Ethical Investment January 25 Report
Dear Investor,
I am pleased to announce the release of our January 2025 Monthly Report for our Funds. The ELMRI ANZ Conviction Fund increased by 5.3% and the ELM Responsible Investments Global Fund increased by 3.2%.
Market Update:
Global equity markets experienced mixed results in January 2025, reflecting varied economic data and geopolitical developments. In the US, the S&P 500 Index gained 2.8% for the month which was supported by strong economic indicators and optimism surrounding President Trump's return to office. Job growth remained robust with 256,000 jobs added in December, while GDP growth reached 2.3% annualised in the fourth quarter. In Australia, the Reserve Bank delivered an interest rate cut today of 25 basis points, and is expected to maintain a gradual easing cycle.
Market Outlook:
The investment landscape is evolving favourably, with the macroeconomic outlook presenting increasingly positive conditions for strategies like ours. We expect inflation will continue its downward trajectory and alleviate the economic pressures that have persisted over the past three years.
Central banks globally are responding to this disinflationary trend, with the Federal Reserve having implemented two 25-basis-point rate cuts in late 2024, and the Reserve Bank of Australia announcing a rate cut today. The shift towards an easing cycle for both inflation and interest rates is creating a more supportive environment for innovative and impactful investments, with lower borrowing costs stimulating economic activity and potentially boosting corporate earnings.
While concerns persist regarding potential trade disruptions due to President Trump’s tariff policies, these should not significantly alter the long term economic outlook or impact our investment strategy. High quality, innovative companies with strong competitive advantages, diversified revenue streams, and financial flexibility are likely to be more resilient in the face of economic uncertainties. The companies in our portfolio that drive positive change through sustainable practices and innovative solutions are well positioned to not only weather potential economic challenges but also to capitalise on the opportunities presented by the evolving global landscape.
Investment Outlook: AI Theme
The AI landscape experienced a significant shift in January 2025 with the launch of DeepSeek's R1 open source reasoning model. This Chinese developed AI system claimed to match the performance of pre-existing models at a fraction of the cost, triggering a significant market reaction, and the DeepSeek AI assistant quickly climbing to the top of app store charts in over 140 countries.
Initially, DeepSeek's assertion of developing R1 for just $6 million raised eyebrows and caused a sharp decline in market valuations across the semiconductor manufacturing AI value chain. This figure however requires closer examination for two reasons:
Industry analysts suspect that the actual investment may have been substantially higher. The $6 million likely only accounts for the cost to build the model, without additional expenses of training and hardware.
While there is an element of Chinese tech efficiency, deflation has also led to decreasing production costs in the AI sector overall.
It's important to note that this development does not significantly disrupt existing investments in the AI hardware sector. NVIDIA chips remain necessary, as DeepSeek utilises NVIDIA hardware for its operations.
Our view is that demand for NVIDIA chips will persist over the coming years, as evidenced by the substantial capital expenditure forecasts for major U.S. tech companies over the next 12 months, which in large part covers semiconductor and infrastructure costs:
Microsoft: $80 billion
Meta: $60-65 billion
Amazon: >$100 billion
Alphabet: $75 billion
The decreasing costs in AI development are generally positive, as competition fuels the democratisation of AI technology. This has the potential to accelerate innovation and productivity gains across various sectors.
For these reasons, we see significant opportunities in AI applications such as software, autonomous vehicles and fintech. As development and integration costs continue to decline, AI will become more accessible to a broader range of businesses and allow even smaller companies to leverage its capabilities. From enabling earlier and more accurate disease diagnoses to optimising operations and boosting output, the increasing capabilities of AI promise growth and innovation across a wide spectrum of sectors.
Company Update: TSMC
Semiconductor design and manufacturing company TSMC reported a net profit of NT$374.68 billion (approximately $11.37 billion) in Q4 2024, a 57% increase from the same period in the previous year. This profitability was driven by strong demand for the company's industry leading 3nm and 5nm technologies, which together accounted for 60% of total wafer revenue. The company's revenue for the quarter reached NT$868.46 billion ($26.88 billion), marking a 38.8% YoY increase. TSMC's gross margin for the quarter was 59.0%, with an operating margin of 49.0% and a net profit margin of 43.1%. These strong financial metrics reflect the company's effective operational management and its ability to capitalise on the growing demand for advanced semiconductors, particularly those used in AI applications. Looking ahead, TSMC projects first-quarter 2025 revenue between $25.0 billion and $25.8 billion, with gross profit margins ranging from 57% to 59%.
ELMRI Global Fund Update
The Global Fund continues to deliver strong returns, with gains of 3.2% in January. Short-term performance remains robust, and since-inception results are steadily improving. Key contributors to the fund’s performance include Microsoft and ASML.
Global Fund Holding Spotlight: Microsoft
Microsoft reported strong financial results for Q4 2024 with revenue reaching $69.6 billion, up 12% YoY and net income increasing 10% to $24.1 billion. The company's AI business exceeded a $13 billion annual revenue run rate, growing 175% YoY, while Microsoft Cloud revenue rose 21% to $40.9 billion.
Global Fund Holding Spotlight: ASML
ASML reported strong financial results for Q4 2024 with record revenue of €9.3 billion and a gross margin of 51.7% (both exceeding guidance). The company achieved total net sales of €28.3 billion for the full year 2024 and expects 2025 total net sales to be between €30 billion and €35 billion.
ELM ANZ Conviction Fund Update
The ANZ Conviction Fund has surpassed the five-year mark and continues to outperform the traditional benchmark by focusing on investments in the most innovative and impactful companies. January has seen continued strong performance with an increase of 5.3%, supported by key holdings in the portfolio. More companies are expected to announce results in February.
ANZ Fund Holding Spotlight: ResMed
ResMed: ResMed reported strong financial results for Q2 FY2025, with revenue increasing by 10% to $1.3 billion and operating profit up 52% year-over-year. The company's gross margin improved to 58.6%, while operating cash flow reached $309 million.
Conclusion
Both the ELMRI Global Fund and the ANZ Conviction Fund are well-positioned to deliver long-term returns while capitalising on the transformative opportunities presented by innovation in technology and sustainability. By adhering to a disciplined investment strategy and focusing on companies driving innovation and positive change, ELM Responsible Investments continues to create value for investors while supporting a sustainable future.
If you wish to discuss any aspect of this report in greater detail, please do not hesitate to reach out. I would be more than happy to arrange a meeting at your convenience. Those interested in investing with us can explore our investment portal and review our fund documentation by clicking the "Invest Now" buttons provided below.
Thank you for your ongoing interest and support.
Kind regards,
Jai Mirchandani
Founder, CIO and Portfolio Manager
ELM Responsible Investments
ELM Responsible Investments Global Fund
ELMRI ANZ Conviction Fund
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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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.