Market Review

The Fund’s benchmark MSCI World Index was up +5.2% in November. The quick and decisive US election outcome was a big tailwind for global equities during the month and the main driver of market performance.

The S&P 500 rallied, recording its biggest monthly gain in 2024. US equities outperformed other regions significantly, with expectations for de-regulation boosting US financials and the fossil energy sector (although the renewable energy sector struggled), while the potential for tax cuts and trade policy boosted a lot of domestic US sectors.  Concerns about the Trump administration’s less friendly stance towards the pharma industry weighed on the Healthcare sector.

Equities in Europe ex-UK fell marginally due to a combination of concerns about US trade policy and earnings warnings from the automotive and consumer goods sectors. Consumer weakness in China and within domestic markets was cited as the cause for the earnings warnings in both cases. Strong performance in Financials supported UK equities this month.

Fund Review

The fund delivered positive returns over the month.

Grand Canyon (Education), and Resource Efficiency stocks Trane Technologies and Trimble were among the best performing holdings. Grand Canyon reported positive results for Q3, beating profit estimates. It is also seen as a stock that performs well during Republican presidential terms and so benefitted from the US election results.

Ventilation and cooling company Trane’s share price maintained its strong upward momentum following another set of solid results in Q3. It continued to see growth across most verticals including commercial air conditioning and data centres. Trimble outperformed following the announcement that they are divesting their Mobility business, which has been a drag on the company’s overall growth in recent years.

Keyence (Resource Efficiency) was the biggest detractor. Despite strong results at the end of October, underperformance in November resulted from concerns that China will be weaker than previously expected over the next few years. Investors are also concerned that President-elect Trump will impose tariffs on US imports further weakening demand for factory automation equipment in China and Japan.

Vestas (Cleaner Energy) also underperformed, reflecting negative sentiment for Wind companies following the US election result.

From a thematic perspective, Health continued to detract from performance alongside Cleaner Energy. The Resource Efficiency theme contributed very positively towards performance.

Strategy and Performance Update

Last month, WHEB held its Annual Investor Conference in London. A tradition started in 2015, the event provides thought-provoking guest presentations, topical panels, and one-to-one discussions with experts or investee companies, as well as the annual strategy update from WHEB’s investment team – this year delivered by Ted Franks and Ty Lee.

The Fund has had several years of difficult relative performance vs its historic key benchmark, the MSCI World Total Return Index. This clearly needs explaining and our update tackled this issue head on. In this monthly, we want to share with you the main messages from the presentation.

Targeting impact and outperformance

The Fund has twin objectives:¹

1. To achieve capital growth over the medium- to longer-term, by
2. Investing in impactful companies which produce goods and services that solve sustainability challenges.

Let’s start off on a positive – we believe WHEB delivers very strongly on the second of these objectives. In fact, the average impact of our portfolio holdings as measured by WHEB’s proprietary “impact engine” has been steadily rising over the past four years, as has the quality of our holdings and the thematic exposure. The investment team is quite proud of its delivery on the impact calculator measures of the positive impact associated with an investment in the strategy.²

Figure 1: Long-term impact development³

Moving on to investment returns, the last few years have been difficult for WHEB and impact-led strategies in general. The table set forth below shows us performance data over 1 January 2020 to 30 November 2024 split by calendar year.

But it is important to remember that it hasn’t always been like this, as illustrated with additional longer-term data sets.

WHEB’s strategy traces its track record back to the end of 2005 and has always been long-term in its investment approach.⁴ From the original launch of the strategy up until the end of 2020, investment returns compared relatively well to the MSCI World Index benchmark and to the broad peer group of global equity funds. But since then, returns have lagged these mainstream comparisons.

Figure 2: Fund and strategy net returns since launch (AUD, partial simulation)⁵

So has WHEB lost its mojo, or what has happened over the past 3-4 years?

There have been two key developments which we would characterise as “abnormal”. The first is what happened to the benchmark, the second being what happened since 2020.

Development 1: A closer look at the benchmark

Over the past four years, the MSCI World Index has been increasingly taken over by the so-called magnificent seven (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla). These seven stocks now constitute almost 25% of the market cap of an index that comprises 1409 companies, and were a big component of the strong performance of the MSCI World in recent years.

Six of these stocks are not providing solutions to sustainability challenges, so they don’t have the positive impact we are looking for. Tesla is disqualified since, unusually, it fails on UN Global Compact criteria relating to freedom of association – not typically seen as a high bar.

Just to illustrate how extreme the current market concentration is, Nvidia alone has a larger market capitalisation than five of the G7 country stock markets.

Looking at the NASDAQ 100 Index, if it was a retail fund in Europe, it would be dangerously close to breaching what is known as the 5/10/40 concentration rule (which states that the combined position sizes in stocks over 5% cannot be more than 40% of the whole portfolio).⁶

Figure 3: Historic stock market concentration⁷

The last time the stock market had a similar concentration was in the 1950s-1960s with the then magnificent seven (AT&T, General Motors, IBM, Standard Oil, General Electric, du Pont, and U.S. Steel).⁸ They are not that magnificent today – and indeed faded quite rapidly from their position of peak pre-eminence, in 1963.

Moreover, the overall overlap with WHEB’s thematic universe of ~429 stocks is only 14.7% which raises big questions about the suitability of the MSCI World as a benchmark for impact investing.

Ideally there would be a good alternative index for impact investing, but there is nothing yet on the market. We have looked.

Figure 4: Impactful stocks are a small proportion of the MSCI World Index⁹

Development 2: The strange past 3-4 years

In 2019 and 2020 there was a lot of optimism in the impact space driven by the election of Joe Biden in the US and a global push from governments to commit to net zero carbon targets. The global COVID-19 pandemic pushed the social agenda in health care. WHEB’s strategy has a strong exposure to health care and the energy transition agenda which resulted in strong performance at the time.

