Ethical Investment Sep 23 Report
Dear Investor,
I am pleased to announce the release of our September 2023 Quarterly Report for our Funds. The ELMRI ANZ Conviction Fund decreased by -2.8% and the ELM Responsible Investments Global Fund decreased by -4.6% during the quarter, both underperforming their benchmarks.
After a strong start to the quarter, September proved difficult for equity investors as higher treasury yields, stronger macroeconomic data and higher oil prices made headlines. Although this short-term uncertainty negatively impacts our short-term performance, it presents an opportunity for long-term investors.
We continue to be invested in the most innovative and impactful, high-quality growth companies. With the strong performance we have seen in 2023, the long-term outlook for our portfolios is still attractive.
Key Positions
Key positions in our portfolios remain stable in the ELMRI ANZ Conviction Fund. ProMedicus, Xero, Infratil, CSL and ResMed are our top 5 holdings. Given the strong performance of ProMedicus, it is once again our largest position. Our positions in CSL and ResMed have decreased as healthcare companies continue to underperform. I’ll discuss this in detail below.
Key positions in the ELM Responsible Investments Global Fund are Tesla, Microsoft, ServiceNow, ASML and NVIDIA. Veralto, a leader in essential technology solutions, helps customers manage, treat, purify, and protect the global water supply. They also help protect the world’s food, medicine, and essentials by enabling customers to track and authenticate their products through the global supply. On 30th September, the company was spun out of Danaher, the global science and technology innovator in which we have a position. During the quarter, we initiated a small position in Novozymes, a world leader in bio solutions that is listed in Denmark. We saw an opportunity given the significant sell-off we have seen in climate change related and ‘green technology’ companies. I’ll also discuss this in detail below.
GLP-1 and its Impact on Healthcare Companies
Concerns about the increasing use of Novo Nordisk and Eli Lilly’s GLP-1 drugs Wegovy, Ozempic, Mounjaro and future generations of drugs in this class weighed on other healthcare companies. These drugs are proving to be effective in treating diabetes, weight loss, cardiovascular disease and now kidney disease with readings from other trials including sleep apnoea to follow.
Last month, I wrote about Novo Nordisk’s results from the SELECT trial. It showed the effectiveness of this class of drugs in decreasing the risk of major adverse cardiovascular events. In early October, Novo Nordisk also found that the drug was so effective at reducing the progression of renal impairment in people with type 2 diabetes and chronic kidney disease, that they stopped the clinical trial early. They were advised that it would be unethical to keep patients in the placebo arm.
According to MST Marquee, there are only 6 million+ patients on GLP-1 drugs in the United States. Given the compelling health benefits, I expect the uptake to continue and could increase by 10x in the coming years.
These results sent shares of Novo Nordisk (holding in the Global Fund) and Eli Lilly higher but sent shares of most other healthcare companies lower. Novo Nordisk is now the most valuable European company. For our Funds, ResMed, Fisher & Paykel Healthcare, CSL and Dexcom were negatively affected. But we remain invested in these companies.
ResMed and Fisher & Paykel manufacture devices used by people with sleep apnoea. It is thought that due to the health benefits of GLP-1 drugs (weight loss can reduce the severity of sleep apnoea), both companies' total addressable market and terminal value are under question. The net impact remains unclear as some severely obese patients who would otherwise be ineligible for the company’s therapy could become candidates for treatment after losing weight. Furthermore the average weight loss in the ‘real world’ is much lower than the weight loss experienced under clinical trial settings and so many patients may still require the devices manufactured by ResMed and Fisher & Paykel.
In the meantime, the stock prices have declined significantly and the P/E of ResMed is now 20x forward earnings, a level not seen in many years. Channel checks however suggest that patient sign-ups continue to be strong for ResMed.
Dexcom, the continuous glucose monitoring company also saw its stock price decline significantly, leading them to issue a presentation on the impact of GLP-1 drugs on their business. They found that the usage of continuous glucose monitoring devices increased in patients on GLP-1 drugs.
It is less clear that the success of the GLP-1 drugs drove the underperformance of CSL. CSL’s newly acquired nephrology business, Vifor may be affected as GLP-1 drugs are successful in preventing kidney disease. But Vifor on its own is only a small part of CSL’s overall business so the impact on CSL should be minimal.
CSL 112 is the company’s flagship treatment for cardiovascular disease, which is still in clinical trials. This also may be affected by GLP-1 drugs. But again, only accounts for a small percentage of CSL’s overall business.
