Peter Michaelis: How to invest for tomorrow, todayHeat Profit
THIRTY years ago, the IBM PC XT was the pinnacle of technology. Today, we have the iPhone, which is not only much more powerful but can also fit into your pocket and is half a million times more efficient.
Meanwhile, advances in healthcare have led to dramatic improvements in life expectancy over the past three decades. If a man was diagnosed with prostate cancer 30 years ago, he had a less than 50 per cent chance of living more than five years. Today the odds are around 90 per cent.
These transformative developments not only have positive impacts on society, they also have the potential to deliver attractive returns for Investors. The Liontrust Sustainable Investment team focuses on long-term trends like these and the high-quality companies that are profiting from changing the world.
The origins of ethical Investing originated with the Quakers in the US, who they did not want to Invest in alcohol. The first ethical fund was probably the US PAX Fund, which avoided Investing in companies that profited from the Vietnam War.
There are three main approaches to managing ethical and sustainable funds. The traditional approach of ethical Investing is to avoid certain industries as the Quakers did, mainly because of the negative effects of their products, with the classic examples being tobacco companies and producers of weapons.
There are other, arguably more interesting, Investment approaches, however. One is to Invest in sustainable themes, which can be referred to as positive screening because the funds focus on what they do want to Invest in. Funds may concentrate on single Investment themes such as environmental technology, renewable energy or water. Others have multiple sustainability themes that can include healthcare, resource efficiency and education.
The third approach is engagement, also known as active ownership. In this case, fund managers engage with the companies in which they Invest so they can influence management into changing the strategy or operational management. For example, this could be to improve labour rights in the company’s supply chain, employee safety or other environmental, social or governance issues.
We all three of these approaches in managing funds. One of our key long-term holdings is Kerry Group, an Irish-based food technology company. Consumers are demanding more and more from their food, wanting healthier and more natural ingredients while still retaining an appealing taste and texture.
It can be difficult to achieve these competing characteristics and so food manufacturers and hospitality companies come to Kerry for its expertise and technology in ingredients and flavourings.
Something else set to change our lives is the rapidly changing automobile sector, where the trends we are focusing on are electrification and improving safety. These two complementary trends come together in Active Safety, including automatic electronic braking, forward collision warning and even the prospect of fully autonomous driving.
These trends require a significant increase in semi-conductor content in a car: there is an average of $300 of such content in a traditional internal combustion engine car but this rises to $900 for a full electric vehicle.
The leading provider of semi-conductor content is Infineon and growing demand for increasing safety has helped the sales growth of the company over the past five years. Infineon also scores well on key environmental, social and governance measures by setting challenging targets every year for energy use and employee training.
High-quality companies whose products and operations capitalise on this type of transformative change are able to benefit financially. We believe that identifying these powerful trends and Investing in exposed companies can make for attractive and sustainable Investments.
Peter Michaelis is head of sustainable Investment at Liontrust.