European Sustainability

Handelsbanken is a full-service bank with a decentralised, customer-focused operating model. It has survived four major banking crises in its 150-year history. During the severe Swedish banking crisis in the early-1990s, it was the only bank not to be either bailed out or nationalised. During the 2008 Global Financial Crisis, it was a net lender to peer banks and to the Swedish (Central) Riksbank.

Handelsbanken has emerged stronger and leaner from a difficult period of restructuring and reorganisation over the last five-odd years. We believe it will continue to improve under the leadership of CEO Carina Åkerström.

We trimmed positions in Tomra (Norway: Industrials), Tecan (Switzerland: Health Care), NIBE Industrier (Sweden: Industrials) and Diploma (United Kingdom: Industrials), among others, during the spell of relative share price buoyancy in the early part of the quarter. We built positions in the companies we recently introduced into the portfolio – Admiral (United Kingdom: Financials), Elisa (Finland: Communication Services), Beiersdorf (Germany: Consumer Staples), Energiedienst (Switzerland: Utilities) and Komerční Banka (Czech Republic: Financials) – and also added to Judges Scientific (United Kingdom: Industrials) and ALK-Abelló (Denmark: Health Care).

We are long-term investors. We understand patience pays off in a number of different ways. We are also trained to invest into crises. As valuations become more attractive, we become more excited about adding to our favourite companies. We will do our best to balance enthusiasm and patience as we take opportunities ahead of us.

We sold ASML (Netherlands), a leading supplier of lithography equipment to semiconductor manufacturers, amid concerns about de-rating risk and an increasingly uncertain outlook for the semiconductor sector. Similar concerns led us to sell Alphawave IP (United Kingdom), the provider of semiconductor connectivity solutions, although the company’s management team have also proven to be less adept than we hoped.

We sold Swiss-listed Schindler, the maker of elevators and escalators, and Kardex, which provides automated storage solutions and material handling systems. The prospects for margin improvement at both companies are receding as economic headwinds stiffen.

And to help make room in the portfolio for more defensive names, we also sold Mister Spex (Germany), the digitally-native eyewear retailer. The company is young and could struggle to grow revenues if consumer discretionary spending weakens.

Bechtle, Beiersdorf, Energiedienst, Elisa, Admiral and Komerční banka were brought into the portfolio.

Bechtle is a German-listed, founder-stewarded company with a broad, vendor-neutral portfolio catering to the IT infrastructure and operational needs of its customers. Beiersdorf, also German-listed, is a family-controlled company that was founded 140 years ago. It makes skin, personal care and adhesive products, including leading brands like Nivea and Elastoplast.

Energiedienst is a 100-year old utility that supplies run-of-the river (Rhine) hydroelectricity and solar and wind-generated power to residential and commercial customers in Switzerland and Germany. Elisa is Finland's market leader in telecommunications and digital services. It has an unusual pricing model based on network speed and quality of service, rather than data volume.

Admiral is a UK-listed, founder-stewarded insurance company with a strong track record in underwriting auto, household, pet and travel insurance. It has a diverse leadership team and an impressive people-focused culture; all employees are shareholders. Insurance companies, like banks, rarely drive change in developed economies, but they play an essential role in allowing individuals, families, businesses and other organisations to cope with risks that are very difficult to bear at an individual level.

Komerční banka is a well-capitalised, conservatively-run Czech bank, with a solid deposit base and strong asset quality. It pays an attractive dividend and has an ambitious decarbonisation programme covering its lending practices and operations.

Big macro questions swirl around us. Will inflationary pressures ease as economies weaken? Have markets now adequately priced in an economic slowdown? If there is a recession, how long might it last? We don’t know the answers.

The questions preoccupying us are fundamental, bottom-up investment questions. Are we holding the best combination of high-quality, great sustainability companies in the portfolio? Do they have safe balance sheets and good liquidity? Do they have pricing power? Do they have strong cash flow capabilities? Are they reasonably valued? We will keep asking these questions, and questioning our answers, in an effort to improve the resilience of the portfolio.

Portfolio activity was focused on buying. We took advantage of inflows and better valuations to increase shareholdings in 32 portfolio companies. The biggest additions were in Tecan (Switzerland), Vitec Software (Sweden), NIBE Industrier (Sweden), Halma (UK) and Judges Scientific (UK). We were also able to introduce Sika (Switzerland) into the portfolio.

Sika is a Swiss-listed provider of bonding, sealing, damping, reinforcing and protecting products for the building and automotive sectors. It is reformulating existing products and developing new products that minimise the use of ecologically damaging substances, reduce emissions, and contribute to circular economy outcomes. Examples include lower-emission and recycled concrete solutions, facade systems for energy-efficient buildings, and adhesives that make electric vehicles lighter.

While susceptible to the construction cycle, Sika is a beneficiary of the perpetual and growing need to repair and maintain a growing stock of buildings around the world. It has demonstrated pricing power and an ability to maintain high margins and cash flows across market cycles.

We made no outright sales, but did halve our position in Ørsted (Denmark), the developer of offshore wind projects, following a sudden – we believe excessive – share price bounce in reaction to fears about hydrocarbon energy shortages because of the Russia-Ukraine conflict.

Over the quarter many portfolio companies reported strong results and good progress at the same time as their valuations de-rated. The combination of improving company fundamentals and increasingly reasonable valuations is unusual. It seems a good time to be buying into our favourite sustainability companies, not a time to succumb to unjustified gloom.

But neither is it a time to succumb to irrational exuberance. Concerns about inflation, rising rates, and the withdrawal of monetary and fiscal support could easily morph into even bigger worries about stagflation, declining real incomes, and the diminishing capacity of governments to absorb shocks and shore up demand as economies slide. We are not predicting a recession, but we are saying it is possible, and we need to be prepared for the possibility. 

We like the shape and composition of the portfolio. We have high conviction in the companies we hold. Holding high-quality, great sustainability companies with safe balance sheets, pricing power and strong cash flow capabilities does not ensure success in all circumstances. But it is the best recipe we know for portfolio resilience across a range of unpredictable market environments: we expect no shortage of these in the months ahead.

1 Hippocratic oath