Hamish Chamberlayne, Portfolio Manager for Janus Henderson’s Global Sustainable Equity Strategy, discusses recent developments affecting the world of SRI, and the strategy’s positioning, performance and activity.
The last three months of 2017 continued the year’s strong run for global equities, with the MSCI World Index finishing at all-time highs. Markets were supported by broad-based improvements in economic growth and the prospects for US tax reform, and were undeterred by lack of progress on Brexit talks or raised geopolitical tensions.
Unsustainability of Bitcoin
While global equity markets generated solid returns for investors in 2017, these pale in comparison to the price moves of Bitcoin and other cryptocurrencies. We are very concerned about the amount of energy required for Bitcoin mining, which increases along with the number of Bitcoins in circulation. It is estimated by Digiconomist that in mid-January 2018 Bitcoin was consuming a similar amount of electricity to New Zealand. This is clearly not sustainable. While cryptocurrency projections are not our field of expertise, we do see this intense energy requirement as a limiting factor to the longevity of Bitcoin. It is simply not productive and we see the positive benefit to society as questionable.
Oil’s move higher could accelerate low carbon transition
The Tesla Semi. Source: Tesla. Image used with permission.
A combination of improving global growth, supply disruptions, and geopolitical tensions has driven oil prices higher. We believe any oil price strength will merely accelerate the transition to a low carbon economy. Oil is an uncompetitive source of energy even at US$50 per barrel and we have a long-term bearish view on oil prices. We noted news in November that the Norwegian central bank proposes to sell all of its oil & gas investments held within its trillion-dollar sovereign wealth fund. The bank’s stated reason was to make Norway “less vulnerable to a permanent drop in oil & gas prices”. We are also expecting the world’s largest oil company (state-owned) Saudi Aramco to push ahead with its initial public offering (IPO) in 2018. The IPO is intended to diversify Saudi-Arabia’s oil-dependent economy.
We do not believe it is a coincidence that these moves to divest fossil assets are coming now. In 2017, innovation gathered pace in the automotive and commercial vehicle industries. Batteries are replacing combustion engines and autonomous driving technology is advancing rapidly. We have recently witnessed significant electric vehicle investment announcements from leading manufacturers including VW and Toyota, and, while several companies unveiled electric trucks, it was Tesla that stole the show with its electric heavy goods truck. With a stated range of 800km, we think the Tesla Semi will be a game-changer for innovation in heavy duty transportation.
Despite all the headlines generated by OECD manufacturers, it is actually China that is leading the pack on electric vehicles. With a 50% share of global sales, China is the largest electric vehicle market in the world; equally, the most important new product announcement in 2017 was arguably the unveiling of a Chinese electric car that costs just US$5,000. These developments are all being made possible by huge increases in battery investments. Led by China, global battery manufacturing capacity is expected to rise to 355 gigawatt hours by 2021, increasing by a factor of almost five times compared to 2016 levels.
2017 was another year of strong growth in renewable energy capacity additions and new price records were set in solar, onshore wind, and offshore wind. These technologies now offer the cheapest form of electricity in many parts of the world. 2017 marked the first year that the UK generated more of its electricity from renewable (wind, solar, biomass and hydro) and nuclear energy than it did through the burning of fossil fuels. It is important to recognise that, around the world, a large and increasing number of nations are actually pledging to cease using coal as fuel for power generation from 2030.
Over the final quarter of 2017, the strategy continued to benefit from stock selection in the information technology sector. Stock selection within the healthcare sector also positively contributed, partly offset by stock selection within the consumer staples and consumer discretionary sectors. Our key contributors and detractors to Q4 2017 are set out below.
Key contributors to performance
Adobe (Knowledge and Technology theme), the developer of software for creative professionals and digital media, rose as the company reported strong results and held a capital markets day where it issued longer-term earnings guidance above market expectations. Adobe’s inventions are helping to drive the exchange of information and creation of ideas – presenting new ways of solving social and environmental problems. Education is one of Adobe’s largest end markets. The shift to digital media also enables customers to reduce waste and save natural resources.
IPG Photonics (Efficiency theme), a leading global manufacturer of high-performance lasers, continued its strong run after reporting earnings ahead of market expectations and considerably above management’s prior guidance. The strong growth was driven by materials processing applications, such as cutting and welding, in addition to strong demand growth from China. The company also continues to take market share as a result of their technological leadership and lower cost base. Fibre lasers are up to 20 times more energy efficient than traditional industrial lasers and their use leads to material energy savings and a reduction in carbon emissions. Fibre lasers not only have lower running costs, but also have a significant number of applications: they are transforming industrial manufacturing processes, medical technology, and consumer entertainment.
