NZ stocks make up for dirty Aussie coal at Martin Currie

by Greg Bright

As the debate about divestment of certain stocks bubbles along among fund managers and their institutional clients, often concerning whether returns may be impacted by a divestment program, at least one manager is looking to New Zealand to provide cleaner substitutes for its energy exposure in Aussie equities.

Martin Currie Australia, an affiliate manager of Legg Mason Asset Management, which manages about $10 billion across a range of equity funds and strategies, has invested in four ASX-listed but NZ-domiciled “integrated energy utilities”: Contact Energy, Mercury Energy, Genesis Energy and Meridian Energy.

Will Baylis, who is co- portfolio manager of the Legg Mason Martin Currie Ethical Fund as well as Martin Currie Australia multi-strategy portfolio manager, says each of those companies passes the manager’s tests for quality, in terms of earnings, as well as rating highly on ESG grounds.

“In fact they are gold-plated utilities,” he says. “New Zealand is a very valuable market for us to be able to get good reliable income growth from solid companies in the renewable space.”

Each is ex-NZ Government-owned with experienced management, good long -term contracts and track records.

From an Australian investor’s perspective, the dual-listed stocks are fungible so that buying and selling in Australia is the same as in the home country listing, with an adjustment for any currency differential.

The stocks allow, for instance, Martin Currie to not hold AGL in its ethical fund, although the firm rates the big energy provider very highly in financial terms and owns some shares in its other portfolios.

AGL, in fact, presents a bit of a quandary for managers because it is both a large user and producer of so-called “dirty” coal and also one of the largest developers of renewable energy streams.

About 50 per cent of all New Zealand electricity comes from hydro sources, 17 per cent from geothermal and 5 per cent from wind. The country also draws other energy usage, such as heating, from geothermal.

Of the 34 countries tracked by the OECD for renewable electricity production, New Zealand ranks third behind Iceland and Norway. Australia ranks 28th, just ahead of the US at 29th, as of a 2015 report.

Martin Currie includes various ESG factors in its valuations for all companies it analyses and ESG is incorporated into all strategies. However, the ethical fund is the only strategy which also has a blanket negative screen that precludes buying AGL, for instance, because approximately 40 per cent of the company’s EDITDA comes from coal-powered electricity generation. Martin Currie’s ethical screen does not allow for more than 20 per cent of a company’s EBITDA to be in thermal coal power generation

“That’s why New Zealand names become good replacements for AGL or Origin,” Baylis says.

The firm’s investment product range has been expanded significantly since the GFC with the addition of equity income, real income, ethical equity income and multi-asset income, reflecting the shift in investor demand. The ethical strategy, which has about $100 million under management in a trust plus small mandates, was launched in late 2015.

MSCI research is used by the ethical strategies to ensure no breeches of OECD or United Nations codes of ethics, such as the use of child labour. MSCI posts a “red flag” notice on companies when they breech a code, as happened with BHP Billiton when it had its Brazilian mining disaster, which automatically excluded the stock from Martin Currie’s ethical universe.

“We don’t just rely on the MSCI score, though,” Baylis says. “We always meet with companies and discuss governance issues along with everything else. We have good access because of our funds under management both in Australia and globally. We listen to proxy advisors and will always vote against resolutions when we see them as inappropriate.”