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1 July - 30 September 2021
Markets ended the quarter roughly where they started1, although the period was punctuated by the predicament of the highly indebted Chinese property company Evergrande, as well as by concerns about inflation, supply chain challenges, energy shortages and the resurgent Delta strain of Covid-19.
In short, the period reinforced the importance of the business qualities we prize: low debt, pricing power, resilient cash flows, and adaptable and competent management teams.
We completely exited positions in Unilever and Neogen.
Unilever (UK) had been held in the strategy continuously since 2012 on the strength of its core brands and ability to provide affordable hygiene products in emerging markets, as well as its ambitious sustainable living plan. Unfortunately, since the attempted takeover by Kraft-Heinz in 2017, Unilever’s balance sheet has deteriorated, and an increasing focus on margins has done little to improve competitiveness.
The company has struggled to develop and acquire leading new brands. It has also had difficulty evolving areas of its product portfolio to suit changing consumer preferences, and has been slow to adapt to the online and omnichannel distribution environment.
The sale of Neogen (USA) was motivated mostly by valuation. However, our lack of success in attempting to engage the company on product safety and sustainability also contributed to the decision.
We brought three new companies during the period.
Synopsys (USA) is the market leader in design software for digital integrated circuits, with around 30% market share. Against a backdrop of increasing costs and resource consumption in the production of ever-more advanced semiconductors, Synopsys supports its customers in achieving better designs and in developing more energy efficient chips, while cutting down on design time and errors. Its specialist software also supports climate solutions in building automation, telepresence and electric vehicles. Synopsys is growing its security services offering, enabling customers to embed best practice cybersecurity checks into software development processes. The company has a distinctive culture and is led by co-founder Dr Aart de Geus.
Adyen (Netherlands) is helping redefine and reduce costs in the complex payments processing ecosystem. Traditional payment processing systems include up to seven steps, commonly carried out on ageing platforms, with various intermediaries charging often-opaque fees to merchants. Adyen consolidates many of these functions to provide excellent process transparency using a modern platform which accepts many different payment types from anywhere in the world. The company is growing rapidly in emerging markets, where payments have historically been complex, expensive and insecure, thereby contributing to our access to finance human development pillar.
Masimo (USA) is a specialist health technology company that uses light and electroencephalogram (EEG) signals to monitor patients’ vital signs in a non-invasive manner. Its products are embedded in the medical devices of leading companies like Philips and GE Medical. Masimo was established in 1989 by founder and CEO Joe Kiani, whose mission to improve patient outcomes and reduce health system costs still defines and strongly influences the company’s culture.
Quality, sustainability positioning and valuation continue to inform all of our investment decisions.
1 April - 30 June 2021
Recent market movements have gyrated off the back of the short-term economic re-opening thematic, and expectations, or speculation, on whether inflation will be transitory or long-lasting with obvious implications for interest rates.
Either way, some economies are discussing a move to tighter money supply and slowing quantitative easing programs and uncertainty remains.
We remain focussed on the long term and the strategy is not exposed to outsized investment risks for inflation or deflation in future. We continue to examine the liquidity and solvency of our companies and the strategy is largely invested in companies with net cash balance sheets. Our companies are not over-reliant on government action or support, and the strategy is predominately invested in companies that historically show strong pricing power and resilience in a variety of economic conditions. About 45% of the strategy portfolios remain invested in companies with some form of shareholding steward, either a family, founder or foundation, who have guided their company through cycles and sometimes generations.
During the quarter we invested in Cognex, a US-listed inspection and machine vision company for industrial automation. The founder, Bob Shillman, and other executives, provide the research and development and engineering-excellence culture that makes this company successful. They guide a very high profit margin business sensibly, selectively choosing growth opportunities to maintain their pricing power. Cognex is a contributor to sustainable production as their products and software help ensure manufacturing quality, reduce waste in the process by minimising errors, reduce costs through the manufacturing process, and allow for greater traceability and control.
This new investment was funded through selling investments in Novozymes, Lenzing and Topicus. Novozymes appears very expensive considering its moderate long-term growth and more recent moves to push inventory through distribution channels, although the market voting machine has disagreed with us in the short term. Lenzing is one of our rare cyclical companies and with elevated industry inventory levels and commodity pricing for cotton, appears fully valued. Topicus was a gift to us after spinning out from our investment in parent company Constellation Software. We prefer to remain invested in the parent company and struggle to understand the structure that was created to set Topicus free.
We remain positive about the prospects for our sustainable, quality companies as we enter an uncertain second half of 2021 where a delicate balance remains between central bank policies and the fragility of real and consistent economic growth.
1 July - 30 September 2021
During the quarter there were 71 resolutions from eight companies to vote on. On behalf of clients, we did not vote against any resolutions.
1 April - 30 June 2021
During the quarter there were 417 resolutions from 28 companies to vote on. On behalf of clients, we voted against 13 resolutions and abstained on one.
We voted against the approval of Texas Instruments’ executive compensation as we believe the CEO’s median pay ratio is excessive. (one resolution)
We voted against the approval of Edward Lifesciences’ executive compensation because they changed the goalposts of their plan in light of COVID-19 and the company was not achieving the threshold performance level for any of the corporate financial metrics. (one resolution)
We voted against Atlas Copco’s remuneration report as we believe the increase in base CEO pay, and the awarding of exceptional bonuses based on short-term and unusual circumstances, is excessive. (one resolution)
We voted against the approval of Alcon’s executive compensation and their compensation report as we believe the CEO’s pay is excessive and have reservations on the company awarding bonuses for the year despite all financial targets being missed. (two resolutions)
We voted against Constellation Software’s request to appoint KPMG as their auditor for the 26th year and their ability to set the auditor fees. We believe the non-audit fees are excessive, given they exceed those paid for audit related services, and a change in the auditor would be in shareholders’ best interests. (one resolution)
We voted against Ansys’ equity compensation plan and executive compensation as we believe they do not reflect long-term thinking and are unnecessarily complex. (two resolutions)
We voted against Zebra Technologies’ executive compensation as we believe the CEO’s median pay ratio is too high and the plan is unnecessarily complex. (one resolution)
We voted against Illumina’s executive compensation because they changed the goalposts of their long-term incentive plan in light of COVID-19. (one resolution)
We voted against two shareholder proposals relating to Texas Instruments and Edwards Lifesciences which would have enabled shareholders to take action with written consent on important issues that arise between annual meetings. We consider ourselves active shareholders and voting an important responsibility in our investment management duties. (two resolutions)
We voted against a shareholder proposal relating to Ansys where shareholders were requesting the company eliminate the super majority vote they have in some circumstances and replace it with a simple majority vote. We believe the current arrangement better protects the company’s independence and growth over the long term. (one resolution)
Voting in line with WEG’s Board for the election of two independent non-executive directors to serve on their Supervisory Council resulted in us abstaining on the minority shareholder nominee. (one resolution)
Oliver Campbell gives an update on the Worldwide Sustainability Strategy.
View our list of investment terms to help you understand the terminology within this document.
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