Low-debt companies driving returns for ESG investors
Avoiding investment in highly leveraged ASX-listed companies can lead to stronger returns, according to a study by environmental, social and governance (ESG) and Islamic fund manager Hejaz Financial Services.
Their recent analysis showed that over one year, the total return (weighted average) for companies with a debt/market capitalisation ratio less than 30% was 14.92%, which was three times that of companies with ratios of 30% or higher.
Over a period of three years, companies with relatively low debt/market cap ratios returned 25.35% (weighted average), compared to 8.89% for the rest of the market.
Over five years, low-debt companies more than doubled the investment return (on weighted average) of more highly geared stocks.
The sectors most likely to include highly-leveraged companies were financials, real estate and utilities, with IT and healthcare companies carrying debt/market cap ratios of less than 30%.
Hakan Ozyon, Hejaz’s senior portfolio manager and chief executive, said that approach helped deliver consistent returns for clients and help outperform ‘mainstream’ ESG funds.
“By taking a values-based approach to investing which, for Hejaz, involves excluding highly leveraged companies, we’ve delivered a gross return of 9.37% per annum since inception,” Ozyon said.
“With interest rates reaching record lows and debt being cheaper than ever, we’ve seen a sharp rise in management’s comfort with taking on greater levels of debt.”
AUTHOR
Chris Dastoor
Recommended for you
Iress has announced it will divest its superannuation business as the latest step in its transformation program, allowing it to focus on wealth management.
The corporate regulator has named its new chief executive, who is set to replace retiring interim CEO Greg Yanco in March.
Following the departure of its chief marketing officer last year, AMP has appointed a successor to take up the position with the appointment coming from the US.
The Financial Services Council has appointed Justine Earl-Smith as executive director for commercial partnerships and growth, a newly created role for the organisation.
