Ethical Investment Jul 23 Report
Dear Investor,
In July, most equity markets were higher as inflation rates declined, creating an expectation that the interest rate tightening cycle is nearing an end. Furthermore, economic growth remained resilient, creating a favourable macroeconomic environment for stocks. I wrote an article on Livewire on this topic, which you can find here. If you like the article, please feel free to “like” it or leave a comment.
Investment Performance
During July, the ELMRI ANZ Conviction Fund increased by 4.2% and the Global Fund by 2.2%. Both funds performed well in absolute and relative terms compared to their respective Benchmarks.
Companies are Becoming Efficient
The quarterly reporting period commenced in July for many of our Global Fund holdings. It is clear now that many companies over-hired, incorrectly expecting the strong growth they experienced during the pandemic to continue. These companies are now re-sizing their businesses, focusing on profitability, and given their market dominance, their initiatives are not impacting their revenue growth. I expect this trend to continue, and the improvement in business efficiency will translate to shareholder returns for many of our key holdings in the years to come.
AI is a REAL Long Term Opportunity
Another trend is the continued focus on AI. In our Global Fund, we have exposure to AI through several of our Key Areas of Investment, including Future Technology and Software and Services. Holdings in these themes include Microsoft, NVIDIA, ASML and On Semi. Tesla, the largest position in our Global Fund and our Electric Vehicle Key Area of Investment, is also a leader in AI through their autonomous driving initiative.
In our ANZ Fund, we have exposure to AI through several holdings, including Xero and Pro Medicus, our two largest positions. Our exposure to AI is carefully constructed and is expected to unlock social and environmental value and drive strong returns for shareholders.
Tesla Update
During the month, Tesla announced its Q2 FY23 results. They reported revenue of US$24.9 billion and delivered 466,140 vehicles during the quarter. Deliveries were 83% higher compared to last year, but revenues were up only 47%, reflecting the steep price cuts undertaken by the company. The price cuts also impacted margins, with operating margins declining almost 500bp to 9.6%. The company is investing heavily through price cuts to make electric vehicles accessible to more people. I think this is a good thing for both shareholders and the environment.
I recently released our Tesla Valuation Calculator on our website. You can input your own assumptions for each of the 10 key variables for the company’s valuation. You will notice that although short-term vehicle deliveries and short-term profits are important, the company’s success in autonomous vehicles through its Full Self Driving software has the greatest impact on valuation. As such, selling more vehicles today at a lower price point and selling their Full Self Driving software to more vehicles in the future is more value accretive than selling fewer, higher-priced vehicles today.
Pro Medicus Update
Pro Medicus, a top 5 holding in the ELMRI ANZ Conviction Fund, announced that it secured a significant contract worth AUD $24 million over 7 years with Memorial Sloan Kettering Cancer Center (MSKCC). Similar to other arrangements, this contract is transaction-based meaning that there is potential for upside for Pro Medicus depending on the usage levels.
MSKCC is one of the world’s most respected comprehensive cancer centres devoted exclusively to cancer and consistently ranks among the top two US cancer hospitals. They operate 24 inpatient and outpatient locations in the New York City metropolitan region and care for cancer patients from around the world. This deal marks Pro Medicus' expansion into North American Tier 1 academic institutions and reinforces the company’s technology lead.
Under the contract terms, Pro Medicus' cloud-based Visage 7 Enterprise Imaging Platform, which includes the Visage 7 Viewer, Visage 7 Open Archive, and Visage 7 Workflow modules, will be implemented throughout MSKCC. This platform will replace the legacy Picture Archiving and Communication System (PACS) and vendor-neutral archive. The migration process will also include integrating image distribution into MSKCC's electronic health record (EHR) system.
We continue to be excited about Tesla and Pro Medicus’ long-term opportunities.
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.
If you would like to arrange a time to discuss any of the topics discussed in this report, 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.
Thank you for your support and interest.
Kind regards
Jai
ELMRI Global Fund
Performance to 31 July 2023
| 3 months | 6 months | 12 months | Inception** | |
|---|---|---|---|---|
| ELM Responsible Investments Global Fund | 18.4% | 27.2% | 19.7% | -4.0% |
| Benchmark* | 6.6% | 16.5% | 24.7% | 11.8% |
*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
16% Tesla
11% ServiceNow
10% Microsoft
5% NVIDIA
5% ASML
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 31 July 2023
| 3 months | 6 months | 12 months | Inception*** | |
|---|---|---|---|---|
| ELMRI ANZ Conviction Fund | 5.8% | 8.5% | 10.8% | 26.0% |
| Benchmark* | 2.0% | 1.0% | 11.1% | 29.6% |
| Ethical Benchmark** | 3.3% | 6.9% | 8.3% | 19.1% |
*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
11% Xero
10% Pro Medicus
8% Infratil
7% ResMed
7% CSL
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.