Worldwide Leaders Sustainability

Key increases over the quarter included Fortinet (US: Information Technology), Graco (US: Industrials) and Watsco (US: Industrials). We funded these additions through trimming Mahindra & Mahindra (India: Consumer Discretionary). While it remains one of the highest conviction positions in the portfolio, the increase in share price during the quarter required us to rebalance the position.

We divested of one stock during the quarter, selling out of Cognex (US: Information Technology) due to decreasing conviction on the strength of its franchise compared to its valuation.

We believe the best way to protect and grow our clients' capital over the long term is to invest in high-quality franchises, run by competent and honest stewards that have strong financials enabling them to contribute to and benefit from strong sustainability tailwinds.

These are high-quality companies well positioned to evolve and grow in the coming decades. We funded this through divestments in Coloplast (Denmark: Health Care), Synopsys (US: Information Technology) and Jack Henry & Associates (US: Financials) where valuations were becoming expensive.

We recently visited India and met with many of the companies held in the strategy. Mahindra & Mahindra (India: Consumer Discretionary) remains cheaply valued despite a solid track record of compounding book value at high rates over the last few decades. There is a much sharper focus on capital allocation, growth and returns under the current management. This alongside a desire to lead on sustainability outcomes makes it one of the highest conviction ideas in the strategy. Elsewhere, HDFC (India: Financials) is preparing to merge with its subsidiary bank. The consolidated institution should become stronger than the sum of its parts with an expanded set of growth opportunities. HDFC is the cheapest it has been for many decades. Our conviction in our Indian holdings continues to remain high in the context of the quality of these institutions and the growth opportunities they are presented with.

The strategy experienced strong absolute returns over the year. We do not fully understand market movements in the short term so it is best we refrain from speculating on the reasons for short term portfolio performance. On the macro front, we continue to worry about the flood of cheap money over the last few decades which would require unwinding at some stage. We also observe that until recently, inflation has remained low for a long time, inequality in society is the highest it has ever been, government and corporate balance sheets are stretched and the world has experienced benign geopolitics for many decades. These are some of the risks we think about and we certainly cannot predict if, and when, they come to bear. We would equally not be surprised should these conditions continue for many decades to come. Continuing to invest in well managed companies with structural tailwinds, strong and improving market positioning, safe balance sheets and reasonable valuations is the best way to manage society’s savings in the face of constantly evolving or unchanged macroeconomic conditions.

From our position, we continue to see the world through the bottom-up lenses of our high-quality investee companies which inspire feelings of optimism and excitement. This is a jarring juxtaposition to news headlines which can drive despondency and paralysis.

A year ago, we were digesting the invasion of Ukraine and a boom in hydrocarbon fuels, alongside questions over the future of sustainable investing. This year, we are looking at bank runs and governance failures, and the denouement of long-term issues stemming from moral hazard and adverse selection. Our goal remains, as ever, to stay focused on high-quality management teams running sustainable and necessary franchises, driving human development forward with strong financials to allow these companies to weather any coming storms.

To that end, we took several steps this quarter to improve the quality of the strategy by reducing our cash balance and adding to positions across the portfolio. It feels comfortable to add to high-quality names, including CSL (Australia: Health Care), Mahindra & Mahindra (India: Consumer Discretionary), HDFC (India: Financials), OCBC Bank (Singapore: Financials), Hoya (Japan: Health Care) and WEG (Brazil: Industrials), among many others. In terms of divestments, we sold out of Techtronic Industries (Hong Kong: Industrials) as concerns over financial quality and governance emerged. We also divested Natura (Brazil: Consumer Staples), a Brazilian supplier of health and personal-care products, as we began to lose conviction in the quality of management and their ability to reverse the fortunes of the franchise and financials. We also trimmed our position size in Constellation Software (Canada: Information Technology) which has been a very good investment over the past few years but was beginning to look expensive. We believe these decisions improve the quality of the strategy at acceptable valuations.

While we don’t make macro predictions, it is hard to escape the feeling that current headlines sound ominously familiar to those of a decade and a half ago. From our perspective, we continue to meet with, analyse and invest in high-quality sustainability franchises, run by competent and honest people and with strong financials, as we believe this is the best way to protect and grow our clients’ capital over the long term.

Talking heads seem to be getting excited by the idea that ‘inflation is slowing’ but macro analyses like these often commit the sin of relative comparison, and in doing so they ignore two key issues: firstly, what that means in real terms to real people (i.e. ‘lower inflation’ still means higher living costs) and secondly, what bearing that has on actual companies, operating on the ground, which are continuing to struggle to balance supply chain issues alongside demand concerns from what appears to be a slowing outlook across the board. For us, we continue to analyse investment opportunities by focusing heavily on high corporate quality and on good sustainability positioning for the long term.

In the quarter, we took the opportunity to initiate a position in Roper Technologies (United States: Information Technology), which is a high-quality and diversified US industrial holding company, supplying vertical software as well as medical and water products. We also initiated a position in a well-known Japanese bicycle supplier at much more generous valuations. We added to positions in: Watsco (United States: Industrials), a well-stewarded heating, ventilation and air conditioning (HVAC) company positioned to benefit from environmental tailwinds. OCBC Bank (Singapore: Financials), a well-run, family-owned Singaporean bank, headquartered in a country known for its economic and macro-prudential stability and with operations in China, Hong Kong and Indonesia. HDFC (India: Financials), a well-run Indian financial institution. Graco (United States: Industrials), a well-run industrial supplier, and Copart (United States: Industrials), a supplier of online vehicle auctions and services to auto resellers.

We divested from Adobe (United States: Information Technology), which is a well-known software supplier, as we struggled to gain conviction in the franchise amid ongoing succession concerns. We trimmed positions in Texas Instruments (United States: Information Technology) and Synopsys (United States: Information Technology) on the back of geopolitical concerns. We also reduced positions in Coloplast (Denmark: Health Care), Constellation Software (Canada: Information Technology), Tata Consultancy Services (India: Information Technology), Arista Networks (United States: Information Technology) and Fortinet (United States: Information Technology); the general reasons behind these trims were strained relationships between valuations and growth outlooks.