Ethical Investment May 24 Report
Dear Investor,
I am pleased to announce the release of our May 2024 Monthly Report for our Funds. The ELMRI ANZ Conviction Fund increased by 1.4%, outperforming its benchmark, and the ELM Responsible Investments Global Fund decreased by 0.8%, underperforming its benchmark.
ELMRI ANZ Conviction Fund Outperforms Traditional and Ethical Benchmarks
Our ELMRI ANZ Conviction Fund is approaching the 5 year mark (inception date is 11th October 2019), which is our minimum investment time horizon, and we are proud to report that it is outperforming both our traditional and ethical benchmarks, showing that we can achieve both our investment and sustainability goals. We are confident that our Global Fund, which only launched in 2021 will also enjoy the same level of success as it approaches the minimum investment time horizon.
RIAA Sustainability Classifications: ELMRI Global Fund receives “Sustainable Plus” Classification
In May, the Responsible Investment Association Australasia (RIAA) launched a new Sustainability Classifications Initiative, that builds on their long-running Certification Program. The initiative introduces three classifications: Responsible, Sustainable, and Sustainable Plus, which provides investors with further differentiation between responsible investment products.
We are delighted that our ELM Responsible Investments Global Fund received the classification of Sustainable Plus, which is the highest classification in the system. This is awarded to products that go beyond the standard requirements of RIAA certification in a range of ways, including having our portfolio aligned to prominent and binding sustainability objectives that are tracked and publicly reported. To learn more, please see our announcement from earlier this month.
Key Positions
Key positions in the ELMRI ANZ Conviction Fund are ProMedicus, Xero, CSL, Fisher & Paykel Healthcare and ResMed. Key positions in the ELM Responsible Investments Global Fund are Tesla, Microsoft, NVIDIA, ServiceNow and ASML.
Our Views on Nuclear Energy
With the federal opposition announcing their policy to build seven nuclear power plants around Australia should they take government, the merits of nuclear energy have been firmly placed in the public discourse once again.
While the debate is dominated by strong ideologies on both sides, at ELM we are rational and evidence-based decision makers who are open minded to any safe technology that will help us achieve our carbon emission targets and mitigate the negative effects of climate change.
Unlike fossil fuels, nuclear has no greenhouse gas emissions. But it comes with other risks including waste storage, water usage, and supply chain.
Today over 40% of enriched uranium comes from Russian state owned enterprise Rosatom. By the time Australia would enter the nuclear market, other major suppliers of enriched uranium would likely include China and Saudi Arabia. If we go ahead with nuclear energy today, as a society, our commitments to Modern Slavery will be compromised and bring further geopolitical risks.
Our report can be found HERE.
Tesla’s CEO Compensation Package: What You Need to Know
In 2018, Richard Tornetta, a minor shareholder holding just nine shares, filed a shareholder derivative lawsuit against CEO Elon Musk and the Tesla board, claiming Musk’s compensation package was unjust.
A judge sided with Tornetta in late 2022, nullifying the massive pay deal valued between $45 billion and $56 billion, depending on Tesla’s market cap.
Recently, Tesla was back in the news as shareholders once again voted to approve the compensation package for CEO Elon Musk.
On the surface, this package is staggeringly large and would be the biggest ever granted to an executive at a US-listed company. However, it’s crucial for investors to understand the context behind this figure.
Musk’s 2018 CEO Performance Award, crafted in 2017 and approved by shareholders in 2018, marked a bold move. Musk agreed to forego a salary, opting instead for an entirely performance-based remuneration scheme. The package consisted of 12 tranches of stock options, each representing about 1% of Tesla’s stock, tied to 28 separate targets: 12 related to market cap (in $50 billion increments up to $650 billion), eight to earnings goals, and eight to revenue goals. Throughout the agreement’s duration, Tesla met the $650 billion market cap milestone and achieved all eight earnings goals, missing only some of the revenue goals.
This resulted in Musk earning the overwhelming majority of the stock options.
