2025 Lookback

When I wrote my 2019 investment outlook, we were in the middle of a “market correction” as it is now retrospectively known. Volatility was extreme and global recession fears dominated the market narrative. I didn’t know which direction the market was going (I still don’t), so I focused instead on disruptive technological trends and the sorts of companies we would be looking to invest in. I called it “inevitable intersections” and you can read what I wrote, then, here. [Note: there are no predictions about the market levels and no mention of interest rates, Donald Trump or Brexit]. 

This year I’ve decided to copy one of my favourite comedians, David Mitchell. Rather than writing an “outlook”, I have instead imagined myself in 2025, looking back at the important things that have happened over the last five years. It’s a “lookback”. The benefit of this is that it focuses minds on the important long-term issues and helps us break free from the status quo bias we are all anchored to.

2025 Sustainable Investment Lookback

Clean & Autonomous Transport
Here we are in 2025 and I still don’t have a car that can drive me from my home to work whilst I snooze in the passenger seat. It’s all very well Tesla* delivering an Electric Car that has 600 miles of range and can do 0-60 in 2.5 seconds for £45,000, but it’s supposed to be fully autonomous by now! Most of my neighbours and work colleagues think the same thing about their Tesla’s. On the plus side – thanks in no small part to Tesla – it looks like the worst climate change scenarios might be averted as oil demand peaked in 2022-23 and is now declining despite robust economic global growth. It’s amazing to see how the global car industry has been disrupted. There are only two genuine “old world” competitors to Tesla in the electric vehicle market (VW and Hyundai) and they are seeing all the growth. 36% of new car sales are electric today and annual demand for new combustion engine cars is less than half what it was just 7 years ago, so it doesn’t look good for most of the traditional car makers at this point.

Healthcare Innovation
Artificial Intelligence was certainly hyped up a few years back, but it’s interesting to see machine-learning being used in a variety of industries, particularly the healthcare sector. The US healthcare system is still over-priced, but some technology that is emerging there is inspiring (from an outcomes and cost saving perspective). Diagnostics is one such area where machine learning has enabled early identification of diseases. This has improved outcomes, reduced hospital admissions and taken cost out of the system. AI-enhanced breast cancer scans and nasal swabs for testing lung cancer are two clear examples.  It’s also great to see these new peptide-based drugs hitting the market and addressing unmet needs in a variety of illnesses. In genomics, research has proliferated and compounded, increasing our understanding of diseases like Cancer and Alzheimer’s.

Clean Electricity
We now have over 100 countries in the world mandating solar panels on all new built houses. Desert states are rapidly leveraging their position in this transition by becoming renewable energy exporters. The relatively simple task of covering their unused land in solar panels and building grid infrastructure around it is so economically compelling now it would be daft not to.** Combine that with 100 new 10-12MW wind turbines that are being built globally per day and we actually have a shot at being fossil fuel free within a decade or so.

The Sustainable Consumer
Sometimes it’s difficult to point to exactly how and when a cultural change occurs but a change certainly came in the early 2020s regarding the perception of human consumption and waste. I think Sir David Attenborough – still going strong at 98 – had something to do with it. However it happened, there has been a step change in how consumers perceive their consumption in terms of both its origin and disposal. Start-ups leveraging a variety of old and new technologies emerged to resolve this friction and large corporations were forced by these disruptors to re-design the environmental and social impact of their entire supply chains.  There’s a lot of work to do but glossy CSR reports produced by outsourced marketing agencies are now a thing of the past. Stakeholder monitoring and oversight of corporates has been taken to a new level. Integrated circular economies are becoming the standard of best practice. Digitally printed garments, which reduce resource use and pollution, compostable plastics, better recycling systems, a reduction in intensively farmed animal protein and less trees being cut down are some of the positive outcomes we’ve seen.

Summary: It could be worse
All said and done, we’ve made good progress this decade. Significant geopolitical uncertainty around the globe and the odd inflation scare haven’t managed to derail the important technological and societal trends that are driving us towards a more sustainable future.  Sure, we could still mess it all up, but the stock market seems to be pricing in a future where companies that are having a net positive impact will be the ones that continue to grow. The world is complex with many grey areas that require diligent analysis in order to get the right answer, but the sustainable wheat is being separated from the unsustainable chaff when attributing value to a share. It’s particularly interesting to see many of the unsustainable companies that were stalwarts of the twentieth century consumer and industrial complex slipping into obscurity and financial irrelevance.

