1 September 2023 (pre-recorded 24 August 2023)
Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.
[INTRODUCTION]
Staci West (SW): Welcome back to the ‘Investing on the go’ podcast brought to you by FundCalibre. Sustainable investing will mean different things to different people and today’s guest highlights that very fact by talking us through the healthcare sector, artificial intelligence and the circular economy. I’m Staci West, and today I’m joined by David Harrison, manager of the Rathbone Greenbank Global Sustainability fund. David, thanks for joining me.
David Harrison (DH): Thanks, Staci. Good to talk again.
[INTERVIEW]
SW: Now, it’s been a busy year for markets, yet in your recent update you wrote about ‘the surprising resilience of the US and UK economies and whether this unexpected resilience can continue’ — is ultimately the million pound question. So, let’s start there. Do you think this resilience in markets can continue?
DH: Yeah, like you say, I think, you know, coming into the year, a lot of the conventional wisdom was that we were going into a recession, certainly in the US you know, I think we had a probably a slightly more positive view on the US economy, and if you move forward to where we are now, we’re still seeing a pretty good performance out [in] many of the important parts of, certainly of the US economy. You look at the US consumer: consumer spending’s still holding up; US employment’s quite good and we’ve seen a lot of huge investment, you know, particularly from the stimulus from the Biden administration on the industrial side. So, I think certainly that, you know, the US has surprised a lot of people in terms of the economic strength and some degree Europe as well.
I think the UK is always a bit of a different case. You know, we know that the UK economy has its own issues, but we’re certainly seeing signs of improvement. So, from an economic level, it’s still okay. I think you have to watch it closely. Obviously what we always look at is the companies, and if you look at earnings, you look at the most recent earnings both in the US and the UK, they’re doing better than expected. So, I don’t want to give you kind of an overly rosy picture, but certainly from where we were 6 – 9 months ago, I think it’s fair to say that things are holding up, but it’s something we’re going to have to keep a close eye on into the end of the year.
SW: And you said there that it’s all about your companies in particular. So, how have you been assessing your companies during this period? Are you taking one view or another? Or are you trying to just really stay balanced no matter actually what the next 12 months looks like? Talk us through that.
DH: Yeah, so it’s an excellent question, Staci. I think for us it always starts with the individual business. So, as we build the portfolio, it’s really understanding what the management team of each business, how they’re facing a lot of challenges. So, really, if you kind of think back, a lot of companies are just coming out of the issues thrown up by Covid. So, by that I mean things like supply chains being disrupted. And many of our businesses now, they are seeing that getting back to normal. So, supply chains [are] improving, inflation [is] coming down in lots of cases, but it really is about case-by-case, meeting the management team, understanding how they’re allocating capital, how they are really facing the challenges.
But I think you mentioned the word balance. You know, balance is really important in this environment. You know, we just spoke about the uncertainty at the macro level, but again, it’s about having companies that are generally conservatively managed, [that] have a strong market position and a sensible management team. And not to oversimplify it, but really that’s the way you achieve the balance, I think. And we’re just going meeting every business as we always do, to see how they’re feeling about the medium term.
SW: Have you had more meetings than in the last 6-9 months because it’s been so hectic and volatile, or is it kind of business as usual on that front as well?
DH: I’d say largely business as usual, but we have made a note that every quarter, you know, we’ll be meeting management teams, either in person [or] virtually. Because almost the last, well, three years have been have been so volatile for companies in terms of how they manage their business, I think it’s really important that you stay very close to the management teams. They don’t always have the answers and you know, you obviously do a lot of work away from that, but you know, we found it is probably one of the most powerful tools still if you meet a good management team, because they’re seeing things that others can’t see, whether it be ordering patterns or what customers are saying. So, that still remains a really important tool for us.
SW: And this fund has just passed its 5th anniversary, so congratulations.
DH: Thank you.
SW: How has investing in this universe changed over that timeframe? Are there new themes coming through? And then maybe, are there areas as well that were once a big concern – like nuclear energy and armaments – that are now thought to be less of an issue as they could be key to the energy transition or defence has been kind of brought back to the fore. Did that kind of make these areas that were once taboo, maybe less ‘un-PC’ than they used to be?
DH: Yeah, so I’d say that on the first part of the question, I mean, in the last five years, sustainability, ESG has expanded so much. So, I’d say in general, the investable universe has gotten a lot bigger and some of the themes, yeah, energy transition you mentioned there in the question, that has grown and will continue to grow. So, our opportunity set of companies has grown significantly and regionally as well. You know, I think what was mainly a European phenomenon 5, 10 years ago, has now expanded rapidly in the US which is very exciting for us.
