19. Sep 2019 Sustainability

Dividends and growth – but please be sustainable

DWS portfolio manager Martin Berberich explains why sustainable dividend funds with a defensive focus on growth are a good fit in current market conditions.

  • Sustainable investment is becoming increasingly popular with investors.
  • Equity funds, such as DWS Invest ESG Equity Income, that combine high dividend yields with a defensive focus, are likely to be a good fit in a market environment where interest rates are low and share price potential is limited.
  • Sustainable fund returns usually do a very good job of keeping up with traditional fund returns.
4 minutes to read

Martin, ordinary people and politicians are now discussing climate change more intensely than ever before. What’s in it for investors?

Investors are no different from society at large: more and more of them are discovering sustainable forms of investment – for example, funds that are put together based on ethical, social and environmental (ESG) criteria. As a result, this segment is going from strength to strength. Investors want to do something to protect natural resources and improve social justice too.

You manage DWS Invest ESG Equity Income, which was launched two years ago. Is the increased popularity of ESG investing in evidence in the fund?

The fund generated net inflows of more than 50 million euros this year alone. That is more than one quarter of its volume since launch. Of course, alongside the sustainable focus, this also has to do with the fund’s other characteristics, which are a good fit in current market conditions. In any case, this shows that sustainable forms of investment have become established and their popularity is increasing.

ESG funds avoid controversial assets, such as defence and gambling stocks. But doesn’t that hurt returns?

Sustainability and returns do not have to be mutually exclusive. For example, returns on DWS Invest ESG Equity Income have been extremely positive at fully 17 percent since launch in August 2017 (as of: 09/09/2019). In 2018, the rating agency Morningstar[1] even included the fund in the “Global Equity Income” comparison group’s top ten percent. The fund’s positive performance since the start of the year is mainly due to two decisions: we excluded tobacco stocks, which many investors have shunned recently, and we included ESG-oriented stocks with an above-average growth profile from the utilities, consumer goods and health sectors.

Martin Berberich

Portfolio manager of DWS Invest ESG Equity Income

Have sustainably managed funds now basically reached the point where they generate better returns that traditional funds?

I would not want to generalise like that. But there are certainly some examples of this. Funds focused on above-average distributions and defensive positioning are also a good fit in the current market environment, where investors are extremely insecure because there are so many political risks.

Beyond sustainability criteria, what is the investment logic for ESG Equity?

I would describe the general focus as “defensive growth”. As with any dividend fund, the fund’s distributions are above average. Since its launch, dividend returns have been about one percentage point above the wider market – 3.3 percent at the end of July, for example. The fund is focused on companies that are growing a bit faster than the economy in general and prefers defensive stocks. This means that when markets go up, investors do not always get the full benefit. However, the fund usually loses less than the wider market when things get uncomfortable.

Could you please give us a few examples of companies that meet the fund’s criteria?

These are companies from sectors that do not follow the economic cycles as closely as other companies. For example, a global pest control company is included in the fund’s investments. Whatever the situation on the markets, its services are in demand all year round from restaurants and public bodies such as hospitals. The company's annual growth is four to six percent, and it therefore has a stable business model that does not depend on the economic cycle. To the contrary, it even benefits from global warming. Another example is a digital publishing house that provides software tools and information content for certain groups of professionals, such as lawyers, tax advisers and doctors. This is also a business that is relatively untouched by market conditions with slightly above-average growth rates.

Is it the case, then, that sustainability and defensive business models often go hand-in-hand?

Yes, this is true in the renewable energy sector, for example. Since the fund’s launch, we have invested in a wind turbine manufacturer and a leading company that produces biodiesel from food waste. Such explicitly sustainable business models are also comparatively resistant to economic fluctuations.

Is the defensive approach with a focus on dividends a good one for the future?

A climate that favours defensive growth stocks is likely to remain in place for a while. Central banks have indicated that they want to give expansionary monetary policy yet another try. On the other hand, latent trade conflicts are likely to create uncertainty for a while to come, slowing economic growth worldwide. In such a complex situation, we believe a defensive dividend strategy makes sense. 

Facts and figures on DWS Invest ESG Equity Income LC:

  • ISIN/WKN: LU1616932866/ DWS2NX

  • Fund type: Equity Fund

  • Share class currency: EUR

  • Front-end load: 5.0 %

  • Income: Accumulation

  • Current costs (12/31/2018): 1.80%

Past 12-month performance of DWS Invest ESG Equity Income LC

Periond

Net

Gross

09/11/2018 – 09/11/2019

12.56 %

12.56 %

09/11/2017 – 09/11/2018

6.12 %

6.12 %

09/11/2017 – 09/11/2017

-5.66 %

-1.17 %

The gross performance (BVI method) takes into account all costs incurred at fund level, the net performance also takes into account the front-end load; further costs may be incurred at investor level (e.g. custody account costs). Since the front-end load is only incurred in the first year, the gross/net presentation differs only in this year. Past performance is not a reliable indication of future performance.

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