** In 2025, scientific consensus that human emissions are causing climate change is 99.99999999999999%. One person on Twitter still believes in the “alternative facts”.

*Companies mentioned are held in some of the sustainable and ethical funds at Kames Capital.

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.  He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience.

*As at 30 November 2019.

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Transport connectivity

Back in the 80’s, when Chris Rea crooned about driving home for Christmas, he probably wasn’t aware of the environmental impact of his travel advice.


Source IEA 2019

Energy intensity of different transport modes in 2017. The left-hand chart shows energy intensity of passenger transport, in tonnes of oil equivalent (toe) per million passenger km travelled. The right-hand chart shows energy intensity of freight transport, in toe per million tonne km transported.

Transport accounts for one quarter of the EU’s total greenhouse gas emissions of which road transport is 82%. Seamless connectivity between different modes of transport is key to enabling travellers to make more sustainable transport choices.

And connectivity between different modes of transport is what Trainline (held across Kames ethical, sustainable and UK equity portfolios) does. In fact the company explicitly states that, ‘Trainline’s ambition is to bring together rail, coach and other travel services into one simple mobile experience so that travellers can easily find the best prices for their journey and access smart, real-time information on the go. By making rail and coach travel easier, our aim is to encourage people all over the world to make more environmentally sustainable travel choices.’ Trainline covers approximately 80% of the supply of rail in the European Union and 60% of coach services. And people love their app (e.g. 4.9 out of 5 stars iOS rating) which Trainline invests significantly in.

In London, transport connectivity is critical for economic success. Readers will perhaps be unsurprised to know that more than 1 million people travel into central London by rail or Tube every morning. Insufficient rail and tube services for central London will constrain future economic growth, but also compromise economic fairness by limiting access to jobs, education and training leading to less social integration.

Transport for London, TfL (held in the Kames Ethical Corporate Bond Fund) is the enabler of the Mayor’s Transport Strategy, a vision of high quality public transport services that connect seamlessly to other forms of active, efficient and sustainable travel across the city. Whilst also making London’s transport network net zero emission by 2050.

Source – London Mayor’s Transport Strategy, 2018

We have previously written about the #Flightshame phenomenon. High-speed rail offers one solution and the IEA suggest that high-speed rail lines can reduce aviation transport on the same routes by as much as 80%. As the chart below shows, the opening of the Brussels-London Eurostar reduced the number of km travelled by plan on that route by 55%. Getlink (held in the Kames Ethical Corporate Bond Fund) is the operator of the Channel Tunnel and estimates that journeys that are shorter than four hours tend to be dominated by rail… assuming connections between the cities exist.  Market share drops significantly with additional journey time.

Average change in passenger activity on selected air routes after high-speed rail implementation. Source – IEA, 2019

Unlike Chris, many people are beginning to reconsider their short-haul travel choices. But more sustainable alternatives also have to be convenient and cost-effective. Transport connectivity is critical to enable travellers to make more sustainable choices.

About the author

Ryan Smith is Head of ESG Research at Kames Capital. He joined Kames Capital in October 2000 as an SRI analyst and was appointed to his current position in September 2002. He has 19 years’ industry experience*. His role involves managing the team that conducts the ESG screening process for our Responsible Investing funds. Ryan’s team also provides corporate governance screening and research for all equity investments, and conducts research into environmental and social issues. Before joining us, he worked as an environmental chemist for Severn Trent Water. Ryan has an MSc in Environmental Chemistry from Nottingham Trent University.  *As at 30 November 2019.

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Can Being Nice Lead to Success?

If it’s good enough for the Brownlee brothers it is good enough for me…………….

Company management often put keeping their shareholders happy above all else; largely due to the fact that they are at the very least strongly incentivised to do so (if not forced by law).

