Covid-19's impact on impact investing

This week we hosted a webinar where we gave an update on WHEB’s strategy covering Q1 2020 and the COVID-19 crisis. Many of you dialled in, we hope you enjoyed it and found it a useful update. For those that missed it, a recording of the webinar is available below.

If you would like to arrange an update call or if you have any questions, please get in touch.

For the month ending 31 March 2020, the Fund returned -6.5% compared to the MSCI World Net TR Index (AUD unhedged) which returned -8.6%. We also provide full investment commentary as well as an article written by Ted Franks: a Lockdown on Leverage.

Top Holdings (alphabetically)

Agilent Technologies United States Health Care

Ansys United States Information Technology

Danaher United States Health Care

Ecolab United States Materials

Icon Ireland Health Care

Intertek Group United Kingdom Industrials

Linde United Kingdom Materials

Roper Technologies United States Industrials

TE Connectivity United States Information Technology

Xylem United States Industrials

For the month ending 31 March 2020, the Fund returned -6.5% compared to the MSCI World Net TR Index (AUD unhedged) which returned -8.6%.

March marked one of the most volatile months in stock market history as the world struggled to fathom the unthinkable implications of the global COVID-19 pandemic. On 16 March, both the S&P 500 and the Dow Jones Industrial Average registered their biggest one-day percentage drops since the stock market crash of 1987. The S&P 500 subsequently marked the best three-day performance since 1931, on the back of the US government’s $2 trillion fiscal package and the US Federal Reserve’s quantitative easing programme.

Amid this volatility, the Fund demonstrated its relative defensiveness, leading to the Fund’s relative outperformance for the month overall. Unsurprisingly, our Health theme was the best performer. Our Sustainable Transport and Cleaner Energy themes performed poorly, as capital investments and discretionary spending are expected to slow down in the coming months.

In the Health theme, Premier was the biggest positive contributor. Premier is a group purchasing organisation, which plays a unique position as a connection point between healthcare providers, suppliers, and federal and state governments. It helps to ensure a more reliable healthcare supply chain in the throes of this global crisis. Its clinical surveillance technology deploys real-time alerts, initiates intervention protocols and tracks patients under investigation and exposure to stem the spread of COVID-19. Several actions recommended by Premier’s team have been enacted by the Centers for Disease Control and Protection (CDC) and the Centers for Medicare & Medicaid Services (CMS), which are the key government health agencies in the US.

HMS was another positive contributor in the Health theme. HMS delivers healthcare technology, analytics and engagement solutions to help reduce costs, improve health outcomes and enhance consumer experience. In response to COVID-19, it has developed a coronavirus-specific rapid messaging solution. It enables healthcare organisations to proactively communicate and deliver the right coronavirus-specific message to the right person at the right time.

Our Sustainable Transport theme was hit particularly hard in March. With one third of the world’s population under lockdown, car sales are plummeting. The outlook for the automotive sector is bleak for the rest of 2020. We have already trimmed our exposure this month, and may do so again.  On the other hand, all of our auto holdings are well positioned to benefit from secular trends including the shift to electric vehicles, advanced safety and autonomous vehicles. We believe these sustainability trends will continue when the pandemic ends.

Cleaner Energy was another detractor to our performance in March due to the poor performance of TPI Composites. It is the largest independent manufacturer of composite wind turbine blades. Management has been in close contact with its turbine manufacturer customers throughout the crisis. They’re confident that the demand for wind turbine blades remains robust. However, the likelihood of project delays cannot be excluded, which put pressure on the stock price.

The relative performance of the strategy was also helped by excluding non-sustainable sectors within the benchmark in March. Energy, Financials and Real Estate sectors were the worst performing sectors in the benchmark which the strategy had no exposure to.

We expect the stock markets will continue to be volatile in the coming few months as the global pandemic develops. We will continue to monitor the situation closely and adjust our positions where appropriate. We will also seize opportunities offered by this crisis to pick up high-quality companies trading at a discount.

We remain confident that the need for a greener, safer and healthier world remains unchanged despite the global pandemic. We also think that, on balance, the pandemic accelerates the shift to sustainability. This strategy will continue to capitalise on these sustainability trends over the long term.

Coronavirus Contagion: a Lockdown on Leverage?

By Ted Franks

A crisis puts everything in a new light. Over the last seven weeks we’ve worked hard to review our strategy and all of our stocks. We’re looking at them from fresh angles, and with different eyes. And so with investors everywhere, no doubt.

Most important is to understand whether the pandemic challenges or boosts business models. Will it impact the sustainability issues that drive our companies? Will it enhance them, or create new challenges?

This analysis can be complex and will only really prove out over time. We gave a webinar with the skeleton of our current views on 16 April. You can watch a replay here.

The second key area of concern for us is much easier to frame. The issue is indebtedness, and liquidity. We can see that there will be a sharp recession, if not depression, beginning right now. A lot of companies, including some of ours, are facing stunning falls in demand. Like an airliner hitting an air pocket, for many it will be stomach-churning.

When their operations switch from a source to a use of cash, can our companies survive? We may feel confident about their prospects over the next six years. How about the next six months? All eyes turn to the balance sheet, to debt levels and cash management.

The truism is that a crisis always comes at a bad time. But you can easily make the case for corporate debt levels in 2020. After the financial crisis of 2008-2009, we’ve had more than a decade of loose monetary policy. The debt markets have responded. Total indebtedness by US corporates has run back up to nearly 50% of GDP, above where it was before that crisis.

As the economy shuts down, many of those excessive borrowers won’t meet their repayments. The risk is of a contagious spread into the banks, and from there back out to healthier companies.

A core part of WHEB’s investment process aims to identify higher quality companies. And for us higher ‘quality’ generally means companies that are sustainable in every sense of the word, with good sound management, stronger cashflow and robust capital structures. We hope and expect that such companies will be in a stronger position to weather the current storms than most.

As a result, our portfolio is generally less levered than the broader market. As at 31 March, our net debt to earnings before interest, tax, depreciation and amortisation (“EBITDA”) ratio is about 1.1x, while the market is 1.3x.

A handful of our companies are more comfortable with a bit more leverage. That’s fine. We invest with good management teams in highly impactful companies. We take time to understand the situation, and if we then invest, it is because we have faith in their ability. It is hard to argue with the track record of the team at Thermo Fisher, for example. But in the eight years we’ve owned them, only one has ended with their net debt below 2x EBITDA.

But we’re not complacent. In the last few weeks we’ve been in touch with the few that might give even slight cause for concern. So far their responses are assured. They are controlling costs, husbanding operating cash flow, cancelling dividends, and speaking to their bankers.

Through the course of the month, governments have responded with financial guarantees and monetary stimulus. In a way, and without wishing misfortune on anyone, we might prefer it if they hadn’t. There’s a moral hazard to governments continually bailing out imprudent borrowers.

But this isn’t our focus. We want to deliver outperformance from investing in sustainability, as purely as we can. It’s a long-term mission, and we keep our disciplined approach to risk along the way. This should stand us in good stead if we do hit more turbulence now.