Three of our analysts give us their view on the themes they're in charge of, and how the pandemic has emphasised the positive thematic attributes of our investments.
Contributions from Alex Cobbold (Automation), Alex Hunter (Ageing), and Jeneiv Shah (Evolving Consumption)
Regular readers of our website will be familiar with our thematic investment philosophy, through which we seek to identify the disrupters and growth companies of the next decade. We look for companies which can outperform the wave of an economic cycle, underpinned by our five themes: ageing, automation, climate change, digitalisation and evolving consumption.
However, a once-in-a-generation pandemic has shocked the system in the broadest sense. Cue an unprecedented financial stimulus which, like quantitative easing in 2008, strives to stabilise the global economy, but this time, there is a noteworthy difference. With lessons learned from the global financial crisis, 2020’s funding efforts are not indiscriminate. This is not a liquidity surge that will re-float all ships; this is a life raft to those who have a viable business model.
Our rigorous stock review process ensures we avoid the ailing franchises whose share prices – and indeed very survival – are likely to yo-yo to a will-they-won’t-they near-term guessing game. Instead, we are invested for the long term. Our thematic discipline is rooted in fundamental analysis – of industry structures, corporate stewardship and strategy – plus now more than ever, engagements with management teams.
This distils our investment universe to fewer than 1,000 stocks – companies which are not just thematic but are winners within their themes. While we should assume a period of greater volatility ahead, investors are right to ask if their portfolios are likely to hold up to the new shape of a post-COVID world. We expect our thematic approach to continue to provide the optimum framework for weathering the storm and our conviction in many of the stocks in our portfolios to strengthen.
Our digitalisation theme has been an obvious beneficiary as more of the population migrate to remote working, streaming entertainment and on-line services.
There is also opportunity within automation; warehousing and logistics are reacting to the near-term shift in consumer demands but sourcing across a global supply chain that may not be as reliable as it once was.
We own companies in our automation theme who will provide long-term solutions both to boost efficiencies and improve health, safety and environment in the workplace. Schneider, with its sector-leading ESG credentials, is at the forefront of smart infrastructure, the adoption of which will speed the world’s transition to decarbonisation. Daikin, which is held widely across a number of our portfolios, is a long-term beneficiary to climate change adaptation and also at the forefront of air filtration: a largely ignored component of their global business which is likely to become a mainstream competitive advantage versus peers.
Whilst robotics will undoubtedly become more prevalent in the workplace, the industry has been fragmented and competitive. However, by tapping into the supply chain through Keyence, the world leader in vision systems, shareholders have been able to benefit from double-digit annual growth rates. We see no reason for this to change. The inevitable widescale adoption of robots and cobots who use more vision sensors means that growth rates are likely to accelerate further.
Alex Cobbold, Head of Equity Research
After decades of complacency about the risks of infectious diseases, the COVID pandemic has given the developed world a reality shock. In part, this complacency is a result of how relatively well contained epidemics like SARS, MERS and Avian Flu were. However, our vulnerability to infectious diseases doesn’t stop with COVID – other pathogens, and growing resistance in harmful bacteria such as MRSA, are cause for concern. These threats combine with other factors such as increasing travel, poorer diets, growing obesity, immunological atrophy and climate change to create what could well be increased pandemic fragility for the world’s population.
The pharmaceutical research and development machine has broken down over the last couple of generations. This has led to a lack of innovation, which the COVID crisis has exposed. There are three main reasons for this.
Firstly, while the vast majority of infectious diseases are typically disproportionately in less developed countries, R&D dollars are tilted towards developed country maladies such as diabetes, cardiac issues and cancer. This has led to the area becoming somewhat neglected, illustrated by the relatively low salaries compared with the rest of the industry.
Secondly, the business model has broken down. The standard model means that cashflows from a branded, higher priced drug allow a company to reinvest in research. With only 12% of the $40bn antibiotics market branded, there is little scope for reinvestment. The result of this is that there is little profit to reinvest.
