Ethical Investment Jan 23 Australia & NZ Report
Market Update
While 2022 was dominated by investor concern over accelerating inflation, rising interest rates and supply chain disruptions, 2023 started with signs of disinflation and hopes of an economic soft landing. China's economic reopening and easing global supply chains also added to the positive sentiment, driving most major equity indices higher.
In the US, the S&P 500 Total Return Index returned 6.3% over the month, and in Europe, the Euro STOXX 50, Germany DAX, and FTSE 100 total return indices returned between 4.3% and 9.9% over the month. In Australia, the S&P/ASX 300 Index returned 6.3%.
Values Based Capitalism
In January, Treasurer Jim Chalmers outlined a path towards pursuing "values-based capitalism" in a 6,000-word essay entitled "Capitalism After the Crises." He proposed more public-private co-investment and collaboration to direct capital towards societal areas in need, such as renewable energy, and overhaul key economic institutions and markets.
Furthermore, he prioritised ensuring an orderly energy and climate transition, building a more resilient and adaptable economy, and achieving growth that prioritises equality and equal opportunity. He argued that the traditional economic model would not be successful in delivering prosperity for Australians, particularly given the sluggish real wage growth and increase in inequality observed since the Global Financial Crisis.
Since the Treasurer's essay implies a larger role for governments and a shift away from the free-market approach to which we have become accustomed, there are concerns among market participants. However, we share many of the Treasurer's concerns. Although new and different frameworks will need to be applied, we think it is important to invest in alignment with our values. Many other "ethical" strategies simply avoid companies that are causing harm. However, like the Treasurer, we believe it is important to direct capital towards companies and industries that positively contribute to the world, achieving social and environmental outcomes beyond financial goals alone.
Portfolio Snapshot
During the month, the Fund returned 9.7% by investing in high-quality Australian and New Zealand growth companies that are making a positive impact on the United Nations Sustainable Development Goals. Our portfolio companies, typically have global operations and are making an impact around the world.
Our portfolio companies also have industry leading business practices and are facilitating the transition to a more sustainable future through their investments and internal policies. They have taken initiatives to address important issues such as inequality and climate change within their respective organisations.
Portfolio News
ResMed
In January, ResMed announced their 2Q22 results, with group revenues growing 16% year over year or 20% in constant currency to US$1,033.7m. Despite increasing average selling prices, the company's gross margin contracted by 30 basis points to 56.1%. This was primarily due to higher sales growth in lower margin devices compared to sales growth in higher margin masks and accessories. Unfavourable currency movements also contributed to declining margins. The company saw strong revenue growth of 26% in the US, Canada, and Latin America, due to increased production from improving chip supplies, and supply challenges faced by its competitor. Revenue in Europe, Asia, and other markets grew by 8% in constant currency and the company’s Software-as-a-Service revenue increased by 18% including the MEDIFOX DAN acquisition.
ProMedicus
ProMedicus secured a $25m, 7 year contract with University of Washington’s UW Medicine - a Tier 1 academic health system. This contract marks the company’s continued expansion into top-tier academic institutions in North America. In January, the company also announced a $12m, 8 year agreement with Samaritan Health Services. This agreement was the company’s 5th major integrated delivery network (IDN) contract in the past year. The company has historically had success with Tier 1 academic health systems like UW Medicine, but in recent years has started gaining traction with both large and small IDNs suggesting that the company’s Visage platform is suitable to various segments of the market. The flexibility of the platform suggests that the total addressable market is much larger than initially thought, and we therefore can expect growth for many years to come.
We are excited about the long-term prospects of both ResMed and ProMedicus and they remain large positions in our portfolio.
This note has been prepared by ELM Responsible Investments (‘ELMRI’) ABN 70 607 177 711 AFSL 520428, for Australian wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth).
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ELMRI funds, its directors, employees, representatives and associates may have an interest in the named securities.
Past performance is for illustrative purposes only and is not indicative of future performance.