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Commentary General Health Resource Efficiency

A Tale of Two Revolutions

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Information technology and sustainability both represent major economic transformations. Sometimes linked, but by no means always. 

The second quarter of 2020 has been remarkable in a few ways. The most obvious is just how positive it has been for equity markets. One of our two benchmarks, the MSCI World index, rose 20.0%.

This took the index return for the first half of 2020 to 1.3%. This innocuous-looking number is in fact a quite startling statistic.   The most profound global health event in a century, and yet equity markets actually rose.

Extraordinary returns from Information Technology and Communication Services

But there are other very striking figures within that performance. Perhaps the most important, is the contribution from the Information Technology (“IT”) sector. A sector return of 22.3% more than doubled the next-best sector over the six months. The Communication Services (“CS”) sector, was also in positive territory, albeit not as healthy as IT. This sector is made up largely of companies previously classified as IT.

In our own attribution, IT was also a standout: but a negative one. It was our largest negative sector attribution, again more than twice the runner-up.   This has been something of a pattern recently. Repeating the same analysis over three years, we can see IT was the strongest sector. And our comparative underweight, and selection, has been our biggest drag on relative performance.

Of course, this is the sort of thing we should notice and think about. And likewise, we would expect our clients to. But it has become of particular interest recently.

That is because IT has become hugely popular in the now burgeoning world of sustainable investment. At the start of this month, two separate surveys identified Microsoft, Alphabet and Apple as all being in the top five most popular stocks in funds that claim to use environmental, social and governance (“ESG”) criteria. In one of those surveys, they were joined by Visa; in the other, by Mastercard1.

Most IT companies are not providing solutions to sustainability challenges

We are often asked about why we are less exposed than our apparent peers. But as our clients well know, we invest in companies that provide products or services that directly address critical sustainability challenges. As a very minimum, half of their business will be focused on this. For most of the companies we invest in, it is the whole of their business. This is perhaps a defining example of what it is to be an impact fund, as opposed to a strategy based primarily on environmental, social and governance (“ESG”) factors.

By contrast, sustainable funds with large weights towards IT are generally using ESG tools to pick their stocks. Before investing, their managers will be looking closely at how a company conducts itself. But they do not need a company to be providing a sustainability solution in the goods and services it provides. In fact, the bulk of the IT and CS companies on the market at the moment don’t fit that definition. There is no lock-step relationship between their unit sales growth and positive social or environmental outcomes.

Most IT and CS companies are “neutral” from an impact standpoint. Their core businesses and the vast majority of their revenues are derived from selling consumer devices (like Apple), advertising space and data (Google and Facebook), platform software (Microsoft), electronic payments (Visa and Mastercard) or anything at all that consumers will buy (Amazon). These are not what we would consider positive impact products at WHEB, and they therefore do not qualify in our investable universe.

If anything, the most common trait of most large technology companies is that they improve consumer experiences. And that may or may not be sustainable.

This of course begs the question, why do so many ESG managers end up with a big weight in IT? What is it about IT companies that makes them look like they have particularly sustainable business models?

There are a couple of possible answers. IT companies tend to have smaller environmental footprints. There is no physical manufacturing in software. Much of technology hardware manufacturing is outsourced. On paper, IT companies can present very low greenhouse gas emissions, for instance. These small footprints mean that they also tend to avoid the controversies which often result in a company falling foul of a negative screen.

Moreover, ESG aside, many IT businesses are compelling investments. They are asset-light, scalable, and often with high proportions of recurring revenue. The very largest ones have built up formidable competitive defences.

IT companies that do address sustainability challenges

We appreciate attractive business models and low-risk ESG profiles. But for us, the key is to connect these traits with real impact. That’s what makes us confident in the long-term future and growth of our companies. It is the incredible power and potential of technology used to promote sustainability that really makes us enthusiastic about the IT stocks we do invest in.

And we are, indeed, enthusiastic. Our portfolio may have less IT exposure than the broader market, and a lot less than the average ESG fund. But we hold roughly twice the weighting of our investable universe of sustainable impact companies. We think IT will solve some of the key sustainability challenges.

We invest in Cerner and HMS Holdings, in our Health theme, which provide software to help deliver better healthcare outcomes. In our Resource Efficiency theme, Ansys and Autodesk create software to empower designers to create ever more energy and resource efficient products.   And we invest in Infineon, Littelfuse and Silicon Labs. These companies make semiconducting equipment which helps control electric power, provide circuit safety, and connect the “internet of things”. By doing so they bring forward the electrification of everything from cars to power generation, with a lighter environmental footprint.

