Just a handful of experts in the sustainable investment community would associate LBBW Asset Management (AM) with being an ESG fund manager. At first sight other asset management houses in the European market could be better known as a typical ESG manager than the investment boutique based in Stuttgart, Germany.
This asset manager has been widely active in the field of sustainable investing for the past ten years. Personnel continuity, outstanding expertise and a solid and transparent sustainability investment strategy constitute the main drivers of their success. And that is exactly why an increasing amount of institutional clients have been seduced by this rising boutique for the past years.
LBBW AM is a 100 percent subsidiary of Landesbank Baden-Wuerttemberg. The company’s client base is broadly diversified with a strong focus on institutional investors ie pension funds, insurance companies, corporations, SMEs, savings banks and churches, among others. In January 2010 the firm was lauded with the highest ÄuroFinanzen award as ‘Fund Boutique of the Year’, winning additional prizes in six different asset classes. The company successfully manages mutual funds as well as segregated mandates (known in the German market as ‘Spezialfonds’) within their clearly defined core competencies. Their investment solutions comprise value-oriented European equity, fixed income with focus on European corporate bonds, commodities and sustainable responsible investment (SRI) portfolios both for equity and fixed income.
For bond and equity security selection purposes this investment house follows a rigorous fundamental active investment approach designed to maximise alpha. Within a framework of effective governance all of their fund managers both enjoy a high degree of freedom and assume a high degree of self-responsibility and self-discipline. Because of their expertise in the management of ESG solutions and while timely identifying the rising demand for sustainable investments, the company expanded already a few years ago its commitment to investment excellence into this field. To underline the importance of that decision, LBBW AM gained membership in FNG (The German, Austrian and Swiss Sustainable Investment Forum); one of the most important organisms regarding issues of sustainable investing in the German speaking area and Europe. In addition Landesbank Baden-Wuerttemberg adhered last year to the ‘Principles for Responsible Investments’ of the United Nations (UN PRI).
The history of this boutique provides a fascinating example of the conception and evolution of premium sustainable investment products. About ten years ago LBBW Asset Management first sought to address the topic in conjunction with one of their most important clients from the ecclesiastic sector. The outcome of numerous rounds of discussions took shape when a strategical partnership with a reputable rating agency was established, a solid catalogue of screening criteria was set and a comprehensive investment process was drafted to be then successfully implemented into a segregated mandate using a combination of negative screening and best in class approach. This long-dated partnership with the Munich-based rating agency oekom research AG provided indeed a quality seal that stands for trust and outstanding investment management capabilities in the field.
This is how the firm started managing numerous segregated mandates for institutional clients. And as it is usual in the investment management industry, success came with time. When performance figures confirmed the quality of their management, it was a logical step for the firm to establish in 2006 a sustainability mutual fund – the equity product ‘LBBW NachhaltigkeitsStrategie’. The fund is loyal to two core principles, on the one hand, it follows a best in class approach and on the other, it applies a consistent ‘negative screening’. The above mentioned best in class concept promotes a healthy environment of competition among companies for them to become the most sustainable firm within the peer group. As for the negative screening policy, it consistently guarantees the exclusion of securities from investment consideration based on a set of previously defined criteria including nuclear energy, armour and ammunition, alcohol, tobacco, agricultural genetic engineering and gambling. Companies that show evidence of social wrongdoing including corruption, child labour or human rights violation are to be excluded as well.
Investors have been attracted by the consistency and transparency of their investment management process. For that reason, the product LBBW NachhaltigkeitsStrategie was the first German fund to be awarded with the ‘European SRI Transparency Code’ by the European Sustainable Investment Forum (Eurosif) – organism created in 2001 to serve as an umbrella association addressing socially responsible investment issues in Europe.
As international investment products have expanded, so have sustainability products. In the past couple of years the interest of investors for fixed income ESG funds showed evidence of a steady increase. If a general outcome of the most recent financial crisis is worth mentioning, it would be the overall lack of confidence in financial institutions or for instance, political regimes with dubious reputation and creditworthiness. As a result not only institutional clients want to profit from this type of responsible investing. Also high net worth individuals (HNIs) seek investment solutions that bear in mind environmental, social and corporate governance factors. And fortunately, for those rather risk-averse investor that prefer avoiding the embedded volatility of equities, financial markets have also engineered fine-tuned solutions, ie fixed income sustainability products.
These vehicles provide a more conservative risk-return profile while also considering environmental, social and governance factors, the so-called ‘double yield’.
Due to this market development LBBW AM launched in 2009 an innovative mutual fund within this asset class: ‘LBBW Nachhaltigkeit Renten’. The fund invests in European sovereign, covered and corporate bonds that in addition to adhering to a best in class approach are also to meet a set of customized fixed income selection criteria.
For instance, only certain sovereign debt securities can be invested in – the negative screening extends to securities issued by governments that do not implement effective and sustainable policies against topics of concern such as nuclear energy, climate change, commodity shortage, corruption, above-average military budgets or possession of nuclear weapons, efficient water use and/or the burden of public debt. This investment vehicle has proved to be a fine example in managing fixed income funds with the additional ESG added value.
The last decade has seen with excitement the development of this market player and the correspondent evolution of its total assets, which currently amount to Ä23.2bn. Their ESG assets have recently reached the Ä0.25bn mark and promise an increasing rate of growth for the coming years.
All-in-all, LBBW AM has given a valuable lesson to the market by positioning itself as a premium ESG asset manager with an established track record of strong risk-adjusted performance and sufficient organizational resources to continue to support their investment efforts. This boutique has confirmed that a transparent and sound investment strategy for ESG portfolios consistently delivers alpha to investors.