When this agreement was made, Tesla’s market cap was between $50 billion and $60 billion, and the company faced the risk of bankruptcy due to delivery target struggles. The valuation needed to increase by 10-13 times to reach the top targets. As investors know, Tesla far exceeded that, reaching a peak valuation of over $1 trillion in late 2021. Even the current reduced valuation of $579 billion (at time of writing) is a ten-fold increase from 2018 levels.
Musk’s 2018 compensation package is the most shareholder-aligned package I have ever seen. If presented with a similar package today, most CEOs would likely decline. What executive would agree to zero base pay, all performance-based, at a company expected to go bankrupt?!
This perspective explains the continuing shareholder support for this package. For long-term Tesla investors, such a large package is a small price to pay for a tenfold (or higher) increase in their investment value. Additionally, it’s noteworthy that the law firm representing Tornetta stood to earn $5 billion if they successfully nullified Musk’s compensation package.
Company News: Fisher & Paykel Healthcare
Fisher & Paykel Healthcare (FPH) released its FY24 results, showing a 10% increase in revenue (8% in constant currency) to $NZ1.74 billion. This growth was driven by higher demand for hospital consumables and strong performance in the obstructive sleep apnea (OSA) masks segment. Reported net profit after tax was $NZ132.6 million, impacted by one-off items totaling $NZ137 million, including a product recall. Excluding these, underlying net profit after tax was $264.4 million, a 6% increase over the previous year (5% in constant currency).
The company saw a 6% growth in hospital operating revenue to $NZ1.1 billion, with new applications consumables revenue up 15%, homecare operating revenue up 18% to $NZ652.3 million, and OSA masks revenue up 21%. The company invested 11% of revenue ($NZ198.2 million) in R&D, which is expected to decrease to around $NZ150 million in 2024-25, supporting margins and overall earnings.
Looking ahead, FPH projects revenue between $1.9 billion and $2.0 billion, with net profit after tax expected to be between $310 million and $360 million, assuming no significant respiratory disease events. CEO Lewis Gradon stated, “After several years of changing demand patterns, we are pleased to have returned to a trajectory of growth. We have an impressive portfolio of products, strong customer relationships, and the right infrastructure for future success.”
In 2024, FPH made progress toward its long-term gross margin target of 65%. Excluding the product recall provision, the underlying gross margin was 61.1%, up 216 basis points in constant currency over the previous year. Including the recall provision, the gross margin was 59.9%, an increase of 95 basis points.
Before the pandemic, the company consistently delivered double-digit growth due to the increasing use of its innovative and life-saving respiratory care devices in hospitals. During the pandemic, the company experienced significant growth as hospitals ordered large quantities of their products. However, as the world moved beyond the pandemic, the company faced declining and volatile revenue and profits.
As the business now returns to its pre-pandemic trends, we expect the company to once again deliver consistently strong growth, which will eventually be reflected in investor returns. This transition has already commenced, and we are excited about the potential for significant shareholder gains.
Conclusion
We are committed to investing in the most innovative and impactful growth companies and I am optimistic about the future potential of our investment strategies.
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
ELM Responsible Investments Global Fund
Performance to 31 May 2024
| 3 months | 6 months | 12 months | Inception** | |
|---|---|---|---|---|
| ELM Responsible Investments Global Fund | -6.2% | 6.5% | 18.2% | 3.8% |
| Benchmark* | 1.8% | 14.9% | 22.1% | 29.8% |
*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:
Key Areas of Investment
Electric Vehicles, Healthcare Equipment, Software & Services, Biotechnology & Future Health, Environment & Renewable Energy, Fintech & Marketplace, Data & Research, Medical Devices, Future Technology
ELMRI ANZ Conviction Fund
Performance to 31 May 2024
| 3 months | 6 months | 12 months | Inception*** | |
|---|---|---|---|---|
| ELMRI ANZ Conviction Fund | 1.0% | 16.4% | 19.3% | 41.6% |
| Benchmark* | 1.1% | 10.7% | 12.8% | 39.8% |
| Ethical Benchmark** | -2.0% | 11.6% | 7.7% | 22.9% |
*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:
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.