Depending on your point of view, Milton Freedman is often credited with or responsible for building this culture of putting shareholders first. His Shareholder theory from 1970 states it is the company’s social responsibility to maximise returns to shareholders. If you look back even further back in history, a court case involving Henry Ford was where this trend actually began. Ford lost the case in 1919 and was told he had to operate the Ford Motor Company in the best interests of shareholders.

Taking a step back; prior to this he was running the business in a more charitable manner. For the benefit of employees and customers; and this is what the minority shareholders were unhappy about. Was Mr Ford really in the wrong though? Was he wrong for trying to stop paying dividends to fund investments in new plants, or wrong for cutting prices to make cars more affordable? Worse still; has this not lead to a focus on the next 12 months; maybe even the next quarter, at the expense of the long term?

This case likely influenced short-term thinking at companies, more deeply than any technology advance has in the years between then and now (which we love to use as an excuse for short termism). But does business always need to be so cut throat…and can being a capitalist with a conscious actually lead to better return in the long run?

As far back as 1799 Robert Owen (an early industrialist) and partners bought the New Lanark Mill in my adopted home of bonnie Scotland. Early factories were harsh, with hazardous working conditions; shifts were as long as 13 hours a day for 6 days. Children as young as 5 worked in the factories. Often the machines were seen as more important than the people. Encouraged by results he had when managing a Cotton Mill in Manchester; he put principles ahead of profits as the main aim of the business. Instead of expecting children to work in his mill he paid for education, opening the first infant school in Great Britain. He installed 8 hour shifts and other improvements in workers’ rights. Despite anger and opposition from shareholders (who tried to sack him), other mill owners (who thought he made them look bad) and even his own staff (who did not trust him at first); the end result was strong profits driven by greater work force efficiency; likely because they were happy. Owen battled the social norms all of his life and would later go on to found the Co-Operative movement and dedicated his life to social change.

What can we learn from this today?

Should companies have more social responsibilities than putting Shareholders first? What about employees, customers and maybe even the planet? Thinking of shareholders may not always be in the best interests of the company (or shareholders for that matter). If we made Shareholders one of the considerations, but not the only one, we might drive a culture of longer-term thinking and one that focuses more on all stakeholders in a business and not just one.

Sadly if I look back over the last 20 years; there are many examples of companies trying to think more sustainably, but not being given a chance by shareholders. Whole foods sold out to Amazon for fear of being forced to tie up with a big supermarket chain. But what is becoming more frequent is companies failing because of innovation that is driven by ethics; this trend is almost certainly here to stay. Whether it’s Tesla*; whose one and only mission statement is “to accelerate the world’s transition to sustainable energy” or Hotel Chocolate*; who supply great tasting chocolate whilst treating people fairly and treading lightly on our planet, the financial world is slowly beginning to appreciate that shareholders are not the only stakeholder that matters.

*Several of the Kames Capital Funds invest in Hotel Chocolate and Tesla.

About the author

Neil Goddin is an investment manager, with responsibility for co-managing both long only and market neutral strategies within the Global Equities team. He also leads the team responsible for building and maintaining the Kames equity investment screen, which provides inputs into the investment process across our equity strategies. Neil joined us in 2012 from LV Asset Management where he was Head of Investment Risk. Prior to that, he worked for WestLB Mellon Asset Management and Deutsche Asset Management in various risk-management roles. He has 21 years’ industry experience*. *as at 30 November 2019

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Is there an ESG bubble?

Are too many investors chasing the same names? It’s a question we’ve had from a couple of clients and prospects in recent meetings. We’ve previously written that we believe that the Kames Global Sustainable Fund investment philosophy is different which means we invest in different things to the majority of our peers…………but of course we would say that!!! Are we actually just investing in the same stuff?

These questions make a recent research note from Goldman Sachs timely. Goldman’s have completed a couple of exercises now looking at the most widely owned stocks in ESG orientated funds globally. The table below is taken from the most recent piece and shows those names which appear most frequently- specifically in two ways, firstly based on the stock’s weight relative to their market capitalisation and secondly the absolute percentage point overweight, relative to their share of a global benchmark (MSCI ACWI)).

