Get the right experience for you. Please select your location and investor type.
The Sustainable 6
A selection we think reflects the variety, quality, and excellent sustainability positioning of all the companies we invest in for clients.
In most of our recent meetings with clients, conversations have jumped quickly to the Magnificent 7 (Mag7). This collection of companies has grown considerably faster than the rest of the index (MSCI ACWI) over the last 6 and 12 months1.
We’re seeing incredible statistics about index concentration (the highest since 19292), the pace of market capitalisation growth (NVIDIA adding the equivalent of JP Morgan in January alone3), and comparisons between market capitalisations and the GDP of countries (Microsoft is larger than France4). Current market capitalisations – above $3 trillion for Microsoft, $2.8 trillion for Apple, $2 trillion for NVIDIA – seemed unfathomable three years ago. No wonder there’s so little talk about other investment opportunities.
As active, long-term fund managers, our job is to build portfolios of 40 to 50 companies we believe will deliver strong returns over a decade and longer. Every conversation with a client is an opportunity to talk about the outstanding companies we invest in around the world, outside of the Mag7, for the long-term. To help with these conversations, we thought it could be useful to showcase a selection of companies we’re referring to as the Sustainable 6. Since we run high-conviction portfolios, there are many different combinations of companies we could have chosen; this is just one selection we think reflects the variety, quality, and excellent sustainability positioning of all the companies we invest in for clients.
1. Fortinet
US listed - market capitalisation: $55bn
With a $55bn market capitalisation, Fortinet seems a minnow in comparison to the mega-cap tech companies, yet operates as a deserving market share leader in network cybersecurity. Founded by cybersecurity tech engineering brothers Ken and Michael Xie, it has consistently taken market share over the past decade to become the second-largest operator, just behind Palo Alto. Cybersecurity is critical for personal and business safety, and the global cost of cybercrime is now c.$11 trillion5. Capitalising on these tailwinds, Fortinet has grown profits by 34% across the last two years. With net cash of almost $1.5bn on its balance sheet, we believe the company is well positioned to weather storms if the competitive environment hots up, or to reward shareholders by doing buybacks if performance continues to be as strong as it has been. Fortinet trades on a 3% yield of next year’s free cash flow.
2. Spectris
UK listed - market capitalisation: $4bn
Spectris has a market capitalisation of just $4bn yet is led by one of the highest quality management teams of any our portfolio companies. Over the past five years they have undertaken a reorganisation process that has created a more focused, leaner, higher-quality business, with a net cash balance sheet. Returns have improved, as have profit margins and free cash flows. Using its expertise in advanced measurement and controls, Spectris provides customers with data, insights and solutions that help make the world cleaner, healthier and more productive. Examples include assisting farmers to improve soil health and crop yields, and equipping renewable energy companies with monitoring equipment capable of detecting potential mechanical problems early enough to undertake remedial and maintenance work with minimal disruption. Spectris trades on 5.5% yield of next year’s free cash flow.
3. Infineon Technologies
German listed - market capitalisation: $48bn
Leader in the field of power management semiconductors. The company was spun out of Siemens in 1999 and has established itself as the world’s go-to provider of chip design for energy efficient data centres and artificial intelligence, transport (for automotive power distribution in electric vehicles), smart homes and buildings, robotics, and power conversion for renewable energy. It has doubled sales in the past four years and grown free cash flows by 41% p.a. during that period. Infineon trades on 3% yield of next year’s free cash flow.
4. HDFC Bank
Indian listed - market capitalisation: $132bn
The leading mortgage provider in the world’s largest democracy, with the largest, youngest, and best educated population of any country. The company was founded in 1977 by H.T. Parekh to provide banking services to the unbanked people of India. More recently, it has brought digital banking services to this large population, enabling it to generate a 2% return on assets across its 80 million customers6. Last year the bank grew deposits at 21% and loans at 17%6, and helped raise mortgage penetration to 11% of GDP at the end of 20227. The growth runway remains long: mortgage penetration in Australia, for example, was 115% of GDP in 20218. Digital transactions now account for 95% of HDFC’s total transaction volume6, underlining how much India has benefited as average GDP per person has surpassed US$2k. With an ROE (return on equity) of 17%, HDFC Bank trades on 2.5x price to book and is expected to grow book value 13% next year.
5. Atlas Copco
Swedish listed - market capitalisation: $81bn
With a 150-year history and a $81bn market capitalisation, Atlas Copco enables customers to achieve sustainable productivity solutions by providing them with industrial compressors, vacuums and assembly systems. Its technologies are used on every continent and in many sectors and industries, including renewable energy, manufacturing, materials processing, and healthcare. They are at the heart of the growing move towards cleaner industry and a circular economy. Around 65% of revenues come from equipment sales and around 35% from rental and aftermarket services9 which help improve the predictability and stability of cash flows. Atlas Copco has doubled sales in the past six years and trades on a 3.5% free cash flow yield.
