Hamish Chamberlayne, Portfolio Manager for Janus Henderson’s Global Sustainable Equity strategy, discusses SRI news and strategy performance over the past year*.
Markets were strong through to the end of January 2018, reaching all-time highs, before retreating back to mid-November levels. While US tax reform and broad economic strength aided corporate earnings, stocks suffered a sell-down following tensions between the US and China over trade tariffs.
Technology investments addressing more than one theme
Market strength over the 12-month period was driven by the information technology sector, which remains the strategy’s largest overweight position relative to sectors within the MSCI World Index. We see technology as a key enabler of sustainability and this is reflected in Knowledge & Technology being our largest theme. This positioning has supported the good performance of the strategy over the past year.
We see great diversity among our technology holdings, as many of our investments are addressing more than one of our sustainability themes. For example, analog semiconductor companies are having a transformative impact on areas such as medical technology and health diagnostics, electric and autonomous cars, smart cities and factory automation, renewable energy and energy efficiency, and water and environmental services. Semiconductors are the backbone of a smart and connected world, and the industry is evolving from serving computing and smartphone markets to being adopted in a growing number of industrial and internet-of-things applications. We expect greater end-market diversity to result in faster growth and reduced cyclicality. We have increased our exposure over the past year and core positions include Texas Instruments, Microchip Technology, and AMS.
Microsoft is another example of a multi-thematic holding that is having a positive impact on the sustainability of many different industries. Its cloud computing platform is providing the tools to a wide range of companies, from water filtration services to public transportation systems, to healthcare; Chief Executive Officer Satya Nadella has embedded sustainability into Microsoft’s vision and strategy.
Tech disruption: aiming to identify the winners
The reality is that all industries are being forced to adopt technology, with digitalisation considered a top priority for senior management. Technology is penetrating every part of our economies and the most important aspect in every investment case is to understand whether or not a company is on the right side of technological disruption. The trend is still in its early stages and we are focused on investing in companies capable of adapting to and adopting new technologies. Over the period, our exposure to cloud computing, semiconductors, factory automation, electric vehicles, and smart water technologies (for water and wastewater management) all benefited performance.
Other software investments our strategy favours are Adobe, Salesforce, Autodesk, and SAP. Each company offers cloud solutions that can be quickly deployed and provide a way for customers to improve efficiency, customer service, and reduce their carbon footprints (due to cloud computing typically being run on carbon neutral datacentres).
Adobe is transforming creative industries and the sharing of information. Education is one of its largest end markets. Autodesk is a design software company that is providing tools to architects, engineers, and manufacturers, enabling them to design low carbon buildings, resilient infrastructure, and sustainable consumer products with more local supply chains. Salesforce and SAP provide enterprise software to help businesses run more efficiently and get closer to their customers. The emergence of cloud computing has also resulted in powerful business model transitions, with customers shifting from licence to subscription plans. Customers on subscription plans represent a predictable, recurring revenue base, which enhances the resilience of the business and also helps reduce piracy. While these positions have performed well, we believe that the market is yet to fully appreciate the attractive financial attributes of these business model transitions.
Source: IPG Photonics with permission
Performance also benefited from positions exposed to factory automation in China. IPG Photonics was the top contributor over the 12 months to March as fiber lasers were adopted in materials processing applications such as cutting and welding. Fiber lasers can be up to 20 times more energy efficient than traditional industrial lasers and their use results in material energy savings and a reduction in carbon emissions. Omron, a Japanese robotics manufacturer also performed strongly over the period. We expect factory automation to improve productivity and safety within manufacturing. While this likely will result in the loss of some low paid jobs, we expect factory automation to be a net positive to society, with higher value jobs being created with the emergence of new industries.
Healthcare: risks and opportunities
Some of the strategy’s healthcare investments weighed on performance over the 12 month period. While ageing societies create growing demand for healthcare, and potentially represent an attractive growth opportunity for companies offering relevant goods and services, they are also increasing the fiscal burden on governments and taxpayers.
Over the year, there has been a greater level of government scrutiny on the cost of medicines and hospital treatments, which has pressured the profits of some companies. CVS, a pharmacy chain and health benefit plan manager, and McKesson, a drug distributor, were two investments impacted as a result of this. The evolving landscape has highlighted the importance of investing in healthcare companies that can clearly demonstrate they are part of the solution to managing the rising costs associated with an ageing population. For example, our position in Humana, a health insurer that provides Medicare Advantage plans to senior citizens, performed well. The company offers a range of clinical capabilities and resources at a similar service level to private insurance but at a lower price point. We exited CVS and McKesson, and invested the proceeds into Capital Senior Living, (one of America’s largest care home operators), Waters Corporation (a manufacturer of scientific analytical instruments), and Physicians Realty Trust (an owner of medical properties).
Engaging with companies on environmental, social and governance (ESG) issues is a key part of our investment process, and during the period we spent time analysing and discussing company cultures. How human capital is managed and incentivised is an important aspect of any business and an area we feel the market often overlooks. Adobe, which displays evidence of a strong company culture, has been one of our best performing holdings, while Acuity Brands, which we sold partly due to concerns about its culture, has been one of our largest detractors. While there are numerous factors that influence share prices, we believe that by incorporating ESG analysis into our disciplined investment analysis we have a greater chance of identifying long-term winners.
Activity following the Janus Henderson merger
The merger has had a positive impact on the investment resource available to the strategy and many of the new positions of the past nine months are the result of working with the enlarged number of portfolio managers and research analysts. Aaron Scully, our new team member based in Denver, has been of great help to us in building good working relationships with our US-based colleagues.
Strategy positioning remains skewed towards the Knowledge & Technology and Efficiency themes, resulting in our continued overweight towards the information technology and industrial sectors versus the MSCI World Index. The strategy remains underweight the energy, consumer staples, and financial sectors, while regional weighting remains in line with the MSCI World benchmark. The strategy is managed to keep regional weightings in line with the benchmark, while sector weightings are an outcome of where we are able to find the most compelling bottom-up stock ideas while aiming to maintain a balanced risk profile.
Please refer to our latest 'Positive Impact Stocks' document for further details on our favoured stocks.
*The official annual reporting period for the Janus Henderson Global SRI funds covers the 12 months to 31 March 2018. The stocks highlighted in bold are held within both the Janus Henderson Global Sustainable Equity Fund and the global equity sleeve of the Janus Henderson Institutional Global Responsible Managed Fund.