Texas Instruments (Knowledge & Technology theme), one of the world’s largest semiconductor design and manufacturing, continued to perform strongly given robust end market growth and impressive execution by the management team. Analog 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, factory automation, smart meters, security systems, battery management systems, autonomous driving, and smart irrigation.
Key detractors from performance
Henry Schein (Health theme), the world’s largest provider of healthcare products and services to medical, dental and veterinary practitioners, continued to underperform. The shares have been derated over fears of increasing competition in lower cost dental items from internet providers, including Amazon. Currently, this is only impacting a small part of Henry Schein’s business, although we are monitoring the situation closely. Henry Schein helps its customers succeed by offering the products and services integral to helping individual practitioners. This not only improves the health and wellbeing of their patients, but also collectively address some of the world’s most pressing health issues.
Unicredit (Sustainable Property & Finance theme), a leading European commercial bank with a focus on financial services to businesses and home owners, declined as investors took profits ahead of the upcoming Italian elections. Unicredit has numerous initiatives to support lending to business start-ups, research and development activities, public infrastructure and renewable energy generation. The bank also incorporates carbon risk into lending risk management and has mapped its activities against the UN’s Sustainable Development Goals.
CVS Health (Health theme),one of North America’s largest retail pharmacy chains and one of the largest pharmacy benefit managers (PBM), declined following news that it is seeking to acquire Aetna, one of America’s largest health insurers. Also weighing on the shares are concerns about Amazon’s rumoured entry into the pharmacy market. In this context the acquisition of Aetna could be a sound long-term strategic move, but in the short term it does add uncertainty to the investment case. The position is currently under review. As a result of scale benefits and purchasing power, CVS Health plays a crucial role in slowing down the rising costs of healthcare and, with ageing demographics, it should benefit from increasing prescription volumes.
Activity and positioning
Over Q4 2017, new positions were initiated in Kone, Evoqua Water Technologies, and Autodesk. Johnson Controls, Willis Towers Watson, and Plant Health Care were sold from the strategy.
Kone (Efficiency) is a global leader in the elevator and escalator industry. It is exposed to the mega trends of population growth, ageing populations, and urbanisation, providing solutions to improve the flow of urban life. Today, cities account for approximately 2% of the world’s land mass but 75% of global energy consumption and about 70% of man-made carbon emissions (source: UN-Habitat). Reducing the environmental impact of urban areas is, therefore, essential for a sustainable future. Kone is a leader and pioneer in developing eco-efficient solutions in the elevator and escalator industry, with some of their current elevators being up to 90% more energy efficient than models from the 1990s.
Evoqua Water Technologies (Water Management) is a water technology company, with a sole focus on water treatment. Its core technologies are focused on purification; removing impurities from water, rather than neutralising them through the addition of chemicals. It serves municipal and industrial customers and its solutions span the entire water life cycle from extraction and purification to waste treatment and reuse. Evoqua’s treatment systems and services enable customers to achieve lower costs from the more efficient use of water, as well as ensuring their ability to meet regulatory compliance requirements and environmental sustainability objectives.
Autodesk (Knowledge & Technology) is the global leader in design software used by architects and engineers worldwide, and is a provider of software to product designers. Autodesk’s solutions aim to empower customers to optimise the environmental and social impacts of their designs. This can encompass producing designs that dramatically reduce energy needs, provide resilient and environmentally sustainable infrastructure, or allow new approaches to product development and manufacturing. Customised goods that are created locally with less materials waste are of benefit to a sustainable economy.
For our 2018 outlook, please follow the link: https://www.janushenderson.com/ukpa/post/16222/sustainable-investing-powerful-themes-cannot-be-stopped-by-politics
Bitcoin mining = the process of adding transaction records to Bitcoin's public ledger of past transactions or ‘block chain’; the growing lists of records are called ‘blocks’. The block chain serves to confirm transactions to the rest of the network as having taken place.
Cryptocurrency = a digital currency stored on an open and decentralised electronic payment system.
Gigawatt hour = a measure of electrical energy equivalent to the work done by one billion watts operating for one hour.
OECD = Organisation for Economic Co-operation and Development (OECD). The OECD promotes policies that are intended to improve the economic and social wellbeing of people around the world.
SRI = sustainable and responsible investment.
Please note that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. References made to sectors and stocks do not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase them. Examples are intended for illustrative purposes only and are not indicative of the historical or future performance, or the chances of success of any particular strategy. These are the manager’s views at the time of publication and should not be construed as investment advice. The opinions expressed do not necessarily reflect the views of others at Janus Henderson.