We are often asked what interesting sustainable investment themes we see in the market. Looking into 2018 and beyond we believe the most dominant theme will continue to be disruption.
In the last two years or so we have noticed more and more sustainable companies emerging as potentially disruptive winners of the future. And when we search for disruptive growth businesses, they are increasingly offering solutions to some of our biggest sustainability challenges.
We have identified eight sub-themes that fit under the disruption umbrella of particular interest:
1. Electric Shock:
The declining cost of electric batteries and the removal of barriers to widespread adoption of electric vehicles. We are primarily interested in component and material suppliers.
2. Healthy healthcare:
Areas of note are healthcare equipment and solution providers that improve patient quality of life and take costs out of healthcare systems; a focus on full lifecycle value-based care over short-term cost savings.
3. Knowledge is pricing power:
Companies that provide increasing price transparency whilst profiting from scalable platforms that offer lower prices and better experiences.
4. Profitable experiences:
Companies that offer valuable experiences that have restricted supply benefit from increasing pricing power, whilst oversupplied ‘stuff’ sees the reverse.
5. Green buildings:
Buildings use a huge amount of energy. Saving energy saves money and reducing emissions saves the planet. This is an economic, environmental and political imperative. Suppliers leading the market in driving down energy usage and emissions can create a lot of value.
6. Robots and co-bots:
The capital cost of deploying robots and automation has fallen to the point that adoption has become economically essential for companies to stay competitive. Forward-thinking industrial and technology companies can benefit from this very large and growing market.
7. Over the top under the radar:
Online gaming and TV are streamed on demand. Low-priced subscriptions and live purchasing of content are the new norm. New digital platforms with high quality content will win.
8. Follow the (ad) money:
TV brand advertising dollars will continue to follow eyeballs away from traditional TV towards online platforms that offer bigger audiences, better targeting and lower prices. In short, a higher return for advertisers.
Some of the themes are relatively simple, but the nuance is complex. Pure play exposure to these themes can be rare, the quality of firms can vary widely, end-market demand can be cyclical or transitory and valuations can be unattractive. Naturally the sustainable disruptors are more likely to exist as mid and small-cap companies rather than in the large or mega-cap world. As such, we are – and will continue to be – biased away from large incumbents.
In terms of traditional sector positioning, we are underweight defensive sectors. This is led by a bottom-up view as we cannot get comfortable with the valuations of many staples stocks, where the premium for ‘stability of earnings’ is still very high, especially given the lack of relative growth exhibited.
Revenue growth for large-cap consumer staples was anaemic in 2017 and we do not see this changing in 2018. Conversely, we are overweight in technology. It is a broad and diverse sector, and despite what market commentators imply it is not comprised entirely of the ‘FANGs’.
Our sustainable stock-picking process has identified interesting sustainable disruptors in each sub-segment of the technology sector and we have established high-conviction, selective positioning based on each holding’s individual merits.
As sustainable growth investors, the outlook for 2018 is positive in our view. In an era with an increasing number of disruptive businesses, the real value will come from selective investing in sustainability disruptors – our collective future may very well depend on them to a large degree.
Craig Bonthron is co-manager of the Kames Global Sustainable Equity Fund.
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