Ethical Investment Jun 23 Report
Dear Investor
I am pleased to announce the release of our June 2023 Quarterly Report for our Funds. The ELMRI ANZ Conviction Fund increased by 4.1% and the ELM Responsible Investments Global Fund increased by 13.9% during the quarter, both out-performing their benchmarks. The longer term performance history of each strategy can be found in the respective Portfolio Snapshot link at the bottom of this email report.
Although both Funds have had a strong start to 2023, we are still seeing strong expected returns across our investments, giving us reason to remain optimistic. The upside in our portfolios are based on the accelerating structural growth opportunities in important areas such as renewable energy, electric vehicles, future technology including AI, digitization of economies and health technology to name a few. Furthermore, many of the macroeconomic factors which were previously headwinds in 2022 are receding, and this is providing an additional layer of support and growth for our investments.
Key Positions
Key positions in our portfolios remain stable in the ELMRI ANZ Conviction Fund. Xero, ProMedicus, Infratil, ResMed and CSL are our top 5 holdings. Given the strong performance of Xero, it is now our largest position, and given the strong performance of Wisetech Global, it is approaching our 5th largest position. We continue to add to our position in Block.
Key positions in the ELM Responsible Investments Global Fund are Tesla, Microsoft, ServiceNow, ASML and NVIDIA. Due to the compelling internal rates of return offered, we have been gradually shifting the portfolio towards software and technology companies and reducing exposure to healthcare companies over the past 3-6 months.
Key Investment Opportunity
2022 was one of the most challenging years for growth (particularly innovative growth) strategies and ESG / sustainability funds. However, the significant decline in the stock price of many high quality, sustainable and impactful growth companies is presenting us with many opportunities for strong future returns.
High quality companies with strong growth prospects that generate significant free cash flows like ProMedicus, ASML and Microsoft are likely to generate decent future returns for their investors, and despite the significant drawdowns experienced in 2022, are already trading at or near all time highs in 2023.
There are several high-quality companies with excellent growth potential that faced significant declines of 60-90% throughout 2022 and still remain below their peaks. We believe the internal rates of return for a selective group of such companies are currently the most compelling.
These companies are now focusing on right-sizing their businesses and improving profitability. Furthermore, despite their lower cost base and improved capital efficiency, the restructuring is unlikely to negatively impact their revenue growth outlook due to their compelling competitive advantages.
In 2022, the market indiscriminately sold off "loss-making" companies as the cost of capital increased significantly. This market behaviour reflects a cognitive bias known as "recency bias," where investors overemphasize recent events, without considering the adaptability of management teams to the new environment. While not all companies will be able to adjust to the current macroeconomic conditions, we expect many of the high-quality companies in which we are invested to do so.
Investors have already rewarded companies like ProMedicus, which has proven its ability to operate in almost any macroeconomic environment. However, the market still holds doubts regarding companies like Xero, Block, ServiceNow, and Shopify. Short-term valuation metrics do not solely guide our decisions, but the charts below demonstrate that both ServiceNow and Xero are currently trading at relatively low valuation multiples (indicated by the yellow and white lines) while focusing on profitability and experiencing accelerating revenue potential.
These companies possess robust competitive advantages and management teams that prioritize improving capital efficiency, which the market does not fully appreciate at present. Given the prevailing skepticism, many of these companies continue to trade at undemanding valuation multiples, presenting a compelling opportunity for long-term investors. As the market gradually recognizes the cash-flow potential and acknowledges the AI capabilities ahead (considering that many of these companies have been investing in AI for years), I believe there is genuine potential for these companies to trade at significantly higher valuations.
ServiceNow Stock Price and Forward Multiples (EV / Sales and EV / EBITDA)
Source: Refinitiv
Xero Stock Price and Forward Multiples (EV / Sales and EV / EBITDA)
Source: Refinitiv
Biodiversity
Biodiversity plays a crucial role in maintaining the health and balance of ecosystems and is essential for the well-being of our planet and all living organisms. It encompasses the incredible variety of species, genetic diversity within species, and the intricate web of ecological interactions. Biodiversity provides numerous benefits, including ecosystem services like pollination, water purification, soil fertility, and carbon sequestration.
Moreover, addressing biodiversity loss alongside climate change is essential for achieving sustainable development goals and building a resilient future. Biodiversity loss can exacerbate climate change impacts and vice versa. Consequently, incorporating biodiversity into the investment decision-making process is not only an environmental imperative but just as climate change poses significant risks and opportunities for companies and investors, biodiversity loss also presents material risks and opportunities that need to be considered.
To discuss this topic in more detail, we are going to be hosting a lunch in September with Dr. Matthew Selinske, a Postdoctoral Research Associate in the ICON Science Research Group at RMIT University. Dr. Selinske's research focuses on conservation psychology and encompasses various projects. These projects include evaluating the social aspects of private land conservation, analysing biodiversity footprints, studying conservation behaviour change, and developing predictive models of human behaviour. During our discussion, Dr. Selinske will present his research findings on the relationship between biodiversity and climate change, as well as provide insights on how we can mitigate their impact. This discussion holds particular significance in light of the new global biodiversity framework, known as the Kunming-Montreal Global Biodiversity Framework, which was adopted in December 2022. If you are interested in joining us, please get in touch.