The company’s most valuable business IVIG, is seeing competition from Argenx’s efgartigimod. This may be a more material drag on longer-term revenue and earnings. Furthermore, elevated inflation and changes in the management team are also weighing on the stock. With CSL, it is not one major issue driving the stock price lower but rather many smaller issues all adding up.
Despite these short-term challenges, we continue to stay invested in CSL. The company has gone through many periods like this in the past, where the threats are well understood and appreciated by the market. However, what is more difficult to appreciate is the potential that sits within the R&D pipeline. Given the scale (over $1 billion per annum invested in R&D) and track record of the company, we remain patient investors.
Company News - ProMedicus
During the month ProMedicus, the largest position in the ANZ Fund announced a significant contract win with Baylor Scott & White Health (BSWH). BSWH is the largest not-for-profit healthcare systems in Texas, and one of largest in the country. This is a 10 year contract worth $140m.
Company News - Intuit
September was a significant month for Intuit, a major holding in the Global Fund. They held their annual Investor Day, outlining their strategic plans and goals for growth. A major focus of the event was on their new “Intuit Assist” AI Assistant, which will integrate AI functionality across their suite of products (including QuickBooks Online, TurboTax, Mailchimp, and Credit Karma). The integration of Intuit Assist across their platforms is designed to not only increase the Average Revenue Per User (ARPU) but also to reduce adoption friction and help drive an increase in the cross-selling of services, particularly in areas such as CRM, payroll, and payments. Together, this AI-driven cross-selling strategy is designed to encourage subscriber growth and ARPU, allowing the company to grow without increasing prices significantly. One of the key figures cited to support this is that Intuit only currently has a 5% penetration of the US$312b Total Addressable Market, so there is still significant growth potential off product innovation. We have been excited for some time about Intuit’s ability to improve productivity for small businesses, and ELMRI’s view is that the integration of AI is the natural next step in pursuing this goal.
Company News - Workday
Similar to Intuit, Workday (top 10 holding in the Global Fund) held a Financial Analyst Day in September, outlining their growth prospects and strategies. They detailed a range of growth areas in which they have invested, including Financials, partner networks, international expansions, and integrating AI and Machine Learning (AI/ML) into their products. Together, these growth areas have expanded the Total Addressable Market for the company to US$142b, enabling significant scope for both new customer growth and upselling existing customers. Workday outlined their targets for subscription revenue growth of 17-19% through to FY27, and a non-GAAP operating margin of >25% by FY27. We view these investments and projections as positive for Workday’s position in the market and the broader goals of digitising the economy and improving productivity to which ELMRI is committed.
Novozymes
Novozymes is a global biosolutions company with more than 6,700 employees and operates in various regions worldwide.
The company is actively working towards sustainability. They are committed to reducing their greenhouse gas emissions by half by 2030. Moreover, they are developing solutions that lower industry and food production emissions, remove fossil-based ingredients from everyday products, and capture carbon.
Their products are also used in household goods such as laundry powder to improve efficiency and reduce emissions and water usage associated with our everyday life. Through their products and services, they have set a goal of saving 100 million metric tons of CO2 emissions annually.
Given the short-term macroeconomic events, volatility in end markets and negative investor sentiment towards ‘green’ companies, we saw an opportunity to invest in the company.
I hosted a webinar on Biodiversity and discussed Novozymes earlier this month. The replay can be found here.
Conclusion
Our strategy of investing in the most innovative and impactful growth companies remains consistent. We did experience some volatility in the September quarter, but 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 anything in this report 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 the "Invest" buttons below.
Thank you for your support and interest.
Kind regards
Jai
ELMRI Global Fund
Performance to 30 September 2023
| 3 months | 6 months | 12 months | Inception** | |
|---|---|---|---|---|
| ELM Responsible Investments Global Fund | -4.6% | 8.6% | 19.1% | -9.7% |
| Benchmark* | -0.4% | 7.0% | 21.5% | 8.9% |
*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
12% ServiceNow
11% 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 30 September 2023
| 3 months | 6 months | 12 months | Inception*** | |
|---|---|---|---|---|
| ELMRI ANZ Conviction Fund | -2.8% | 1.2% | 14.5% | 17.0 |
| Benchmark* | -0.8% | 0.1% | 12.9% | 25.0% |
| Ethical Benchmark** | -3.1% | 1.4% | 10.9% | 10.7% |
*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
13% Pro Medicus
10% Xero
8% Infratil
7% CSL
6% 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.