Source:Revisiting the ‘ESG Nifty Fifty’: The Rise of Impact, Goldman Sachs Equity Research, 2 Dec 2019

Some well-known and loved ESG favourites. And on reading this, naturally our next question was, ‘How many of these companies does the Kames Global Sustainable Equity Fund hold?’ (The answer is two btw – Kingspan and Relx). Albeit, we have held some of the others in the past, but sold them, often because of their valuation. That’s right, just being sustainable doesn’t necessarily make something a good investment! (Although we do believe it can help). We are passionate advocates for ethical and sustainable investing, but we mustn’t ignore the risk of an ‘ESG bubble’ developing in any asset class.

Which also makes Christine Lagarde’s first speech as the incoming European Central Bank’s President worth flagging here. In it, she hinted she may want to harness the institution’s asset purchase program to fight climate change. What does this mean in practice? Assuming the EU can agree more standard definitions of ‘green assets’, it likely means buying green bonds, albeit the green bond universe is still small. It’s a radical proposal and departure from traditional monetary policy (specifically the principle of market neutrality to avoid bubbles)… albeit consistent with the narrative of other central bankers. But the climate crisis requires radical solutions and the ECB’s balance sheet could play a significant role in speeding up the green transition. Investors just need to be mindful of the potential unintended consequences of a desire to do the right thing.

 

 

Kingspan Group Plc and Relx Plc are held in the Kames Global Sustainable Equity Fund as well as other Kames Fund portfolios. Other company names listed in the table above whilst not held in the Kames Global Sustainable Fund, may be held in other Kames Fund portfolios.

About the author

Ryan Smith is Head of ESG Research at Kames Capital. He joined Kames Capital in October 2000 as an SRI analyst and was appointed to his current position in September 2002. He has 19 years’ industry experience*. His role involves managing the team that conducts the ESG screening process for our Responsible Investing funds. Ryan’s team also provides corporate governance screening and research for all equity investments, and conducts research into environmental and social issues. Before joining us, he worked as an environmental chemist for Severn Trent Water. Ryan has an MSc in Environmental Chemistry from Nottingham Trent University. 

*As at 30 November 2019

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Is it all smoke and mirrors?

Public Health England have said that using E-cigarettes (vaping) is 95% better than smoking. But is this claim a bit premature? If vaping has only been mainstream since around 2007 in the UK and US, can anyone say they know the long-term effects of usage?

There have been 48 deaths and a further 2,290 people made seriously ill as a consequence of vaping this year.”

 

Source: Centre for Disease Control and Prevention (CDC)

For those who aren’t familiar with the process- vaping devices heat up liquid to an aerosol state that is inhaled by the user. The liquids usually contain nicotine but also a number of other substances such as heavy metals and possible carcinogens – albeit in smaller amounts than in traditional cigarettes.

Two recent studies in the US that have found the damage to hearts is similar in vapers and “traditional” smokers but the research samples were quite small. These aren’t the only studies- there are a number of academic studies happening all over the world, so can expect more results from those over the next few years. With research fairly limited at the moment, there is still uncertainty surrounding health effects on users or those who are exposed to their exhalations.

According to the Centre for Disease Control and Prevention (CDC) in the US, there have been 47 deaths and a further 2,290 people made seriously ill as a consequence of vaping this year alone. It is unclear what the cause is. The victims are spread across all states (apart from Alaska) and the number of devices and liquids used are widely varied, albeit around 75% have added THC (the ingredient in marijuana that provides the high) to their vaping devices, and there is some evidence that an additive to thicken THC for vaping devices is causing the lung damage in 29 of the most recent cases. At the moment the problem doesn’t appear to have spread outside of the US, which could be because there are a high number of counterfeits in the US market.

That said, marketing to minors has also been aggressive by some players. Companies like Juul have been questioned over their marketing techniques and variations that would appear to be targeting children. Last year, an estimated 3.6m children in the US used a vaping device and a separate study in the UK claimed the figure was around 12% of 11-16yr olds. President Trump is currently contemplating raising the minimum age for vaping to 21 and banning the flavoured devices altogether in an effort to curb this “epidemic”.

As we have previously written, it can be very difficult to transition an already established business to a more sustainable alternative.  The tobacco industry faces these challenges. E-cigarettes have been positioned as a less-harmful alternative to traditional cigarettes, but we shouldn’t forget that similarly positive narratives were also used by the tobacco industry in the past.

