Desjardins SocieTerra Positive Change, sponsored by Desjardins Investments Inc., has delivered outstanding returns in the short time since its introduction in September, 2018. At mid-October of this year, the F class showed an impressive 32.3% average annual compound gain since inception.
The fund has been undeterred by this year’s global pandemic and perhaps even fuelled by it, with a year-to-date return at Oct. 14 of 66.2%.
The investment approach focuses on companies that prioritize Environment, Social and Governance (ESG) practices within their operations. These companies may also offer products and services that address environmental and social challenges, and therefore possess a superior sustainability outlook.
Essential Ethics Due Dilligence
“ESG credentials are just as important as financial credentials,” says Catherine Flockhart, client service director for fund sub-advisor Baillie Gifford & Co. of Edinburgh, Scotland, and product specialist for Desjardins Societerra Positive Change. “We want to democratize access to ‘impact investing’, which has historically been limited to private equity investors.”
The approach results in the exclusion of businesses that sully the environment, foster poor labour relations or negatively impact the social fabric of their communities. For example, the fund does not invest in companies associated with fossil fuels.
The fund’s investable universe includes companies around the globe including emerging markets, as long as the companies have a market capitalization of US$1 billion or more. Geographically, the biggest weighting is in the U.S. at 45% of assets.
Although many global stock markets are struggling to recover from the effects of the correction triggered by the arrival of the coronavirus earlier this year, the fund holds a healthy mix of companies benefiting from such emerging trends as working at home and remote medical monitoring.
Good Trends
“The pandemic is accelerating trends that were already present and for which were already positioned,” Flockhart says. “The COVID crisis has strengthened many companies in our portfolio.”
The fund’s stringent bottom-up stock selection process has resulted in a heavy emphasis on health care (about 34% of assets), consumer cyclicals (16%) and technology (14%). The portfolio is highly concentrated with about 33 stocks currently, and normally holds between 25 and 50 companies.
The top holding is Tesla Motors Inc. (TSLA), which specializes in electric vehicles and accounts for about 10% of assets. The portfolio may not exceed 10% of assets in any one company, and to achieve diversification must include exposure to a minimum of six countries and six industry sectors.
“We invest for the long-term in a small number of companies that can deliver exceptional returns,” Flockhart says. “We look for a sustainable competitive advantage that can endure for many years.”
For example, she cites Alphabet Inc. (GOOGL), which has “democratized” public access to information, even in emerging markets.
“Alphabet has created a culture of innovation, and is able to generate cash flow that can be invested in new and exciting areas to maintain its leadership,” she says. “But even smaller companies can be market disruptors, not just the giants. We seek companies doing things in new and exciting ways that have a strong competitive edge.”
Desjardins Societerra Positive Change’s turnover rate has been a relatively low 5% to 10% annually, as the fund tends to hang on to companies while their potential unfolds.
Healthcare Focus
In the important health care sector, key holdings include Illumina Inc., a provider of comprehensive gene sequencing products and services to the research, clinical, and applied markets.
“Illumina is riding the amazing wave of personalized medicine now coming to fruition,” Flockhart says.
Another holding is U.S.–based biotech company Moderna Inc. (MRNA), a drug developer that has been a forerunner in researching a vaccine against COVID-19.
U.S.-based Teladoc Health Inc. (TDOC) and Japan-based M3 Inc. (2413), are leading providers of “telemedicine ” or virtual healthcare technology, allowing for consultation via the internet between patients and medical professionals without the patient needing to visit in person.
In the same vein, the fund holds DexCom Inc. (DXCM), which produces devices for diabetics that continuously monitors fluctuations of glucose in the blood. It is significantly more effective than the traditional finger-prick method and allows doctors to watch over patients remotely. In February 2020, Dexcom and Insulet Corporation signed an agreement to combine Dexcom’s continuous glucose monitoring systems with Insulet’s tubeless insulin delivery pod system to enable automated insulin delivery to patients, with information transmitted by smartphone. The prevalence of diabetes is growing rapidly around the globe.
“Telemedicine is a growing long-term trend in health care,” Flockhart says. “If you don’t need to actually go to a doctor’s office or hospital, why would you – especially during a pandemic? There are now a variety of devices that can monitor such diseases as hypertension and diabetes, as well as track and analyze data over time, and provide this information instantly to medical professionals.”
Innovation Supporting Societies
In the technology area, significant holdings include chip-makers ASML Holdings NV (ASML) and Taiwan Semiconductor Manufacturing Co. Ltd. (TSM), both of which are riding the exponential growth of online activities around the pandemic and long-term trends around everyday devices becoming increasingly powerful and interconnected with the 'Internet of Things'.
A recent purchase that combines technology with cuisine, has been Beyond Meat Inc. (BYND), which manufactures meat substitutes made from plant-based products and rides the trend toward healthy eating. The company makes products designed to emulate chicken, beef, and pork sausage.
Beyond Meat also supports sustainable agriculture, which will become more important as it becomes increasingly challenging for the globe’s resources to feed an expanding population, Flockhart says.
Have You Found Your Niche?
Explore the latest Global Thematic Fund Landscape report here
