One of this fund's longest-held stocks is also its winningest

LiveWire12-17

alt headline: How to avoid the hyper-growth companies that end up becoming hyperduds Note: This interview was taped on Friday 15 November 2024. The term, the Magnificent Seven, was first coined in a ...

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Although the term may be new, the companies that make up this exclusive club are hardly new. The newest two of the lot, Tesla and Meta, have both been around for over 20 years.\nThere is a problem, however. The Artificial Intelligence opportunity set is a lot larger than these seven companies, although they take up most of the real estate when it comes to press coverage, analyst research, and so on. Goldmans' long-term AI portfolio has 50 stocks while State Street's equivalent includes more small and mid-cap AI plays.\nThe same analogy could be said for sustainable investing. The theme is a lot more than just buying windmills and solar panels. Yes, energy efficiency is a key theme. But sustainable investing is also about finding companies that are working on solutions to deal with ageing populations, food security, financial innovation, and so much more. Needless to say, not all companies that work in this space are of equal quality. \nIn this edition of The Pitch, Eddie Orchard sits down with David Winborne to talk about Impax Asset Management's approach to understanding and harnessing the power of sustainability investing. He'll discuss a fact that he feels needs to be talked about more, a myth that needs to be busted, and how he finds quality companies in the sustainable investing space. \nHe'll also delve deep into the comparisons that equity bears love making - that 2024 is a lot like 1999. Is this time really different? Finally, Winborne will talk about a stock the fund has held for eight years - and we're willing to guess you won't be able to work out what it is before you read it.\nedited transcript\nWhat is a fact about sustainability investing that you feel is not talked about enough?\n\nWinborne: It's the sheer breadth of the opportunity, which has expanded enormously over the last 26 years that Impax has focused on this opportunity set. \nIf I was to summarise the opportunity set at a high level, really there are two paths you can go down in terms of sustainable investment. \nThe first is environmental sustainability, which is providing solutions to energy efficiency and resource efficiency type problems. The second is social sustainability, which is finding solutions to some big societal pressures like ageing populations, or dietary change and the companies are involved in providing solutions there, or things in the financial space like financial inclusion in emerging markets or companies providing banking services for people that previously didn't have them. \nNow, what I think is quite interesting is that the first leg of environmental sustainability, which is the bread and butter of impacts is where we started back in 1998. That opportunity encompasses essentially a very wide range of sub-opportunities at a very high level. \n\nIt starts off as energy efficiency - making existing processes much more energy-efficient.\nWater infrastructure, which has very different dynamics, but these are the companies that make the pumps, pipes and valves that replace crumbling infrastructure in many developed nations.\nThe whole food value chain\nCircular economy\nDigital environment, and \nClean and efficient transportation. \n\nWhen you think about those six groupings, there's an enormous number of opportunities there. \nSimilarly, on social sustainability, that complete opportunity set is [found] across all sectors of the global economy. Healthcare is a very important part of the investment universe for us. In the global opportunities fund, healthcare is about 21% of the fund. \nThere are numerous, exciting sub-opportunities under each of those ones. It's the sheer breadth of that opportunity and the number of exciting or exciting paths you can go down to look for alpha-generating opportunities. \nWhat is a myth you often hear about sustainable investing that you feel needs correcting?\n\nWinborne: I think a couple [need debunking]. I think that the first one would be that surely it's all about renewable energy, which isn't the case at all. We don't have any renewable energy exposure in the Global Opportunities Fund. \nThe second thing is that, from our perspective, the reason why you invest in alignment with a more sustainable global economy is not through altruistic reasons and not through ethical considerations. It's because we believe you can generate better financial returns as a result of that. \nThe outcome of the whole process is generally that you have a portfolio that is well aligned with the sustainable transition and you invest in companies that are hopefully addressing some of the big societal pressures we have. But I think it's just that point that you do this for pragmatic purposes, which is to generate better alpha.\n\nThe Impax team talks about investing in “high quality companies with sustainability tailwinds.” What does quality mean to you?