With specific areas around defence and nuclear weapons, this is something we talked about a lot. And you know, the fund, we have a very strict ethical framework and particularly last year, we talked about nuclear, we talked about defence in light of what was happening in the world, but we stuck to the original framework. So, we are not incorporating defence companies or nuclear energy companies really because of the beliefs we have, but also the opportunities we see outside that. So, you know, we feel that within the industrial base or energy transition, we don’t need to go [down] the nuclear route or include defence companies because we have that big investable universe. But it is something that we monitor and we monitor very closely with our colleagues at Rathbone Greenbank Investments.
SW: With the kind of expandable universe then as well, are you seeing more companies being on your radar or on your bench, so to speak, than you would’ve maybe at the start of this process five years ago?
DH: Yeah, we definitely see more, you know, it’s in every theme or you know, every sector, we’re seeing lots more companies that maybe 3 or 4 years ago they wouldn’t have figured for us. And I think that reflects a lot of the companies themselves, [they] have done a lot of work. So, you know, we talk about the US as a good example. We’ve seen so many companies embrace how they express sustainability or ESG, getting better around how they disclose things, talking about their business. So, that does give you a much wider bench or a longer kind of tail of things we can look at. We find though, often, just because something might have a strong ESG rating, until we actually meet the company and we dig into the detail of the business you know, it does whittle out quite a few ones that might look good on the surface. So I’d never say that there are too many on the bench. I think you have to … it really goes back to now, when there is that optically that much bigger choice, going back and digging in and doing the work. And it really, it kind of goes back to the fundamentals of going to meet the management team, going to kick the tyres, all these things, and really looking about what sustainability means to each business and how they can express that. And we still find that kind of whittles down the options for us, as it were, quite quickly
SW: Talking about some of these themes, when we spoke to you back in January, you mentioned healthcare briefly as a long-term theme. So I just want to take some time and get more into that today. You’ve recently added a new holding in this space as well with Merck [& Co., Inc.]. So, maybe let’s just start by talking us through some of the opportunities in the healthcare space. What types of companies are you investing in when you’re saying that you’re looking at healthcare and what is their appeal today?
DH: Yeah, so I think the healthcare space, particularly with kind of a global lens or looking through a global lens, you’ve got so much choice. You know, you mentioned Merck in the question. So, you’ve got the traditional kind of pharmaceutical healthcare businesses, and we added Merck earlier in the year mainly because they have a very strong franchise in Keytruda, which is an oncology and cancer treatment. They have that incredibly strong franchise, which is growing and they can extend. So, in the case of a kind of a simple, or not a simple but a pharmaceutical business like Merck, it’s the appeal and the importance of something like cancer treatment or oncology.
But then, when you kind of take a step back in healthcare, you’ve got, you know, things like medical devices. And what do I mean by that? You know, we’ve owned a business called Dexcom [Inc.] for a number of years and Dexcom is one of the leaders in diabetes care. So, you know, when we think about healthcare, I think you have to break it down. And we know something like diabetes is probably one of the biggest future healthcare issues we’re going to face everywhere. Something like a Dexcom that provides the monitoring software, is growing, is a business that, you know, has clear benefits for consumers in terms of how you live your daily life. So I think, you know, diabetes is really interesting.
Then we own another business called IDEXX Laboratories [Inc.], which some people might know, listening to the podcast. IDEXX Laboratories are the leaders in companion animal diagnostics. So, when you go along to the vets, you’ll get diagnostics done and it can really reveal issues that clearly your pet can’t tell you about. That’s a phenomenal business that is probably most penetrated in the US but is growing internationally. Even in the US, the penetration is quite low. So, something like that, again, very targeted.
You know, we think one of the best management teams in the healthcare space or you know, kind of again in another part a niche of healthcare, is a business like Thermo Fisher Scientific [Inc.] Thermo Fisher, again, we’ve owned for a long time. You go to any university or commercial lab, you’ll see the Thermo Fisher equipment that is used, [it] was incredibly important in Covid in [the] development of vaccines testing. But again, kind of thinking about future drug development and future technologies, something like Thermo Fisher is incredibly well-placed.
I think the other thing as well on healthcare is, you know, as well as you’ve got the sustainability side, but the fundamental side is really attractive. You know, these businesses, you know, you have to pick the right ones, but generally grown nicely over the economic cycle. Barriers to entry are high. All those business I mentioned, you know, they are the leaders and it’s taken a long time to build up that leadership position. So, we think it’s just a really interesting area.
SW: I have to admit, I didn’t consider healthcare to be my dog’s blood work. <Laugh> Yeah.
DH: <laugh> Yeah. And that’s the beauty in a way. It’s so diverse and there’s so much opportunity.
SW: I’ll rethink that when I get the next vet bill.
DH: Yeah. <Laugh>
SW: But one of the reasons that I did want to talk about healthcare is because it’s not necessarily one of the first things that I would associate with sustainability. I mean, on the one hand you have the development and the creation of these potentially life-saving medicine and devices like you talked about, which is obviously great. And then on the other hand, you have this high cost of medicine in countries like the US — where I have experience — and good medicine especially can be really hard to access for so many people.
