Hamish Chamberlayne, Portfolio Manager for the Janus Henderson Horizon Global Sustainable Equity Fund, discusses recent developments affecting the world of Sustainable & Responsible Investment (SRI), and the fund’s positioning, performance, and activity.
Global stock markets marked a strong finish to the year with the MSCI World Index rising by more than 8% in US dollar terms in the final quarter, bringing the total return for 2019 to more than 25%. Markets responded positively to tangible signs of progress on the US and China reaching an initial détente in trade negotiations. The US Federal Reserve made no change to interest rates and several other central banks across the world signalled a more accommodative monetary policy stance ahead. Returns were more modest for sterling based investors as the British pound strengthened in response to a large conservative majority in the UK general election, which promised greater political stability and a possible escape from the Brexit quagmire. With rising optimism, outperformance came from several of the more economically sensitive sectors such as information technology, financials and materials. The industrial and communication services sectors also produced good returns while the more defensive utility, consumer staple and real estate sectors lagged.
From a sustainability perspective, 2019 has been an important year with a number of economically impactful ecological events making it into the news headlines. We wonder if we will look back and see it as a tipping point for broader public awareness and concern over the immediacy of global environmental issues.
2019 marked the first bankruptcy directly related to climate change as Californian energy utility PG&E filed for Chapter 11. Terrible fires, often accompanied by record temperatures, have dominated news headlines throughout the year from heavily populated areas in California, South East Asia and Australia to pristine wildernesses such as the Amazon and the Arctic Circle. It was also the year where a 16 year old girl from Sweden became a household name acting as the face of a worldwide climate protest movement, that awareness of plastic pollution became prevalent and that people started to wake up to the environmental costs of meat production.
On a more positive note, more and more businesses embraced sustainability with many putting it at the heart of their growth strategies; clean technologies kept on getting cheaper, with the cost to build new renewable energy falling below the running costs of coal; electric vehicle sales had their biggest year ever and automakers committed $225bn to electrification in the coming years and, plant based meat went mainstream.
The fund returned 10.1% in US dollar terms over the quarter compared with a 8.6% rise in the MSCI World index*. The fund’s overweight stance towards the information technology sector had a positive impact on performance but good stock selection also contributed to positive returns, with four of the top ten performers coming from different sectors. Only one of the top three contributors was a technology stock.
*Source: Morningstar, as at 31 December 2019, Janus Henderson Horizon Global Sustainable Equity Fund A2 in US dollar terms. Past performance is not a guide to future performance.
Contributing to performance:
Humana (Health) is a health insurance company with a primary focus on providing Medicare Advantage plans to senior citizens in the US. Humana rebounded strongly due to a reversal of political risk. Early in the quarter, investors placed a lower probability on the implementation of Elizabeth Warren’s Medicare-for-all bill. This risk transformed into a tailwind as Trump signed a law permanently repealing an Obama-era tax on health insurers.
Tesla (Sustainable Transport) is a world leading manufacturer of electric vehicles, lithium ion batteries and solar power systems with a mission to accelerate the world’s transition to sustainable energy. The stock rose by 25% in December taking its six month return to 87% and more than 100% up from the lows of June. After reporting a surprise profit in Q3 the shares were further fuelled by the opening of the Shanghai Gigafactory and positive commentary on the production timeline for the Model Y. Shortly after the end of the year, the company reported Q4 deliveries that were ahead of expectations and this has driven the shares higher still. We spoke with the company in December and we are cautiously optimistic that operational execution is on a sustainably improving trajectory. Meanwhile it is evident that Tesla has a multi-year lead after a string of underwhelming electric vehicle (EV) launches from competitors that have seen little traction with consumers.
Autodesk (Knowledge & Technology) is the global leader in design software used by architects and engineers. Its solutions empower customers to optimise the environmental and social impacts of their designs whether that be reducing energy needs or providing resilient and environmentally sustainable infrastructure. Autodesk rose in the fourth quarter after reporting better than expected results and raising its full year free cash flow guidance. The transition to a recurring, subscription based revenue model is now largely complete and the results demonstrated progress in converting non-paying users (which still represent nearly three quarters of the global user base) and good momentum in both construction and manufacturing end markets, where Autodesk is enabling digital transformation. While Autodesk is not immune to a global growth slowdown, we continue to see a long growth runway and numerous self-help margin initiatives over the coming years giving us conviction in the investment case.
