Ethical Investment Dec 23 Report
Dear Investor,
I am pleased to announce the release of our December 2023 Quarterly Report for our Funds. The ELMRI ANZ Conviction Fund increased by 11.1% and the ELM Responsible Investments Global Fund increased by 10.0% during the quarter, both outperforming their respective benchmarks.
2023 was a very strong year for our funds. In particular, our Global Fund rose over 38%, and ranked as one of the top performing funds according to Morningstar. Our ANZ Conviction Fund also performed well, rising over 23%.
During the year, we saw the challenging macroeconomic conditions such as high inflation and interest rates start to diminishing, sending our economies back to a lower-growth environment. This new paradigm is likely to benefit our holdings as we typically invest in companies that are taking market share, and able to grow through innovation regardless of macro-economic conditions.
This transition offers a prime opportunity for long-term investors who prioritise innovative, impactful, and high-quality growth companies. I think over time, these companies will yield the highest returns, along with significant social and environmental benefits. Despite the exceptional returns in 2023, the internal rates of return remain attractive, and so we are still excited about the prospects of both the Global and ANZ Funds.
Company Update
During the year, we also made significant progress in expanding our own business. Brian Johnson joined us in late 2023. He has over 25 years of investment and financial markets experience and was a Director at Goldman Sachs, having worked in Tokyo, New York, London, Melbourne and Sydney for over 10 years. He also has experience advising large financial institutions including The Commonwealth Bank of Australia, Iress, Westpac Banking Corporation and First Sentier. He brings a global perspective and diverse financial markets experience to ELM Responsible Investments and we are already seeing the benefits of his presence.
Professor Sarah Bekessy also joined us. She leads the Icon Science Research Group at RMIT University which uses interdisciplinary approaches to solve complex biodiversity conservation problems. She is also a Lead Councillor of The Biodiversity Council and brings a wealth of expertise to ELM Responsible Investments as a Sustainability and Biodiversity Advisor.
James McLean also joined ELM to help us with our business development and marketing initiatives. He has already added a tremendous amount of value to our business. He has helped expand our client base, engage with existing clients and made our Global Fund available on platforms including Mason Stevens and Netwealth. He continues to work on improving access to our Funds, and is currently working with the Responsible Investments Association of Australasia to get our Fund Certified.
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.
Key positions in the ELM Responsible Investments Global Fund are Tesla, Microsoft, ServiceNow, Workday and ASML.
Company News: Brookfield Asset Management
Brookfield Asset Management is a global alternative asset manager, specializing in real estate, renewable power, infrastructure, and private equity. They have been prominent in the public discourse throughout 2023 as they lead the consortium bidding to take over Origin Energy, an effort which ultimately failed after being voted down by shareholders (including AustralianSuper) for the final time in early December.
We were disappointed to see this result. While we appreciate the concerns of shareholders that this takeover bid would have removed Origin from public trading, the Brookfield consortium had clear plans to dramatically accelerate the move of Origin towards renewable energy. As Origin is Australia’s largest energy producer, with a strong presence in oil and gas sector, this would have been a major accelerant in moving Australia’s power networks towards a renewable and sustainable future.
Nevertheless, we remain positive about the impact of Brookfield going forward. In 2023 they achieved a global renewable power generation capacity of 25,000 MW and raised $15 billion for the Brookfield Global Transition Fund I. They also issued $7 billion in green and sustainability-linked financial instruments. Although the company still has exposure to legacy assets, we have engaged with the company on this topic, and expect their exposure to sustainable energy sources to increase over time. While the takeover bid for Origin was unsuccessful, we are confident that those funds will be invested elsewhere, towards some of the many energy transition opportunities available globally.
COP28
The United Nations Climate Change conference, COP28, concluded in Dubai last month with a first-day agreement to transition away from fossil fuels, triple renewable energy and increase climate finance for vulnerable nations facing the worst impacts of climate change. Billed as the most significant set of decisions since the 2015 Paris Agreement, COP28 concluded with wins and disappointments, eliciting mixed feelings from experts across the globe. Celebrated in some quarters as the end of the fossil fuel era, the COP28 formal decision falls short of delivering the decisive climate change action that science says is urgently needed to limit long-term global average temperature to 1.5˚C above the pre-industrial era.
Read our full statement here.
Investment Themes - Renewable Energy
One of our major investment themes is Environment & Climate, an important theme given the significant amounts of capital needed for the transition of the global economy away from fossil fuels to renewable sources. However, many companies operating in this space have experienced significant drawdowns since 2021 due to the unfavourable macroeconomic environment.
One such company is Danish renewable energy developer Orsted. They faced numerous operational challenges due to the aforementioned macroeconomic forces. They include:
Impairment of US Projects: Orsted bid on US projects before the pandemic. However, subsequent inflation and supply chain issues increased development costs without changes to expected tariffs, impairing their US operations.
Weak Wind Production in 2022: Wind production was lower than expected in 2022, causing a downgrade in financial performance.
Impact of Inflation and Interest Rates: Higher inflation and interest rates have affected Orsted’s asset valuation, especially as a capital-intensive business investing in growth.