6. Edwards Lifesciences
US listed - market capitalisation: $52bn
Edwards Lifesciences was founded by Miles Edwards in 1958 when he developed the world’s first artificial heart. Today it is a world leader in heart valves used to treat cardiovascular disease, the number one cause of death globally. Its products include tissue replacement heart valves and repair devices, as well as transcatheter heart valves for higher-risk patients. Edwards has a credo to improve quality of life around the world and a commitment to provide innovative solutions for people fighting cardiovascular disease. Both aspirations are reflected in consistently high levels of research and development (18% of sales in 2022)10. The company has $1bn of net cash, providing ample capital for ongoing research and development and scope to return cash to shareholders. It is expected to grow profits by 33% over the next two years. Edwards Lifesciences trades on a 3% yield of next year’s free cash flow.
While the Mag7 draw market attention like a black hole absorbing all matter around it, many stars shine brightly across the universe. While the Mag7 may provide strong returns going forward, history suggests they will not be the only companies to do so. Over 3, 5 and 10 years, Fortinet has generated a higher total return for investors than Microsoft, Amazon and Apple. Investors in Atlas Copco have received a total return higher than Amazon over 3 and 5 years. When we look back over a longer time frame, say 15 years, the total return generated by Infineon Technologies exceeds that of Microsoft and is just shy of Apple and Amazon. Over 20 years, Fortinet, HDFC Bank, Edwards Lifesciences and Atlas Copco have all rewarded investors with higher total returns than Microsoft. Shorter-term, all of the Sustainable 6 have returned more than Tesla over 3 years. NVIDIA? Well, at the moment it seems no company can match its meteoric rise, though gravity might eventually have the last word.
We believe the sustainable development contributions of the Sustainable 6 are as impressive as their financial performance. Whether it be the 1.4m online attacks that Fortinet11 protect their customers from every minute, the 165,000 rural villages HDFC provides access to financial products to6, the more than 800,000 patients treated with Edwards’ lifesaving transcatheter therapies in 202212, or that Infineon estimates its products save 34 times the emissions they take to produce13, these companies are driving the solutions to the largest social and environmental challenges the world faces.
We believe companies such as the Sustainable 6 – high-quality companies with sustainable development tailwinds, capable of compounding cash flow growth at reasonable valuations – are well positioned to deliver attractive returns for a long time to come.
Important Information
The information contained within this material is generic in nature and does not contain or constitute investment or investment product advice. The information has been obtained from sources that First Sentier Investors (“FSI”) believes to be reliable and accurate at the time of issue but no representation or warranty, expressed or implied, is made as to the fairness, accuracy, completeness or correctness of the information. To the extent permitted by law, neither FSI, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from any use of this material.
This material has been prepared for general information purpose. It does not purport to be comprehensive or to render special advice. The views expressed herein are the views of the writer at the time of issue and not necessarily views of FSI. Such views may change over time. This is not an offer document, and does not constitute an investment recommendation. No person should rely on the content and/or act on the basis of any matter contained in this material without obtaining specific professional advice. The information in this material may not be reproduced in whole or in part or circulated without the prior consent of FSI. This material shall only be used and/or received in accordance with the applicable laws in the relevant jurisdiction.
Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.
In Hong Kong, this material is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this material is issued by First Sentier Investors (Singapore) whose company registration number is 196900420D. This advertisement or material has not been reviewed by the Monetary Authority of Singapore. First Sentier Investors, FSSA Investment Managers, Stewart Investors, RQI Investors and Igneo Infrastructure Partners are the business names of First Sentier Investors (Hong Kong) Limited. First Sentier Investors (registration number 53236800B), FSSA Investment Managers (registration number 53314080C), Stewart Investors (registration number 53310114W), RQI Investors (registration number 53472532E) and Igneo Infrastructure Partners (registration number 53447928J) are the business divisions of First Sentier Investors (Singapore).
First Sentier Investors (Hong Kong) Limited and First Sentier Investors (Singapore) are part of the investment management business of First Sentier Investors, which is ultimately owned by Mitsubishi UFJ Financial Group, Inc. (“MUFG”), a global financial group. First Sentier Investors includes a number of entities in different jurisdictions.
MUFG and its subsidiaries are not responsible for any statement or information contained in this material. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment or entity referred to in this material or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.
Investment involves risks. Past performance is not indicative of future performance. Refer to the offering documents of the respective funds for details, including risk factors. Investors may not get back the full amount invested.
This website is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. First Sentier Investors, FSSA Investment Managers, Stewart Investors, Realindex Investments and Igneo Infrastructure Partners are the business names of First Sentier Investors (Hong Kong) Limited.
Copyright © 2024 Stewart Investors.