\n\nWinborne: For me, that boils down to consistency. So what I'm interested in is identifying companies that have generated and have proven track records of generating consistent margins and consistent returns over extended periods of time. They've been able to generate those margins and returns without lots of debt. \nTypically, the holdings in the portfolio have very, if any, low debt within the portfolio. A crucial one for me in terms of articulating quality investment is that you need to do as much analysis on the supply side of the industry as the demand side. We can talk all day about these wonderful demand trends. But what you can see is, if you look back through academic research, you'll see that the ultimate determinant of how well a company does over the long term, is not the demand picture of an industry, but rather, it's the supply. \nHow many companies are making a similar product and how quickly will your margins get eroded over that time? \nThere are countless cases where the demand picture of an industry has been fantastic, but the supply side has changed. Cell phones are the perfect example. Nokia dominated the mobile phone industry 20 years ago. 1.1 billion cell phones were made every single year and it should have been a really good environment for Nokia. It was not because the supply side changed. Apple came along and launched the iPhone in 2006. So equal focus on the supply side of an industry as to demand, I think, is probably the key lesson for my career.\n\nLast time you were here (2022), you mentioned that Impax has benefited from avoiding the “hyper-growth” companies. What are some of the defining characteristics/red flags of a hyper-growth business vs a sustainable growth business? \nWinborne: As I mentioned, the Global Opportunities Fund has that quality investment focus. Now, you could argue maybe one of the drawbacks is that you miss out on the really early-stage growth opportunities because we are investing in mature, established businesses, which still can grow into the future but are already generating good margins and good free cash flow. \nBut the point I was referring to a couple of years ago is that if you look at what led markets up to 2021, were companies I would term to be \"hyper-growth\" tech companies. These were a group of companies that captured the imagination of investors. You could see incredibly rapid top-line growth and everyone assumed that growth would continue for an extended period. The poster child examples were things like Peloton (NASDAQ: PTON), Beyond Meat (NASDAQ: BYND), and Oatly (NASDAQ: OTLY). \nPart of the reason why I was so sceptical about these companies is that I used to be a tech analyst and I joined the industry just after the tech bubble burst in the early 2000s. But I've done a lot of reading on the 1999 tech bubble. And one very clear pattern from that time is that people extrapolated out fantastically high growth rates for a very long period of time and they just weren't delivered on at all. \nCisco (NASDAQ: CSCO), for example, was a poster child at that time and grew earnings by 40% in 1999. By 2002, it was down to 10-12% or something like that. \nThe thing for those hypergrowth companies is that they haven't kept up that hypergrowth, which they benefitted from during the COVID period. And if you think back to what you saw in terms of the sell-side analysis back then, they were assuming you'd see 20, 30, or even 40% revenue growth into almost perpetuity. We never invested in those companies. \nOn the flip side, I can say that a company that we've held in the portfolio for eight years now, and it's actually been the single best contributor to alpha over that time, is a US company called Cadence Design Systems (NASDAQ: CDNS). \n\nWhat Cadence do is they make software design tools, which sounds like it's hard. It's not. Essentially, it's the Lego instructions about how you would design a semiconductor chip. And why that's so interesting is basically as chips get smaller, at the same time as chips go to more and different end markets, the demand for those chip design tools just gets higher. \nWhat I love about this and why it's like an archetypal Global Opportunities company is that basically if you look at their return and revenue profile over time, it's incredibly consistent. When you think of the ebbs and flows of the tech industry over time, their revenue, returns, and margins are very consistent. Now why is that? It's because they are geared toward the R&D efforts of the semiconductor industry. \nSo whereas chip sales might go up and down like this, the big chip design companies will never really cut back on R&D because that's their way of ensuring relevance in the next tech cycle. What I love about Cadence is it's a way to capture digitalisation with much less volatility. And for me, that's just a perfect example of a Global Opportunities Fund company.\nLearn more\nImpax invests in companies and assets that are well positioned to benefit from the shift to a more sustainable global economy. They seek higher quality companies with strong business models and governance that demonstrate sound management of risk. Visit their website or fund profiles below to learn more. \n\n\n\n\nManaged Fund\nImpax Global Opportunities Fund\nGlobal Shares\n\n\nView\n\n\n\n\n\n\n\nNever miss an update\n\n    Enjoy this wire? Hit the ‘like’ button to let us know. \n    Stay up to date with my current content by \n    following me below and you’ll be notified every time I post a wire","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2492510679"}