Financial-market turbulence has alerted more investors to the benefits of investing in low-volatility equities. What many investors may not appreciate, however, is that―depending on the investment approach they take―it’s possible to buy low-volatility stocks which pay socially as well as financially.
As more investors are discovering, low-volatility stocks have tended to outperform the market over time by losing less on the downside when the market has fallen and capturing enough of the upside when markets recovered.
There are many ways of attempting to identify good, low-volatility stocks. In our case, we look for stocks in companies that are stable and of sound quality, with strong cashflows and attractive valuations.
Such companies can operate in many different markets, but we’ve noticed that some of them happen to be very closely aligned to society’s needs―to such an extent, in fact, that the work they do has an unusually high social value.
Such as enabling deaf people to hear, helping people through difficult times, curbing greenhouse emissions and achieving breakthroughs in the treatment of diseases.
Indeed, four of the outperforming stocks in our Managed Volatility Equities portfolio last year did precisely these things. They were, respectively, Cochlear, Medibank Private, Qantas and CSL.
There’s a logical reason why some of the companies we invested in happened to be well aligned to society’s needs: it’s because of a similarity between market dynamics and business models.
The needs of society change relatively slowly over time (hence the companies tend to be stable) and the rewards of meeting those needs in new and effective ways can be substantial (hence robust earnings and cash flow).
It can be emotionally satisfying to own a stake in a company that benefits society. But that raises a question: when the investment signals for such a stock turn to “sell”, should the socially-conscious investor be ruled by the heart or the head?
Before we consider that question, let’s look in some detail at what these four companies do.
These Companies Can Improve People’s Lives…
Cochlear is recognised globally as a major innovator in designing and making hearing implants and other innovative hearing solutions. More than 250,000 people have received its devices since 1982 and, while the company has achieved dominant market share in Australia and the US, it still has room to grow globally. During the first half of 2017, its developed-market business grew 12%.
The company’s ability to transform lives can be seen in this video, in which a mother describes an implant’s effect on her four-year-old daughter. The social value of Cochlear’s work takes on more significance when considered in aggregate terms―that is, its impact on the health and productivity of the broader economy as more individuals regain their hearing or hear for the first time.
Private health insurer Medibank’s social value, as measured by customer experience, was quite low just a few years ago, when complaints about the company to the Private Health Insurance Ombudsman were 2.2 times the industry average. The poor performance was the result of computer problems as well as below-standard customer service.
A realignment of the organisation to address that issue has resulted in a huge improvement, with the company’s share of industry complaints having fallen to well below the industry average. It also took a big step to improve customer service further by launching a “concierge” service to provide personal assistance to people preparing for, or recovering from, a stay in hospital.
The aviation industry is widely regarded as a high emitter of carbon but Qantas, in our view, provides a good example of how an airline can improve its carbon efficiency. The company is targeting zero growth in its emissions after 2020 through a combination of innovative fuel efficiency, higher load factors, new aircraft, energy-management apps for pilots and investment in carbon offsets.1
CSL has dramatically improved the lives of sufferers of hereditary angioedema (HAE)―a rare and potentially life-threating genetic condition which causes swelling in various parts of the body―with the introduction of Hizentra, a drug which, compared to its predecessors, sharply reduces the recurrence of critical episodes of the disease.
The drug’s success―a driver of the 24% increase in CSL’s net profit after tax in 2017―is reflected in the experiences of this family in the US, for whom HAE has been a challenge for generations.
…But When It’s Time to Sell, Sell
These highly positive stories suggest that, for socially aware investors, there may be a value in owning these shares above and beyond the financial benefits. Should that become a consideration when our research clearly indicates that it’s time to sell these shares?
No, is the simple answer. That might sound harsh, but it’s important to think of these and similar stocks in the context of an active investment strategy.
Our core focus as active managers is to invest in a diversified portfolio of stable, high-quality stocks at reasonable valuations. If a company for some reason no longer meets these criteria, we will remove it from the portfolio, regardless of our admiration for its benefits to society.
1AllianceBernstein Australia Ltd is a partner in Qantas’ Future Planet customer carbon offset programme.
Disclosure on Security Examples
