Sustainable investing often gets knocked for underperformance, but Joe Reiland says that, if anything, using environmental, social, and governance metrics enhances shareholder value.
The performance of his $3.9 billion American Century Sustainable Equity fund (ticker: AFDIX) bears that out. Sustainable Equity is a Morningstar five-star fund, beating both the S&P 500 index and the large-blend category on a one-, three- and five-year basis. Also on a five-year basis, Sustainable Equity sits among the top 5% of its peers, and doing so with an average expense ratio of 0.79%.
Reiland, the fund’s senior portfolio manager, points out that sustainable companies have strong governance at the management and board level and often have low employee turnover because they are actively engaged in enhancing worker satisfaction and career development. They are also typically mindful of their carbon footprint by managing costs and resources effectively, which usually means generating less waste, and using less water and electricity.
“That means your costs are likely lower, your margins are going to be higher, and that company is going to be more profitable,” Reiland says. “At the end of the day, the shareholders are going to have more value.”
The Kansas City, Mo.-based Reiland, 46, joined American Century in 2000. He became a portfolio manager of the fund in 2008. Before joining American Century, he was an equity analyst at Commerce Bank in Missouri.
American Century Sustainable Equity
|Large Blend Category||31.3||20.8||16.6|
|Top 10 Holdings / Ticker|
|Company / Ticker||% Assets|
|Microsoft / MSFT||7.5%|
|Alphabet / GOOGL||4.9|
|Apple / AAPL||3.8|
|Amazon.com / AMZN||3.8|
|Prologis / PLD||2.0|
|Nvidia / NVDA||2.0|
|JPMorgan Chase / JPM||1.9|
|NextEra Energy / NEE||1.8|
|Home Depot / HD||1.8|
|Morgan Stanley / MS||1.7|
Note: Holdings as of Sept. 30. Returns through Nov. 22; three- and five-year returns are annualized.
Reiland’s two co-managers, Justin Brown and Rob Bove, have also been with the fund since 2008 when it was called Fundamental Equity. In 2016, the team tweaked the existing quantitative and fundamental strategy to include sustainability analysis as more companies began addressing the topic, and they changed the fund’s name to Sustainable Equity.
The managers balance quantitative metrics and fundamental research when they review possible holdings. On the quant side, they seek stocks with positive growth, quality, valuation, and momentum factors. The fundamental side looks for business improvement, zeroing in on strong cash flows, which gives management the flexibility to address needs. They also consider earnings growth, margins, and return on equity.
Their ESG analysis balances quantitative metrics, using third-party ESG ratings and their own fundamental analysis. The best names will be in the center of a Venn diagram of these analyses.
Changing the strategy five years ago meant kicking out companies such as oil giant Exxon Mobil (XOM). The fund’s No. 5 holding, Prologis (PLD), a commercial and industrial real estate firm, was one of its first purchases under the new strategy.
Prologis is well-positioned to benefit from growing e-commerce, having favorable warehouse locations in cities, Reiland says. The company has one of the largest green-certified building portfolios in the sector and is one of the largest generators of solar power in the U.S., he adds. Additionally, he says, Prologis has “great worker-training development programs.”
In April 2020, the fund added Aptiv (APTV) after the Irish auto-parts company showed up on its quantitative screens. Aptiv has broad capabilities in both vehicle electrification and active auto-safety features. “They’re at the crossroads of a lot of sustainability trends that are really feeding that cash flow, that business-improvement profile,” Reiland says.
Reiland evaluates companies by sector relative to peers, seeking out the most sustainable in each, rather than shunning entire sectors like some ESG funds. That means the fund can have a small stake in ConocoPhillips (COP). Reiland says the oil-and-gas exploration-and-production company is “very mindful of greenhouse gas emissions and stewardship.”
The fund’s No. 8 holding is NextEra Energy (NEE), a utility with a sizable and growing renewable energy business alongside fossil-fuel and nuclear power generation. NextEra’s strong cash flow growth enables it to reinvest in renewable energy, and focus on storm-resilient energy facilities by replacing wood transmission structures and burying power lines.
Having some energy exposure may not sit well with ESG purists. But that’s not Reiland’s objective. He wants to make the fund compelling enough for people to have a hard time saying no to sustainable investing. “We want to be a competitive option in an Erisa plan, in a joint account,” he says. Erisa is the federal law over employee pension and benefit plans.
The United Nations Climate Change Conference, known as COP26, wrapped up earlier in November in Glasgow, with pledges by world leaders to reduce methane gas emissions, the most harmful greenhouse gas. Reiland believes that if attention on mitigating climate change continues, the fund will benefit.
“If the average investor cares more about the environment, cares more about the workers and the community, they’re going to be buying more of the types of names we own,” he says. Overall, the fund’s holdings produce 67% lower greenhouse gas emissions and generate 97% less waste than the broader S&P 500.
In July, the fund’s head of ESG, Guillaume Mascotto, left. Reiland says Mascotto built the firm’s ESG framework, particularly on proxy voting, and many of his responsibilities had shifted to a team of now six individuals, including a dedicated engagement analyst. American Century plans to eventually replace him, but it will be at a corporate level, rather than just for the fund.
Increasing a firmwide focus on sustainability also melds with American Century’s corporate structure. In 1998, American Century’s founder, Jim Stowers, and his wife established the nonprofit Stowers Institute for Medical Research, which, in turn, has a controlling interest in the fund company. Forty percent of American Century’s profits, in the form of dividends, fund the institute’s work.