Performance review and a look ahead

For the month ending 31 December 2019, the Fund returned -1.1% compared to the MSCI World Net TR Index (AUD unhedged) which returned -0.9%, and for the 2019 Calendar year the Fund returned 24.8%.

We saw strong performance from our defensive themes including from Education and Health in December. At the same time, we saw weak performance from our Resource Efficiency and Water Management themes. Between the two, the Fund slightly underperformed its benchmark this month.

Grand Canyon Education, in our Education theme, was the Fund’s largest positive contributor. Grand Canyon helps universities and colleges with the non-academic aspects of providing education. This delivers better outcomes for the students. In Grand Canyon’s case, most of those students are from less advantaged backgrounds studying vocational subjects. There have been various concerns recently over the stock, including concerns over potential regulatory changes. As we explained in our commentary in October, we believe the stock price had overreacted. We were glad to see it correct somewhat in this month.

Within the Health theme, Varian continued it’s solid performance. This leading radiotherapy equipment manufacturer helps address the growing demand for cancer treatment. It has a global presence including in emerging markets. Its new treatment system has recently been installed in three additional clinics in Africa to provide further access to cancer treatment. The system is particularly designed to target emerging markets, thanks to its smaller footprint and easier operation.

Premier was also a strong performer within the Health theme. As a group purchasing organisation, Premier helps healthcare providers reduce their costs. It also provides consulting services to help hospitals develop industry best practices to improve efficiency. Its stock price jumped in December over speculation that it is a takeover candidate.

Resource Efficiency was the weakest theme in the month. Lennox was the major detractor. Lennox makes air conditioning systems and heat pumps with a particular focus on high efficiency products. Its stock price weakened after it announced its guidance for 2020, which was below market expectations. The company is facing some short-term issues but we believe it is still well positioned over the long term.

Our Water Management theme performed poorly in December due in part to China Water Affairs. China Water Affairs supplies tap water and provides wastewater treatment in China. The market appears to be concerned about the company’s ability to gain access to capital during the trade war between the US and China. There is also slowdown in long term growth potential as the company has reduced construction in its Environmental Protection segment.

Our investment review for 2019 and 2020 Look Ahead can be found HERE

Top Holdings (alphabetically)

A.O. Smith United States Industrials

Agilent Technologies United States Health Care

Grand Canyon Education United States Consumer Discretionary

Icon Ireland Health Care

Linde United Kingdom Materials

Orpea France Health Care

Roper Technologies United States Industrials

TE Connectivity United States Information Technology

Thermo Fisher Scientific United States Health Care

Varian Medical Systems United States Health Care

WHEB NEWS

During the 2019 United Nations Climate Change Conference (COP 25), WHEB was one of over 500 B Corporations from around the globe who announced their commitment to reduce greenhouse gas emissions to reach the critical 1.5 degree trajectory and therefore becoming a net zero business by 2030. The announcement was made at COP 25 in Madrid. WHEB has committed to an earlier target of achieving net zero by 2025.

Investment Review 2019

It is often said that markets climb a wall of worry and in 2019 that was clearly the case. That said, the headwinds associated with global trade tensions and their impact on economic growth hit the strategy slightly harder than the overall market. Many of the companies that we invest in are global in nature and will generally thrive in more open markets. Sustainability is also more easily advanced when governments collaborate internationally.

Of our 9 sustainable investment themes, Environmental Services was the main contributor in 2019. Our Resource Efficiency theme also performed well, whereas the Cleaner Energy theme underperformed.

The Environmental Services theme was lifted by the increasing awareness of environmental issues which drive growing demand for products and services provided by our holdings. Horiba was the best stock performer in the theme. It is a Japanese manufacturer of precision instruments for a variety of applications, including vehicles emission testing. Smurfit Kappa was another top contributor in the theme. Smurfit Kappa provides paper-based packaging solutions which can replace single-use plastic packaging. It also promotes sustainable forest management and sources most of its raw materials from recycled fibre.

Our Resource Efficiency theme was the second largest contributor. Although several of the stocks adversely impacted by trade tensions, they were outweighed by a smaller number of stocks with strong sustainability drivers in the year. Those included ams AG, which provides sensors that are used to help reduce power consumption. These sensors are used in a variety of health applications and in improving automotive safety and efficiency.

Our Cleaner Energy theme was the worst performer in the year, mainly driven by the poor performance of TPI Composites. It is an outsourced manufacturer of turbine blades for wind turbine manufacturers. The demand for ever longer blades to improve energy efficiency require has required TPI to adjust its manufacturing lines resulting in slower growth and margin compression.

Outlook for 2020

2019 was a disappointing year for sustainability related policy progress. The 25th “Conference of the Parties” climate summit broke up in December without making meaningful progress. Despite this, in the real economy the trend toward sustainability continued to strengthen.

Renewable energy continued to increase its share of global energy generation, as its cost continues to decrease dramatically. The transition to electric vehicles gathered pace. There were positive developments in areas ranging from low-carbon food to plastic use reduction, and there is increasing awareness about climate change as well as social issues from both investors and the public in general. This bodes well for the strategy in 2020 and beyond.

We are particularly excited about the prospects for our Sustainable Transport theme in 2020. We have seen increasing demand from automotive OEMs to develop new electric vehicles to combat climate change. The demand for battery management systems and automotive electronic components continued to grow despite the industry downturn. As a result, we initiated a position in Infineon in 2019, which provides state-of-the art chips for electric vehicles. We continue to monitor the many opportunities in this changing industry.

Other areas where we see the potential for exciting developments in the coming year include industrial automation, advanced materials, agricultural efficiency, and the circular economy. We are also confident that our investments in climate change adaptation will benefit from increasing demand in 2020. One area where we can foresee significant volatility is in our Health theme, as a result of uncertainty around the US election.