Since then, the world has seen a deeper pandemic than anticipated, a war in Europe, sky-rocketing inflation, a cost-of-living crisis, a supply-chain crisis, and the re-election of Donald Trump. A flourishing impact agenda sadly stalled and impact investing moved out of favour.

To highlight just a few specific aspects of this:

• The environmental agenda was not followed through as expected, meaning that the then global warming target of “at or below 1.5°C” has become a fantasy and even a greater than 2.0°C scenario is now more likely than not.

Figure 5: Likelihood of exceeding global warming temperature thresholds¹⁰

• Progress in healthcare turned into headwinds. COVID-19-related drivers and with it biotech funding evaporated, US drug price regulation moved back centre-stage with the “Medicare Drug Price Negotiation Program”, and China started a resolute crack-down on corruption in healthcare which created a huge amount of collateral damage to the entire Chinese healthcare sector.
• High interest rates supported financials; the Ukraine invasion and Trump election supported oil and gas and financials stocks – both sectors WHEB is not invested in as they don’t qualify for our impact universe.

It’s always darkest before dawn

All this might make depressing reading, but our spirits are high and we believe we have good reasons to be optimistic regarding what’s to come.

1) Sentiment for impact investing is very, very low which can be seen in the portfolio valuation relative to local markets, such as Price to Earnings¹¹ or Price to Book Value¹² ratios. Markets usually turn when the last marginal seller has left.

Figure 6: Portfolio price to forward earnings ratio, relative to local markets, rebased¹³

2) The urgency for climate action has never been greater and the means have never been more economically attractive. 2024 had a series of extreme weather events (e.g., hurricanes Helene and Milton in Florida; storm floods in Valencia) while clean power costs (e.g., solar and onshore wind) are now well below fossil-fuel based alternatives.¹⁴ Electric vehicles also often beat their corresponding internal combustion engines option on a total cost of ownership analysis.¹⁵ This will enable an increasing number of environmental markets to grow independently of the political environment.

3) We are confident that most of the more strongly underperforming stocks in our portfolio have been hit by short-term issues the market is focussing on while the fundamental, longer-term investment case is as sound as ever (e.g., Spirax, AstraZeneca or ICON).

4) We observe that historically, the strong deregulatory agenda put forward by Republican administrations has tended to powerfully support the mid-cap stocks that our strategy is most exposed to.

So we remain excited about the future and convinced that the opportunity has never been greater.

1. Refer to the Fund’s product disclosure statement for more detail, available at https://pengana.com/PDS/Sustainable-Impact-Fund.
2. See https://impact.pengana.com/#impact-calculator for more detail.
3. See our Impact Assessment and Measurement Methodology document https://www.whebgroup.com/assets/files/uploads/20240528-impact-measurement-methodology-final.pdf
4. In 2012, WHEB underwent significant expansion when joined together with the team that had formerly run the ‘Industries of the Future’ and ‘Global Care’ funds for Henderson Global Investors. The FP WHEB Sustainability Impact Fund was relaunched with the combined team from 30 April 2012, based on the Industries of the Future strategy, and therefore traces its track record back to the end of 2005, when the strategy was founded.
5. From August 2017, performance figures are those of the Pengana WHEB Sustainable Impact Fund’s class A units (net of fees and including reinvestment of distributions). The strategy’s AUD performance between January 2006 and July 2017 has been simulated by Pengana from the monthly net GBP returns of the Henderson Industries of the Future Fund (from 1 January 2006 to 31 December 2011) and the FP WHEB Sustainability Fund (from 30 April 2012 to 31 July 2017). This was done by: 1) converting the GBP denominated net returns to AUD using FactSet’s month-end FX rates (London 4PM); 2) adding back the relevant fund’s monthly ongoing charge figure; then 3) deducting the Pengana WHEB Sustainable Impact Fund’s management fee of 1.35% p.a. The WHEB Listed Equity strategy did not operate between 1 January 2012 and 29 April 2012 – during this period returns are zeroed. The Henderson Industries of the Future Fund’s and the FP WHEB Sustainability Fund’s GBP net track record data is historical. Performance figures are calculated using net asset values after all fees and expenses, and assume reinvestment of distributions. No allowance has been made for buy/sell spreads. Past performance is not a reliable indicator of future performance. The value of the investment can go up or down.
6. See https://maples.com/services/legal-services/funds-and-investment-management/eu-regulated-funds/ucits for more detail and explanation.
7. Country market capitalisations as of 24 October 2024. Sources: Apollo Academy, Apollo Global Management. Nasdaq 100 weights taken from Invesco Nasdaq ETF, 22 November 2024
8. https://globalfinancialdata.com/200-years-of-market-concentration
9. WHEB data as of 30/09/2024
10. Emissions Gap Report 2024, UNEP
11. See https://www.investopedia.com/terms/p/price-earningsratio.asp for explanation of price to earnings ratio
12. See https://www.investopedia.com/terms/p/price-to-bookratio.asp for explanation of price to book value ratio
13. WHEB’s analysis. Mean ratio of price to next twelve months’ earnings by analyst consensus, FP WHEB Sustainability Impact Fund, excluding distortions from meaningless or negative denominators in five cases: FirstSolar, Advanced Drainage Systems, Vestas, Silicon Labs, and Autodesk. Source: Factset
14. IRENA – Renewable Power Generation Costs in 2023.
15. https://www.nrdc.org/stories/electric-vs-gas-cars-it-cheaper-drive-ev