Western & Southern affiliate Touchstone Investments recently expanded its exchange traded fund lineup with the launch of the strong ticker game Touchstone Climate Transition ETF (HEAT) bringing the traditional m utual fund and investment manager's tally to five funds with around $225 million in assets under management. I've covered a number of what used to be called "ESG" funds, but are now referred to as "Climate Transition" strategies. (That label change came after the Securities and Exchange Commission voiced some concerns about the use of environmental, social, and corporate governance in fund labeling.) Let's see how this fund captures the "climate transition" zeitgeist.
Bringing the HEAT?
Touchstone partnered with sub-adviser Lombard Odier Investment Managers, who, per the firm's most recently filed Form ADV, is a U.S.-based manager with roughly $8 billion in assets under management. Of those assets, interestingly about $6.6 billion of them are from non-U.S. investors. After researching them, I get the impression this manager was based in Geneva and Montreal before setting up its current NYC-based office. The reason why this got my interest is that since it's been said that "America innovates, China replicates, and Europe legislates," my take is that the legislation Europe has enacted around ESG reporting and investing might come into play when it comes to how Lombard Odier goes about making final investment decisions.
By way of background, unlike with managers here in the U.S., overseas markets take into account not just the product a company makes but also the energy sources and quantity used in manufacturing including the overall energy and emissions footprint of the corporate structure (Scope One), emissions from the production of any energy sources utilized by the company (Scope Two) and finally, any upstream and downstream energy use and emissions created from developing, selling and using the company's product (Scope Three). U.S. managers have access to tools like the data gathered by groups like Greenhouse Gas Protocol but there is no regulatory body overseeing how and if they use this kind of data to make investment decisions.
My guess is that this kind of background comes with a discipline to the security evaluation and selection process that just isn't prevalent in many U.S. issuers' products. To me, this is evidenced by not just the same conflict of interest language in this fund's Statement of Additional Information (SAI), but also the additional language that states "Lombard Odier has adopted policies and procedures it believes are reasonably designed to address such conflicts." This is language which I have not seen in any of the conflict of interest disclosures I've read recently.
The 'Cooling' Process
The fund is actively managed so the summary prospectus is the best place to learn about the security selection process.
There are three types of companies the strategy is focused on. "Solution Providers" are focused on carbon reduction or recapture or providers of hydrocarbon-free energy products. "Transition Leaders" are companies that may be in a traditionally carbon-intensive industry, but are taking steps to transform their business to be less carbon dependent. Finally, what they describe as "Adaption Opportunities" are companies that facilitate the transition away from hydrocarbons and help foster an overall lighter environmental impact.
Looking through HEAT's current holdings, I see a lot of familiar companies, like Canada-based Boralex (local ticker BLX), Denmark's Orsted A/S (local ticker ORSTED), France's Schneider Electric (local ticker SU) and Germany's Infineon Technologies (local ticker IFX). There are some semiconductor names in the mix as well like Nvidia (NVDA) , and Taiwan Semiconductor (TSM) , which makes sense given the Transition Leaders focus. Sprouts Farmers Market (SFM) and Japanese bicycle component manufacturer Shimano (local ticker (7309) seem more like lifestyle plays but ultimately fit the narrative here.
Wrap It Up
As there's no available history and the fund is new, I can't make any outright recommendation here, but overall, the strategy as presented makes sense and from what I can see, portfolio holdings are in line with the positioning of this fund. To be clear, HEAT isn't geared for an immediate run based on some single event or catalyst. The fund is positioned to give investors exposure to companies that are either leading the way or taking meaningful steps toward reducing greenhouse gas emissions which seems to be the new "doing well and good." Slow and steady wins the race? HEAT is going on my watchlist and I'll revisit this fund once it's had a chance to build some history.