Lastly, it remains technically difficult to devise new antibiotics. Not only are researchers running uphill against increasing resistance but it is also difficult to get the right dose in the right part of the patient without excessive toxicity. According to the WHO, of the 50 or so antibiotics in pipelines at the moment, only eight are considered truly innovative. Even then, there is no certainty that they will work.
Alex Hunter, Global Equity Analyst and Portfolio Manager
The COVID crisis has shone a spotlight on how woefully unprepared the world was for a pandemic. In a post-COVID world, the complacency that led to this lack of preparedness should diminish and companies will remerge more skilled in addressing infectious diseases. Japanese healthcare company Shionogi is well placed given its skills in virology (in particular with HIV, COVID, and flu) as well as antibiotics (Cefiderocol). Australian CSL is at the forefront of flu vaccines as well as in developing COVID therapies. Both these stocks are held across several of our global equity funds.
The post-COVID world will likely pay more heed to the threat of infectious disease. It may also be more inclined to consider the role each of us play in maintaining our own good health. Immunity, dietary health, and food supplements are structural themes that have been in place for many years, and which form part of our evolving consumer megatrend. This has been driven in part by various academic studies, which show a link between obesity, gut health, and prevalence for certain diseases. Research from the EAT-Lancet commission indicates that adopting a planetary diet rich in fresh fruit, vegetables, and nuts, and halving red meat in favour of white meat, could result in approximately a 19-24% lower comparative risk of disease, saving 11 million adult deaths globally per annum.
Diet is increasingly recognised as an individual’s most powerful tool in the quest for good health. The human body has more bacteria in our stomachs than we have human cells throughout our body. Lifestyle factors and probiotic and prebiotic supplements can change or improve the function of the gut microbiome, which may in turn support the immune system. Even natural fresh fruit and vegetables such as bananas and onions are a source of prebiotics1.
The rise of online information, food blogs, and challenger brands has meant consumers are now aware of how food can help improve health.
It starts right from the moment a baby is born. Infant milk formula is increasingly fortified with vitamins, minerals, and probiotics. Over time we have seen probiotic-enhanced yoghurt, on-the-go protein rich snack bars, and stand-alone vitamin supplements grow as new categories in their own right for adults and children. These food categories are witnessing fast growth and helping boost demand for enriched functional ingredients that give health and immunity benefits. For example, according to Global Markets Insight, the global probiotic market is expected to reach $64 billion in 2023, which implies it will grow at a 7% CAGR from today.
COVID-19 is likely to intensify this tendency. We think COVID-19 will enhance a focus on the vitamin and probiotic markets. For example, data from Feedinfo to the end of April 2020 suggests year-to-date pricing for Vitamin A prices are up 46%, Vitamin B2 17%, Vitamin E 61% and Vitamin D3 a staggering 424%. DSM, a Dutch-listed global life science company focused on nutrition, is one of the largest vitamin suppliers to the food industry. We have holdings in DSM across several of our global equity funds and continue to see a strong fundamental outlook for its nutrition division in a post Covid-19 world.
Jeneiv Shah, Global Equity Analyst and Portfolio Manager
Evolving consumption, automation and ageing are not the only themes that we believe will be more valuable in the new normal.
We see further opportunities with climate change and digitalisation. The experience of a pandemic-scarred workforce is likely to accelerate our automating world, while calls for the post-COVID world to solidify its commitments to a sustainable future are intensifying. With few exceptions, the post-COVID environment will realise both a faster and broader adoption of our themes. Through identifying the leaders within each theme we believe our global equity portfolio will not just survive the pandemic, but will be in a position to thrive.
1Source: Food Matters Live podcast, featuring Dr Caroline Childs, a lecturer in Nutritional Sciences within medicine at the University of Southampton, and Dr Gemma Walton, a lecturer in metagenomics at the University of Reading.