Ethical Investment Oct 23 Report
Dear Investor,
I am pleased to announce the release of our October 2023 Monthly Report for our Funds. The ELMRI ANZ Conviction Fund decreased by -6.9% and the ELM Responsible Investments Global Fund decreased by -4.7% during the month.
After a strong start to the calendar year, our strategies faced short-term macroeconomic headwinds as bond rates increased and short-term industry-specific headwinds in healthcare and renewable energy impacted our portfolios.
Despite the monthly volatility, we remain fully invested in the most innovative and impactful, high-quality growth companies. In time, I believe these are the companies that will deliver the highest returns, and also deliver social and environmental benefits. The internal rates of returns of many of these companies still remain incredibly attractive and we are starting to see the financial gains accrue as the macro-economic conditions become more favourable.
Key Positions
Key positions in the ELMRI ANZ Conviction Fund are ProMedicus, Xero, Infratil, CSL and Fisher & Paykel Healthcare. Given the strong performance of ProMedicus, it remains our largest position. Our positions in CSL and ResMed decreased as healthcare companies underperformed.
Key positions in the ELM Responsible Investments Global Fund are Tesla, Microsoft, ServiceNow, NVIDIA and ASML.
Company News - Cochlear
Australian medical technology company Cochlear held their Capital Markets Day in October, their first since before the pandemic. They presented an optimistic outlook, with high confidence in future growth due to factors including: their market position as the leading manufacturer of cochlear implants, high rates of global hearing loss, and broadening reimbursements. They also cited the under-penetration of the important Adults and Seniors market, at only 4-5%, which will be a focus of forthcoming sales and marketing efforts. This all supports their long-term targets of 10% revenue growth and 18% net margin guidance. They also continue to invest appreciably into research and development, at a rate of approximately 12% of sales revenue.
Investment Themes - Digitization and Cloud Computing (Microsoft, Amazon, Alphabet)
One of our major investment themes is the digitization of the economy, and as a part of that we have an ongoing interest in companies providing the infrastructure and services that enable ‘Cloud Computing’; that is, the remote storage and access of files and software. Our company research in this field has led us to take a large position in Microsoft for our Global Fund.
Over the last twelve months there has been a surge in public usage in artificial intelligence (AI), starting with the launch of ChatGPT in November 2022, and continuing with the integration of AI into many software applications. As these services operate ‘in the cloud’, this has in turn led to a significant increase in the capacity required from cloud computing services.
The three biggest providers of these services are Amazon, Microsoft, and Alphabet (Google parent). As these are all already mega cap global companies through their primary services (ecommerce, productivity software, and search advertising respectively), their size has allowed them to rapidly develop the infrastructure required to support their cloud computing offerings. For this reason, they have become known as hyperscalers. For each, their cloud computing business is the fastest growing arm of their company, and so is of particular interest for investors.
In October all three companies released their quarterly reports, with mixed results. Amazon is the most established in the space, and has the largest market share; but their growth rate has dropped to 12%. While trailing Amazon in market share, Microsoft’s report was very positive: their growth rate has increased from 26% to 29%, and their profit margin is very impressive at about 40%. Google, which has the smallest market share, has a good growth rate of 22%, but only has a profit margin of about 3%, meaning they are by far the least profitable.
Based on these results, we feel very confident in our position in Microsoft. We further believe that the suite of AI products they are rolling out will offer an additional pathway to monetization in this field.
I recorded a video on this topic earlier this month. The replay can be found here.
Conclusion
Our strategy of investing in the most innovative and impactful growth companies remains consistent. Although recently, we have experienced volatility, given the improving macroeconomic conditions and exciting growth opportunities ahead, I am 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 contact us 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 October 2023
| 3 months | 6 months | 12 months | Inception** | |
|---|---|---|---|---|
| ELM Responsible Investments Global Fund | -11.2% | 5.1% | 10.1% | -14.1% |
| Benchmark* | -3.4% | 2.1% | 12.2% | 7.8% |
*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, 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 October 2023
| 3 months | 6 months | 12 months | Inception*** | |
|---|---|---|---|---|
| ELMRI ANZ Conviction Fund | -13.1% | -8.1% | 0.4% | 9.5% |
| Benchmark* | -7.3% | -5.5% | 2.5% | 20.0% |
| Ethical Benchmark** | -12.2% | -9.2% | -2.0% | 3.2% |
*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.