Detracting from performance:
The most significant stock specific detractor was our underweight position in Apple. In respect of owned stocks the three largest detractors were Gildan, Progressive and Texas Instruments.
Gildan (Quality of Life) is a North American textile manufacturer renowned for its high social and environmental standards. The company has facilities that enable it to produce higher quality goods at a lower cost, while minimising the environmental impact of its operations and providing industry leading working conditions. Gildan fell after reporting disappointing results and lowering its full year guidance as a result of weaker than expected customer demand within its screen print segment. While the demand setback is disappointing, we remain confident in Gildan’s position as the low cost leader within the basic screen print and fashion basics categories and do not believe this weakness is related to a change in the competitive environment.
Progressive (Safety) is one of the largest automotive insurance companies in the US and considers itself a data science company focused on the insurance industry. It uses data analytics to identify and attract lower risk drivers, enabling it to offer lower insurance rates, which results in a competitive advantage and higher rates of growth. Progressive was subject to profit taking after reporting a modest disappointment in its core loss ratio, a reserve charge in its commercial auto business and lower than expected consolidated premium growth.
Texas Instruments (Knowledge & Technology) is one of the world’s largest semiconductor design and manufacturing companies, focused on developing analogue chips and embedded processors. Analogue semiconductors are the building blocks of a more connected world and serve a wide variety of end customer applications including renewable energy technology, healthcare diagnostic equipment and autonomous driving. The holding declined after reporting in-line results but issued guidance below the market’s expectations. Texas Instruments is experiencing weakness in its auto, industrial, consumer and communications end markets where trade tensions have resulted in lower near term demand. While trade tensions continue to be a headwind to orders, the company has been effectively managing inventory and costs and is well positioned to benefit when the demand improves.
During the quarter, positions were initiated in Innergex and Zendesk and divested in Costa Group and Waters.
Innergex (Cleaner Energy) develops and operates renewable power facilities throughout Canada, the United States, France and Chile. It specialises in wind, solar and run-of-river hydroelectric projects. On its projects the company has partnered with government, non‑governmental organisations (NGOs), conservation groups, academia and local organisations to design and enact solutions that mitigate human-wildlife interaction and disturbance to important ecosystems.
Zendesk (Knowledge & Technology) is a global provider of customer relationship management software with a mission is to help organisations build better relationships with their customers. Its software unifies customer communication and customer data across disparate channels to provide great omni-channel customer service and engagement. Built on the public cloud and open standards, Zendesk’s software is easy to use and implement, affording organisations the flexibility to move quickly, focus on innovation and enhance productivity.
Our outlook has not changed. Looking around the world it is not hard to find causes for concern. Slowing economic growth, geopolitical instability, the ongoing US-China trade war and Brexit are heavy burdens on business and investor sentiment and we understand why many people are arguing for caution when it comes to equities. However, we remain constructive on the outlook for equities, especially those with superior growth characteristics. We have now had several quarters of industrial and manufacturing weakness and there are signs that the stock building cycle and industrial momentum may be close to bottoming. The semiconductor sector is often a lead economic indicator and, in the last few quarters, we have seen evidence of stabilisation in memory prices with management teams commenting that they expect to see a recovery in 2020. The shift by central banks towards more accommodative monetary policy is highly supportive of growth equities and we still see substantial upside potential in many of our investments. While it is true equity valuations are above long‑term averages on an absolute basis, they are at historically low valuations relative to bonds.
While we are standing ready to add incrementally to investments that will benefit with a recovery in industrial production, we are mindful there remains a lot of uncertainty. We have a significant allocation to companies with a high degree of recurring revenue, strong balance sheets and which are more insulated from global macroeconomic trends. We believe our sustainability framework helps us to navigate uncertainty, helping us to find investments with resilient growth characteristics and that will compound wealth through periods of economic turbulence.
There are plentiful opportunities in companies that are on the right side of secular trends. Technological change and innovation has not slowed down and sustainability issues continue to grow in importance. Active managers can make a positive impact by allocating capital to companies that contribute to a sustainable planet and away from those that cause harm.
All data sourced from Janus Henderson Investors as at 31 December 2019, unless otherwise stated.