In the first quarter of 2019, global stock markets recovered almost all of the losses of the prior quarter. The MSCI World Total Return Index rose 10.1% in sterling terms to finish the quarter 3.2% below the highs of 2018.
In a mirror image of the prior quarter, the information technology sector led market gains, rising by 17% (MSCI World IT Total Return Index in sterling terms).
One of the main reasons behind the market strength was the shift in tone and policy by the US Federal Reserve away from monetary tightening. The Chinese government is also starting to enact economic stimulus policies. This is a great example of reflexivity – the two way feedback loop between investor perceptions and the economic environment – with stock market performance being a key input into central bank decision making. Fears over slowing growth were an important driver of weak markets in the prior quarter and this, in turn, influenced central bank policy. The equity market rally was further reinforced by good corporate results, with many companies reporting strong growth. It is important to remember that aggregate economic statistics hide a much more complex reality and there are many secular trends that are driving growth for the companies exposed to them.
With regards to sustainability matters, there was significant news, both positive and negative. In March, the International Energy Agency reported that carbon emissions rose by more than 2% in 2018 to reach an all-time high. This follows a 1.6% increase in 2017. Strong growth in renewable energy was not enough to offset increased coal-fired power generation in China and India, and higher oil use in transportation markets. After three years of flat emissions from 2014-16 this is sobering news for the fight against climate change. Emissions need to start declining sharply from 2020 in order for the world to stand any chance of staying within the climate targets agreed at the 2015 Paris summit.
In response to this, we are making carbon reduction a core element of our engagement programme, with the aim of encouraging our holdings to chart a path towards achieving carbon neutrality. As we keep on saying, economics is no longer a barrier to clean technology. In the last year, the cost of clean energy has fallen to a level where new solar and wind generation is cheaper than the running costs of existing coal and gas generation. The cost of batteries and electric vehicles continue to decline as well. In the first quarter, Tesla finally released the $35,000 version of its Model 3 sedan.
There are signs of building momentum in the circular economy and towards tackling the ocean plastics crisis. More and more companies are looking at ways to use recycled plastic in their supply chains. This quarter, one of the strategy's holdings – Kingspan - announced an initiative to use recycled ocean plastics as an ingredient for its insulation panels, which are used to improve the energy efficiency of buildings. It has a target of recycling one billion plastic bottles by 2020.
Over the quarter, the fund outperformed the MSCI World Total Return Index in sterling terms*. Sector allocation contributed to just under half of the outperformance, thanks to the fund's overweight position towards the information technology sector. Stock selection was positive, with many of the fund's holdings returning more than 30%**. Past performance is not a guide to future performance.
*Source: Morningstar, 01.01.19 to 31.03.19, Janus Henderson Global Sustainable Equity Fund I Acc, net of fees, gross income reinvested, GBP. **Source: Factset.
Key contributors to performance
Shimadzu (Safety), recovered strongly in the first quarter with signs of improving demand in the Chinese market. It also announced a range of new liquid chromatography products that should underpin future growth. Shimadzu is a Japanese manufacturer of analytical and measuring instruments that are being used in a wider range of applications, from new drug discovery, drug quality control and assurance, research into new high performance materials, clinical healthcare and food and environmental safety testing. It has one of the broadest technology portfolios with a variety of instruments at differing price points. It has been developing new blood tests for early screening of Alzheimer’s and cancer.
Cadence Design Systems (Knowledge & Technology) continued its strong run as it announced a large new customer win and reported better than expected results, both of which served to highlight the secular themes driving its growth. Cadence is a provider of system design tools, software, internet protocol solutions and services for the electronics design chain and its customer set is expanding as more companies look to incorporate connectivity and intelligence into their product designs. Cadence provides the resources semiconductor companies need to develop highly differentiated products within the automotive, cloud, datacentre, consumer, industrial, internet-of-things (IoT) and mobile industries. Its solutions help accelerate the design of innovative electronic products that transform the way people live and work.
Intuit (Sustainable Property & Finance), performed strongly in the first quarter after reporting better than expected results. Intuit is a financial technology company covering areas such as tax, payroll processing and personal finance for small businesses, accounting professionals and consumers. It is seeing strong demand for both its QuickBooks (for small businesses) and TurboTax (for consumers) products and should continue to see good growth as we approach the April consumer tax season. Intuit’s mission is to power prosperity globally and it does this by providing the tools to help small businesses and consumers manage their financial resources more effectively. Intuit’s QuickBooks also provides loans, helping small business formation.
Key detractors from performance
Costa Group (Quality of Life) fell, following a negative trading update. The company is Australia’s largest grower of fresh fruit and vegetables and it experienced weaker than expected demand in some categories, which resulted in lower prices. Costa’s main products are berries, avocados, citrus, tomatoes and mushrooms, which it supplies to supermarkets and independent grocers worldwide. We expect this weakness to pass and that there should be strong growth over the coming years as Costa expands its growing operations to China and Morocco. The company has adopted leading sustainability initiatives in its agricultural operations, including smart irrigation and vertical farming.
Humana (Health) declined, along with many other health care service stocks due to politically-related uncertainty around the future government reimbursement environment. As a health insurance company with a primary focus on providing Medicare Advantage plans to senior citizens in the US, we would expect it to play an important role in any expansion of government health provision. From a fundamental perspective, the company continues to perform well, reporting results in line with expectations and delivering a positive outlook at its recent investor day. Humana is a pioneer in integrated care, aiming to lower costs for its members through better prevention of health problems and programmes to encourage healthier lifestyles.
