-term. 

What is your take on the current valuation of the Indian equity market?  

The genesis of a sharp rise in global equity markets, over the previous year, lies in the monetary stimulus of 2020-21 by central banks across countries. The simultaneous fiscal measures by the governments have further improved the growth outlook for the economies. Also, the undergoing roll-out of the vaccine across countries, in a scenario of subsequent virus spreads, shall not only keep the fear to human lives at bay but also, the probabilities of severe economic lockdowns low. 

India has not been too different on these aspects and additionally, one sees an increased government focus to push economic growth through a better and improved policy framework. Also, we see improving corporate earnings growth during the previous two quarters. We are of the opinion that with reduced cost structures and improved balance sheets, corporate earnings are in the early stages of a recovery and this may extend into a multi-year growth cycle. 

The current market valuations, when considered in this backdrop, are not expensive and offer investors an opportunity to earn growth-based returns even from the current levels. 

Which sectors you believe will drive the index returns from here on?  

In line with our base case of sustained economic growth for a longer timeframe driven by the growth-oriented budget, accommodative stance of Reserve Bank of India, benign global liquidity along with under-penetration opportunities in many industries in a young aspirational nation like India, we like pro-cyclical sectors such as financials, industrials, and consumer discretionary on a structural basis. Additionally, commodity stocks also look attractive on a tactical basis.