From a sustainability perspective, how do you balance that innovation with this conflicting trend of rising drug prices? And how are you then, you know, engaging with your companies who have this medicine and capability, to ensure that the innovation and all of the great stuff that they’re doing and is taking place, but then remains accessible for those people who need it most?
DH: Yeah, that’s a very good question, Staci. And this is, you mentioned it, it’s about engagement. So, I think, absolutely, when you look at global drug pricing, there’s huge disparities and this is something we engage with. We started in the Covid period – engaging with healthcare, pharmaceutical businesses, you know, testing companies around the availability and pricing of drugs and testing – this is something that won’t be solved in three or six months. It’s longterm engagement and it’s something we actively do, not just the fund ourselves, we do it across the unit trust business and Rathbones as a group. We generally find that actually the health, the pharmaceutical businesses, they’re more receptive. But still there’s a long way to go. It’s clearly something that we need, you know you can’t rely on just on generics coming in and then making that price cheaper. It’s something that we do engage on, but it’s something that will take three to five years. I would say though, certainly if you think about the companies we own in the fund, Merck and AstraZeneca are the kind of two traditional drug makers, as it were. They have been very receptive and they’re willing to work with us and others in the industry, but it’s something that we need to keep engaging on.
SW: That kind of brings me nicely to what I wanted to finish on, which was looking forward to these kind of long-term themes. So, as we said at the beginning, this fund has reached its 5-year anniversary. So, maybe talk us through what you potentially are thinking you’re going to see in the next five years. Are there newer trends that are coming to the forefront that maybe people don’t know about or just simply aren’t talking about? Because they’re not “mainstream” enough. What do you think are going to be those next big things that, hopefully when we talk in five years’ time, is the subject then?
DH: So I thought about kind of two. So, one that we’ve spoken about a lot that is really gaining traction is circular economy. So, circular economy; we know the reuse of everything from clothing, plastics, building materials, for example, that has taken a while to pick up but now is really accelerating. I think it’s taken a lot of the companies, but, you know a lot of the industry-wide and kind of wider bodies like the Ellen MacArthur Foundation that it’s taken a long time to engage, but there’s really a flywheel effect there. So, you know, for us, we see it in a business like Advanced Drainage Systems [Inc.], which we’ve held, which is based in the US that use recycled plastics for stormwater drains in buildings, and it just takes time to get included in the building codes in various states in the US. But once you’re in and people realise the benefits, that adoption rate goes up.
I think, you know, you’re seeing people start to think in a more circular fashion in things like clothing. And that’s something that is really, has probably gone from very, very niche to growing. And I think in five years time will be a very big area of sustainability because we need to … that’s one of the most urgent areas we know that we need to do more and we’re not doing it enough. So that’s, you know, one and where … sometimes you might lobby, you know, hundreds of companies you can invest in, but one of the most powerful, wider, big themes, which is very exciting, although we do have exposure.
I’d say the other one, you know, today’s not about AI, it’s not about … but I’ve been thinking about industry and how industry becomes more digitised and we have spoken about that in the past. So, everything from a factory, the construction site … What we are seeing and what our companies are telling us, things like AI are accelerating that massively and the benefits will be felt across a number of industries. So, we’re still at the very, very early stages of this. And I know you’ll speak to other people that they’re much more focused on this, but this does touch on a number of our companies. So, whether that be some of the big technology companies we hold, like Microsoft [Inc.] that will enable that, or a number of the industrial companies that you know, or other technology companies like ANSYS [Inc.] that will allow that acceleration or a number of industrial companies that then their customers are investing in those digital assets because it improves efficiency and safety. I think that could be a really, a huge growing area that’s still quite early days.
So, that’s two, I could talk about loads more, but I kind of feel very strongly on the circular economy side and I think that industrial digitisation theme is really accelerating now, particularly from the adoption of AI coming through.
SW: It’s interesting that you say the circular economy, because we didn’t really have time to get in it today, but obviously you kind of use the sustainable development goals from the UN within the framework of this fund, and the circular economy is one of those things that kind of transcends so many of those goals that it almost makes sense that that is going to become a bigger, more long-term thing. Same with kind of AI to an extent, it would cross over into a lot of those things. Definitely have to talk about that next time in a little bit more detail because, so David, thank you so much, that was really interesting. And thank you for letting me pick your brain about healthcare, I have been thinking about that since January.
DH: Thanks very much, Staci. It’s great to talk to you again.
SW: Rathbone Greenbank Global Sustainability can invest in companies of any size but will have a bias towards mid-caps. The fund also has fully integrated sustainability analysis, undertaken in collaboration with the Rathbone Greenbank Investment team. This includes actively avoiding businesses involved in unethical or unsustainable practices, as well as each holding possessing at least one positive environmental, social or governance attribute. To learn more about the Rathbone Greenbank Global Sustainability fund, visit FundCalibre.com – and don’t forget to subscribe to the ‘Investing on the go’ podcast, available wherever you get your podcasts.
