Reasons to be cheerful with Montanaro’s Ed Heaven

John Stepek talks to fund manager Ed Heaven about political turmoil, ethical investing, and why ultimately human ingenuity will prevail.

Ed Heaven author headshot

Ed Heaven joined boutique asset manager Montanaro in 2014. He is the deputy chairman of the ESG committee, focusing on sustainable & impact investing, and was heavily involved in the launch of the Montanaro Better World fund in April 2018.

Ed will be discussing ethical investing at our Wealth Summit on Friday 22 November, near St Paul's in London, alongside Merryn Somerset Webb, Helena Morrissey and Julie Hudson of UBS.

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How concerned should investors be about the current political turmoil and if you had to choose one area that concerns you most, what would it be?

Investors should only be concerned insofar as political "noise" can induce knee-jerk reactions that they later come to regret. In our opinion, it is unwise to invest on politics (there are many examples of election predictions being wrong in recent years). Politics tends to be far removed from the detail of company analysis, so as the herd moves to avoid a market (as they did with Italy in the run-up to their constitutional referendum), bottom-up stock pickers have the chance to identify long-term investment opportunities that are attractively priced.

Nonetheless, it is likely that the US/China trade war dominates the airwaves in the months ahead. Yet the US president wants to be re-elected, so a resolution of sorts that can be viewed positively by the market suits him.

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What's your view on the increasing visibility of ESG (environmental, social and governance) investing and what do you think investors should be considering with regard to its effect on their portfolios?

ESG has transitioned from being a fringe element of company analysis to a core, mainstream part of investment decision making. This is a good thing. Share prices do not decline just because a company has failed to meet financial targets. They can fall if a business is hit by an ESG event an environmental incident, the social mistreatment of its workers, or issues with executive pay.

When integrated into company analysis and that means the same investment analysts considering the financials alongside ESG it can lead to a better understanding of a company and a more complete investment case.

Are there any individual markets or asset classes that you feel are highly overvalued right now? And any that look like good value or even bargains?

UK SmallCap is undoubtedly undervalued relative to history, perhaps with good reason. In the aftermath of the Brexit referendum, sterling plummeted to a near 30-year low and investors shifted allocation away from domestically-focused companies towards the large exporters who source so much of their earnings from overseas.

Small caps remain unloved. A resolution of Brexit or at least a greater degree of clarity than we currently have could see this reverse. Investors with large overseas investments could find themselves exposed.

Yet we are a long way into a bull market that is the second longest since World War II. Investors are nervously asking "are we at the top"? Answering this at a macro level is difficult. At a company level, investors need to decide: do high valuations indicate that those businesses have structural growth that is worth paying up for? Or do they mean that the business is simply overpriced?

What do you consider to be the biggest long-term challenge right now to those saving for retirement?

Yield or the lack of it due to low interest rates is an obvious challenge to retirement planning. But away from that, a more existential threat exists. The world is facing many pressing challenges, defined and evidenced by the United Nations Sustainable Development Goals.

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Issues such as climate change are placing pressure on every segment of society: governments, businesses, regulators and individual savers. Action needs to be taken by all stakeholders in order to address these global challenges.

Long-term investors such as those saving for retirement should ensure that they are invested in businesses that are adapting to these challenges. As Mark Carney, the governor of the Bank of England, recently said: "Companies that don't adapt will go bankrupt without question."

Thinking about the investment and economic landscape, what makes you feel optimistic today? And what makes you feel pessimistic?

My only pessimism stems from the noise investors are forced to listen to. I have lost count of the number of times I have read a headline that screams "Markets fall!" only to learn that the decline is merely the worst that month, or even that week. I worry that markets fuelled by our thirst for information and reaction have lost their sense of time and perspective.

Despite this and the many challenges facing the world human history makes me optimistic. We have a good record of dealing with problems. Life for the majority of people on earth has improved over time: societies are more prosperous, healthier and more full of opportunity compared with the past. This makes me confident that we will find a way of managing today's problems and if as an investor you can identify businesses that are providing the solutions, then you should also be able to grow the value of your savings too.

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