Macroeconomics supporting the start of a Bull Market
As we all experience elevated levels of inflation in our daily lives, it may be difficult to believe, but the forward indicators of inflation are looking much better today.
Inflation tends to be correlated around the world, and inflation levels in the two largest global economies, US and China are both easing dramatically. China is on the brink of deflation, and the country’s producer prices, a lead indicator of future inflation declined -5.4% this month, a ninth straight decline.
US inflation as measured by the consumer price index rose 3% for the year in June, declining significantly from over 9% last year. The internals of inflation are also looking very promising with many items now in deflation territory. Shelter prices in the US continues to increase, but there is an acknowledgement that there is a significant lag in how the data is captured. When we incorporate real time shelter prices, inflation is in fact much lower than the ‘headline’ number. Truflation estimates US inflation to be running at 2.5% as opposed to the government reported rate of 3.0%. It is only a matter of time before what we are seeing in US and China to flow through to here in Australia.
US employment and GDP figures are also looking much better than expected. There were fears of a recession coming, but after the halfway point of 2023, the US economy is showing resilience and holding up much better than feared. They may in fact avoid a recession through this interest rate tightening cycle.
When we consider the easing inflation, stronger than expected economy and S&P 500 trading at compelling valuations when we exclude high quality technology names exposed to the AI theme, it is supportive of a view that the next bull market has in fact already commenced. Despite the pessimism we hear today, I am optimistic about the future returns of equities.
Conclusion
Our strategy of investing in the most innovative and impactful growth companies remains consistent, and given the improving macroeconomic conditions and exciting growth opportunities ahead, I am particularly excited about the potential of our strategies. With Dr. Matt Selinske, I will be discussing biodiversity, equity markets and our Funds in more detail at a lunch in a couple of months time. If you would like to join us, please get in touch for more information. Or if you would like to arrange another time to discuss this matter in more detail, please click here to schedule a meeting.
Alternatively, if you are interested in investing with us, you can access our investment portal and review our fund documentation by clicking on the "Invest" buttons below. Otherwise, please feel free to respond to this email, and we will promptly get in touch with you.
Thank you for your support and interest.
Kind regards
Jai
ELMRI Global Fund
Performance to 30 June 2023
| 3 months | 6 months | 12 months | Inception** | |
|---|---|---|---|---|
| ELM Responsible Investments Global Fund | 13.9% | 31.6% | 25.5% | -5.4% |
| Benchmark* | 7.5% | 17.2% | 22.4% | 9.5% |
*Benchmark for ELM Responsible Investments Global Fund is MSCI World Accumulation Index in AUD
**Inception is 15th October 2021 for ELM Responsible Investments Global Fund
Top Holdings
Tesla
Microsoft
ServiceNow
ASML
NVIDIA
Key Areas of Investment
Electric Vehicles, Healthcare Equipment, Property & Infrastructure, Software & Services, Biotechnology & Future Health, Environment & Renewable Energy, Fintech & Marketplace, Data & Research, Medical Devices, Future Technology
ELMRI ANZ Conviction Fund
Performance to 30 June 2023
| 3 months | 6 months | 12 months | Inception*** | |
|---|---|---|---|---|
| ELMRI ANZ Conviction Fund | 4.1% | 14.2% | 20.3% | 20.3% |
| Benchmark* | 1.0% | 4.4% | 14.4% | 26.0% |
| Ethical Benchmark** | 4.7% | 10.5% | 14.5% | 15.8% |
*Benchmark for ELMRI ANZ Conviction Fund is S&P / ASX 300 Accumulation Index
**Ethical Benchmark is the NASDAQ Future Australian Sustainability Leaders tracked by BetaShares Australian Sustainability Leaders ETF
***Inception is 10th October 2019 for ELMRI ANZ Conviction Fund
Top Holdings
Xero
Infratil
ProMedicus
CSL
ResMed
Key Areas of Investment
Renewable Energy, Employment & Education, Software & Services, Biotechnology, Medical Devices, Digital Wallets, Health Technology, Property & Social Infrastructure, Housing & Sustainable Building Products
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).
The information is not intended for general distribution or publication and must be retained in a confidential manner. Information contained herein consists of confidential proprietary information constituting the sole property of ELMRI and its investment activities; its use is restricted accordingly.
This note is for general informational purposes only and does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of preparation and presenting and all forecasts, assumptions, opinions, data and other information are not warranted as to accuracy or completeness and are subject to change without notice. This is not an offer document and does not constitute an offer or invitation of investment recommendation to distribute or purchase securities, shares, units or other interests to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this note. Any potential investor should consider their own circumstances and seek professional advice.
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.