Encompass Health (Health), declined for similar reasons to Humana. As a leading provider of post-acute care in the US, we view Encompass as well positioned to benefit from an aging demographic that is pressuring US healthcare costs. Its inpatient rehabilitation centres and home care services offer a cost advantage over senior nursing facilities.
Activity and positioning
Portfolio turnover was 8.0% in the first quarter of 2019 and 22.5% for the 12 months to 31 March 2019. This is in line with our long term average of 20%-30%. Portfolio positioning remains skewed towards our Knowledge & Technology and Efficiency themes, resulting in our continued overweight towards the information technology and industrial sectors versus the index. The portfolio remains underweight the energy and consumer staple sectors and regional weighting remains in line with the MSCI World benchmark. The portfolio is managed to keep regional weightings in line with the MSCI World benchmark, so that sector weightings are an outcome of where we are able to find the most compelling bottom up stock ideas while maintaining a balanced risk profile.
During the quarter, we initiated new posiitons in Blackbaud, Crown Castle, Murata Manufacturing, PayPal, Walt Disney, and Wolters Kluwer. Positions in AMS, Capital Senior Living, Hubbell, Omron, Panasonic, Sanepar, Schwab, Solar Edge, Visa, and Vodafone were divested.
Blackbaud (Knowledge & Technology) is a cloud software company that provides technology tools and services to the ‘social good’ community, which includes non-profits, foundations, corporations, educational institutions, and healthcare institutions. The company’s vision is “to power an ecosystem of good that builds a better world” and its solutions are targeted at improving the operational productivity of mission-based organisations, from fund raising through to award management and performance analytics. Just a 1% increase in fund raising effectiveness could drive close to $4bn more every year towards social good programme work.
Crown Castle (Knowledge & Technology) is a provider of communications infrastructure in the United States. It owns and leases cell towers and fibre networks and it is investing in small cells which will enable the transition to 5G communication networks, providing the backbone to a more connected world.
Murata Manufacturing (Safety) is one of the world’s largest manufacturers of passive components for electronic devices, such as capacitors, acoustic filters, ultrasonic sensors, communication modules, power inductors and lithium-ion batteries. These types of components are necessary for the safe and effective functioning of all electronic circuits, being used to control electric flow, store electricity and enable wireless communication. There is strong growth in demand from electric vehicles and 5G communications technology, as well as from any market where electrification is accelerating.
PayPal (Sustainable Property & Finance) is a financial technology company that provides electronic payment solutions to merchants and consumers worldwide. No longer simply a digital wallet for online commerce, it has expanded its suite of financial services to include merchant payment processing, money transfer and lending. It has been expanding into international markets such as India, South America and Africa, with financial inclusion at the heart of its strategy.
Walt Disney (Quality of Life) is one of the best known media and entertainment companies in the world. Since its founding in 1923, it has always been associated with family friendly entertainment and today, it owns the rights to some of the most globally recognised characters, from Mickey Mouse to Luke Skywalker. Disney makes live-action and animated films, television shows and sports content, and operates theme parks around the world. Its mission is to inform and inspire people around the globe through the power of unparalleled storytelling, reflecting iconic brands, creative minds and innovative technologies.
Wolters Kluwer (Knowledge & Technology) is a global provider of professional information, software solutions and services for clinicians, nurses, accountants, lawyers and tax, finance, audit, risk, compliance and regulatory sectors. It provides services that support the strength and smooth running of governmental, regulatory and public service institutions. Its services focus on the world’s most critical areas for helping to protect people’s health and prosperity and contributing to a safe and just society.
Last quarter, we remarked on the parallels with 2016, when we noted how many of our stocks had good growth prospects and were trading at attractive valuations. Although valuations are less obviously compelling following recent market strength, we still see cause to remain constructive in our outlook. The fact that central banks are pulling back from their course of tightening monetary policy is a significant positive for equity markets, especially for the stocks of companies that are growing.
Furthermore, while aggregate economic growth is slowing, there are still many companies that are growing strongly due to having products or services exposed to secular trends. Our investment framework is specifically designed to help us identify these types of company.
When we think about sustainability we see a world of opportunity. We are seeing rapid increases in renewable energy, many more electric cars, and billions more connected devices with semi-conductors and microchips capturing and generating vast amounts of data. All of this will be stored in the cloud, requiring memory, and then analysed and made useful by software in order to create efficiencies, increase productivity and generate value. As well as holding many leading companies related to these areas, the fund also has exposure to consumer companies leading the way in the circular economy; and to companies in health and life insurance, healthcare services, water technology, electrical safety, architectural design, education and entertainment.
So, our outlook remains unchanged. Technological change and innovation-driven growth have not slowed down. Sustainability issues will continue to grow in importance, with active managers making a positive impact by consciously allocating capital towards companies that are contributing to a more sustainable planet, and away from those doing harm. Over the long term, we believe that growth will always generate the most value for investors. To our mind, creating long-term investment returns is, by its very nature, investing in sustainability.
Discover more about our favoured stocks in our Positive Impact Stocks document.