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.”