About the author

Miranda Beacham is Corporate Governance Manager in the ESG Research team. She is responsible for monitoring, engaging and voting of investee companies in line with our Responsible Investment Policy. She joined us in 1994 as a research assistant in the UK equity team and has 25 years’ industry experience*. Miranda studied Chemistry at Napier University and has the IMC professional qualification.

*As at 30 April 2019.

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The Silent Disruption: Why traditional car makers and customers will get an Electric Shock! Part III

Part III: Practice makes perfect

In part I and II of my series on the disruptive shift to electric vehicles (EVs), I explained why it is normal for car buyers and traditional internal combustion engine (ICE) car makers to be surprised by it. As I explained, it is mostly about the relative rate of improvement on the key performance vectors (including the all-important affordability factor). But a key consideration when investing is understanding not just if, but when an inflection in demand will happen. So why now? A key factor in my conviction (combined with Christensen’s framework explained in Part I and II) is Wright’s Law. Formulated in 1936 by Theodore P. Wright, it states that progress increases with experience — specifically:

“Each percent increase in cumulative production in each industry results in a fixed percentage improvement in production efficiency.”

This law has successfully explained the cost curve of over 60 products from solar panels to cars, including the Model T Ford. In car production it has translated to 15% improvement for every doubling of cumulative production. Crucially, small numbers double much faster than large ones. Wright’s Law still applies to mature technologies, it just takes longer. What’s fascinating (to me anyway) is that the Tesla Model 3 is already following the path of the Model T Ford. By Q2 2019 Tesla had cumulatively produced 275k Model 3’s and will produce about 600k by the end of 2020. Based on Wright’s Law this should result in a 23% improvement in production efficiency. Translated to finance speak, this means higher gross margins and lower capex per unit of production.


Source: Ark Investment Management LLC, 2019

Tesla has produced more EVs than any other company. Unlike its incumbent competitors who have largely outsourced their innovation to suppliers, Tesla is a vertically integrated technology company. It designs and builds its own electric motors and batteries. It is adding production and battery capacity at a faster rate than any other company (with 44GWh they have almost 50% global EV battery capacity). It has been refining its own drive chain management software for years and it owns the largest and fastest charging network in the world. Does this company remind you of any others?


Source: Bloomberg survey October 2019 (5000 owners)

Range and recharge speeds are probably the two performance vectors on which EVs still lag ICE. However, with range there has long been what Christensen calls “performance oversupply”. Most car journeys are < 50 miles long and now you can refuel while parked, which means the necessity for rapid refuelling falls. Furthermore, Tesla recently announced a 3% range increase for the S and X and a 5% increase for the 3. These were deployed via an over the air software update. And for those who regularly drive further than 300 miles, the most recent generation of Tesla superchargers can deliver up to 75 miles of range in 5 minutes. Teslas are the only cars on the market today that continually add improved features to the car over the air for free. The car improves while on the road.


Source: Tesla Q3 2019 Shareholder presentation and researchgate.com.

Tesla are growing units of production and reducing cost per unit of production faster than anyone else, in a market that will grow faster than most expect. Quality is improving every month and the energy and creativity evident in product development meaningfully differentiates it in the design stakes. The recent #CyberTruck (pickup truck) is the most obvious example. Does any other automaker have the courage, creativity or technical ability to replicate it? What this all translates to – in my opinion – is a combination of underappreciated competitive advantage, underappreciated addressable market and an underappreciated inflection in demand.

“They can have it in any colour they want, as long as it’s black.” Henry Ford

In summary, I believe the winner in the transition to electric vehicles will be the company that has the clearest vision of the future, the least historical baggage (in terms of mindset, bureaucracy and source of revenue) and is innovating fastest. That company will never be perfect but at least we can have confidence that they are motivated to improve and move as quickly as possible in the right direction. The recent unveil of the Tesla Cybertruck is – to me – indicative of all of this. Bold and courageous, built from first principles, technically superior to any ICE pickup truck on the market at the same price… but with windows that need work before they can reliably be claimed to be bullet proof. Remember nothing is perfect to begin with!

“We can fix it in post” Elon Musk


Source: Tesla

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.  He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience (as at 30 April 2019).

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