Information Technology is reshaping the sustainability challenge just as it reshapes the world. Not every piece of technology is sustainable. But technology companies with a genuine and direct application to sustainability are compellingly impactful.

1 Surveys by RBC Capital Markets and Morgan Stanley

Important Notices:
Risks include: the price of shares (“Shares”) in FP WHEB Sustainability Fund, WHEB Sustainable Impact Fund or WHEB Environmental Impact Fund may increase or decrease and you may not get back the amount originally invested, for reasons including adverse market and foreign exchange rate movements. Past performance does not predict future returns. The Fund invests in equities and is exposed to price fluctuations in the equity markets, and focuses on investments in mid-sized companies in certain sectors so its performance may not correlate closely with the MSCI World Index (the benchmark). For full risks, please see fund prospectus on www.whebgroup.com

 

General: This information, its contents and any related communication (altogether, the “Information”) is issued by WHEB Asset Management LLP (“WHEB Asset Management”). It is intended for information purposes only and does not constitute or form part of any offer or invitation to buy or sell any security including any shares in the FP WHEB Sustainability Fund or WHEB Sustainable Impact Fund, including in the United States. It should not be relied upon to make an investment decision in relation to Shares in the FP WHEB Sustainability Fund or WHEB Sustainable Impact Fund or otherwise; any such investment decision should be made only on the basis of the Fund scheme documents and appropriate professional advice. This Information does not constitute advice of any kind, investment research or a research recommendation, is in summary form and is subject to change without notice. The performance shown does not take account of any commissions and costs charged when subscribing to and redeeming shares. WHEB Asset Management has exercised reasonable care in preparing this Information including using reliable sources, however, makes no representation or warranty relating to its accuracy, reliability or completeness or whether any future event may or may not occur. This Information is only made available to recipients who may lawfully receive it in accordance with applicable laws, regulations and rules and binding guidance of regulators. WHEB Asset Management LLP is registered in England and Wales with number OC 341489 and has its registered office at 7 Cavendish Square, London, W1G 0PE. WHEB Asset Management LLP is authorised and regulated by the Financial Conduct Authority with Firm Reference Number 496413.

 

FP WHEB Sustainability Fund

FundRock Partners Limited (formerly Fund Partners Limited) is the Authorised Corporate Director of the Fund and is authorised and regulated by the Financial Conduct Authority with Firm Reference Number 469278 and has its registered office at 6th Floor Bastion House, 140 London Wall, London, EC2Y 5DN. The state of the origin of the Fund is England and Wales. The Representative in Switzerland is ACOLIN Fund Services AG, Leutschenbachstrasse 50, CH-8050 Zurich, whilst the Paying Agent is NPB Neue Privat Bank AG, Limmatquai 1/am Bellevue, P.O. Box, 8024 Zurich . The relevant documents such as the prospectus, the key investor information document (KIIDs), the Articles of Association as well as the annual and semi-annual reports may be obtained free of charge from the Representative in Switzerland.

 

WHEB Sustainable Impact Fund

The Manager of the Fund is FundRock Management Company S.A., authorised and regulated by the Luxembourg regulator to act as UCITS management company and has its registered office at 33, rue de Gasperich, L-5826 Hesperange, Grand-Duchy of Luxembourg. The Representative in Switzerland is ACOLIN Fund Services AG, Leutschenbachstrasse 50, CH-8050 Zurich, whilst the Paying Agent is NPB Neue Privat Bank AG, Limmatquai 1/am Bellevue, P.O. Box, 8024 Zurich. The relevant documents such as the prospectus, the key investor information document (KIIDs), the Articles of Association as well as the annual and semi-annual reports may be obtained free of charge from the representative in Switzerland. The state of the origin of the Fund is Ireland. The Fund is registered for distribution to professional investors in Austria, France, Germany, Italy, Luxembourg, Norway, Singapore, Sweden and the United Kingdom, and is registered for offering to retail investors in Switzerland, Denmark and the Netherlands. The Fund is also available for professional investors in Belgium and Hong Kong. It is not available to investors domiciled in the United States.

 

WHEB Environmental Impact Fund

The Manager of the Fund is FundRock Management Company S.A., authorised and regulated by the Luxembourg regulator to act as UCITS management company and has its registered office at 33, rue de Gasperich, L-5826 Hesperange, Grand-Duchy of Luxembourg. The Fund is registered for distribution to professional investors in the United Kingdom. It is not available to investors domiciled in the United States.

 

The MSCI information may only be used for your internal use, may not be reproduced or re-dissseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages (www.msci.com).

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