However, all these operational challenges are starting to improve. They are now renegotiating the tariffs on their projects to account for the higher development costs. Wind production has also improved and inflation and interest rates are moderating, easing financial conditions for future growth and supporting asset valuations.
The company has also made efforts to focus on value creation and efficiency, setting itself up for future success. Furthermore, the company remains committed to sustainability, aiming for net-zero wind farms by 2040 and engaging in partnerships to promote low-carbon solutions and biodiversity.
Investment Themes - Healthcare and Health Technology
A significant investment theme that runs across both of our funds is Healthcare and Health Technology, and we are focused on those companies that are developing innovative solutions to the health problems of today and the future. It has been an eventful year in that sector so we will address a few of our holdings in this area.
Healthcare: GLP-1 drugs and their effect on other healthcare companies
In previous reports I have discussed the success of the GLP-1 drugs (such as Ozempic, Wegovy, and Mounjaro) produced by Novo Nordisk and Eli Lilly has weighed down on other healthcare companies. To briefly restate the thesis, there is an expectation amongst some in the market that the GLP-1 drugs will lead to such a reduction in population-wide obesity that there will be reduced demand for other drugs or medical devices to treat obesity-related health conditions.
This has had a negative impact on some holdings in our funds, such as ResMed, a manufacturer of CPAP devices and masks, used by people with sleep apnoea. It is thought that due to the health benefits of GLP-1 drugs (weight loss can reduce the severity of sleep apnoea), ResMed’s total addressable market and terminal value are under question. However, we are not convinced of these negative views. The net impact remains unclear as some severely obese patients who would otherwise be ineligible for the company’s therapy could become candidates for treatment after losing weight. Furthermore, the average weight loss in the ‘real world’ is much lower than the weight loss experienced under clinical trial settings and so many patients may still require the devices manufactured by ResMed. ResMed’s stock price remains depressed, but we remain committed, and are confident it will rebound as more real world data comes to hand.
Another company affected by this thinking is Dexcom, which produces continuous glucose monitoring products for diabetics. Their stock price declined significantly, which lead them to issue a presentation on the impact of GLP-1 drugs on their business; their findings were that usage of continuous glucose monitoring devices increased in patients on GLP-1 drugs. After a significant drop in Q3, Dexcom’s stock price has strongly rebounded in Q4.
Biotechnology: Ginkgo Bioworks
One of our most forward-looking holdings is biotechnology company Ginkgo Bioworks, who specialise in using synthetic biology to design custom microbes for a variety of applications. They leverage computational biology to program cells much like one would program computers. In 2023, Ginkgo Bioworks turned their focus to tackling climate change and biological threats through synthetic biology, assisting companies in sustainable development in pharmaceuticals, food, and agriculture. One notable partnership was with Agrivalle, a Brazilian agricultural biologicals leader, to develop advanced fertilizers and biocontrol agents, enhancing agricultural sustainability. This collaboration leverages Ginkgo's synthetic biology expertise, addressing global challenges in climate change and biological threats.
Health Technology: Pro Medicus
Melbourne-based health technology Pro Medicus performed very strongly throughout 2023, such that is now the largest holding in our ANZ Conviction Fund. Their primary product is end-to-end software solutions for radiology and imaging, and in recent years they have integrated AI algorithms into this software, to both improve patient outcomes and reduce radiologist workload.
Throughout 2023 they announced major contracts for the implementation of their cloud-based Visage 7 Enterprise Imaging Platform, notably an AUD $24 million 7-year contract with Memorial Sloan Kettering Cancer Centre (MSKCC), one of the most respected comprehensive cancer centres in the world. Company founder Dr. Sam Hupert flagged plans to extend the functionality of the Vistage 7 platform to move beyond radiology into other related fields such as cardiology, benefiting even more patients and improving healthcare outcomes while also driving further profitability for shareholders We are very excited about this company.
Conclusion
Our strategy of investing in the most innovative and impactful growth companies remains consistent. The strong performance of our funds through 2023 points to improving macroeconomic conditions and growth opportunities ahead, and so I am excited about the potential of our strategies into the future.
If you would like to arrange a time to discuss anything in this report in more detail, please reach out, and I would more than happy to organise a time to meet. If you are interested in investing with us, you can access our investment portal and review our fund documentation by clicking the "Invest Now" buttons below.
Finally, thank you all for your continued interest and support throughout 2023. We are excited for 2024 to be a year of strong growth for ELM, both for our funds and our company, so I look forward to connecting with you all throughout the year.
Kind regards
Jai Mirchandani
ELM Responsible Investments Global Fund
Performance to 31 December 2023
| 3 months | 6 months | 12 months | Inception** | |
|---|---|---|---|---|
| ELM Responsible Investments Global Fund | 10.0% | 4.9% | 38.1% | -0.7% |
| Benchmark* | 5.4% | 4.9% | 23.0% | 14.8% |
*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 December 2023
| 3 months | 6 months | 12 months | Inception*** | |
|---|---|---|---|---|
| ELMRI ANZ Conviction Fund | 11.1% | 8.0% | 23.4% | 30.0% |
| Benchmark* | 8.4% | 7.5% | 12.1% | 35.5% |
| Ethical Benchmark** | 5.8% | 2.5% | 13.3% | 18.7% |
*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.