One year on from the launch of the Liontrust GF SF US Growth Fund, fund manager Chris Foster talks about why he is optimistic about the opportunities offered by sustainable companies in the US.
Earlier this month Americans celebrated US Independence Day – 248 years after the US gained its freedom from the British – while July also saw the one-year anniversary of the launch of the Liontrust GF SF US Growth Fund.
Since the start of 2023, US stock market returns have been dominated by a handful of companies, the so-called Magnificent 7. The best performing of these, Nvidia, Meta and Tesla, rose 239%, 194% and 102% respectively in 2023. The S&P 500 in comparison rose just 25% but looking at the equal weighted index, the returns are even more stark at 12%. This resulted in what was one of the most concentrated returns in the US for the last 30 years, with only 27% of companies outperforming the index vs. 48% on average historically[1]. Nvidia has continued its meteoric rise into 2024, rising a further 159% year to date.[2]
Yet while these household names have provided excellent returns to investors, looking ahead, we question whether the future will be as bright and believe that the best opportunities over the next five years lie outside of these mega-cap stocks.
We launched the Liontrust GF SF US Growth Fund 12 months ago in response to client demand and to capitalise on these opportunities. Performance in absolute terms has been strong at 18%, but our underweight to the mega caps, in particular the Magnificent 7, means we have trailed the benchmark by around nine percentage points in the year from 7th July 2023 to 7th July 2024.
While some of the mega-caps do fit our investment process, we are most excited about the companies further down the market cap spectrum, indeed you can see our preference to mid and small cap businesses below in green, compared to the benchmark (in gold) that is dominated by the mega cap stocks.
Our investment philosophy is that more sustainable companies have better growth prospects and that growth is more resilient than the market gives credit for. We invest in companies that we believe address one or more of our three key trends – Better resource efficiency; Improved health; Greater safety and resilience. And at a high level, we believe the world will become cleaner, healthier and safer over time and despite the difficult period for sustainable investing, when we look across these themes, they seem more relevant than ever.
The US is often seen as behind Europe in terms of progress on key environmental issues, and certainly there are far fewer sustainability-focused investors there compared with Europe. Yet there are many reasons why we are excited and optimistic about the opportunities it offers to invest in strong sustainable companies of the future.
Reasons for optimism
Looking at just a few examples brings this to life. As the graph below shows, even in the US the total number of days across 35 major US cities where the air quality reached ‘unhealthy’ levels fell from over 2,000 in the year 2000, to fewer than 700 just 20 years later. That’s a threefold improvement.
Source: United States Environmental Protection Agency: A Look Back: Ozone and PM in 2020, arcgis.com. *Sensitive groups for ozone and PM2.5 include people with heart or lung disease, older adults, children and teenagers, and people who are active outdoors
This is also echoed when we look at another key metric for success in a society, child mortality rates. There has been a substantial reduction in childhood deaths per 1,000 births over the past 200 or so years in the US, the UK and China. As the graph below shows, in the last 100 years alone we have seen a 27-55 fold improvement across these countries.
Source: www.gapminder.org, January 2024
Finally, there is much written in the press about how bad the situation is with regard to road accident deaths in the United States, but this should be viewed in the broader context of how much people drive today. In the last 98 years, the road accident deaths per 100 million vehicle miles driven have fallen from over 20 to less than two –a 14-fold improvement. This has been driven by innovative companies improving the safety of cars, and inventions such as seat belts.
Source: Historical Car Crash Deaths and Rates - Injury Facts (nsc.org), The National Safety Council, 1923-2021
Here are just a few of the businesses we own that are in the small-mid cap space that align with our key investment themes and which we believe deserve investor attention:
Cleaner: TopBuild ($13 billion market capitalisation) – TopBuild is the largest installer and distributor of insulation products and related building materials in the US and is therefore exposed to our theme of Improving the efficiency of energy use theme. It provides all the products and installation services for single family and multi-homes and also distributes products for other installers of home insulation.
TopBuild continues to surprise investors positively with strong earnings reports and guidance. These have led to earnings upgrades resulting in the share price rising nearly 60% since we launched the Fund. Due to the important role TopBuild plays in improving the energy efficiency of homes in the US, we continue to be excited about the prospects of the business.
Healthier: TransMedics ($5 billion market capitalisation) – TransMedics is a healthcare technology company that makes organ transplant modules and facilitates an organ transportation service in the US, easing friction between donors and patients. TransMedics has developed an Organ Care System (OCS) that keeps organs in a dynamic state – keeping them working in a near physiologic state versus the current standard of care known as cold storage. Current organs that are sustained with this technology are livers, hearts, and lungs.
Unlike cold storage, the OCS device provides monitoring and evaluation of the harvested organ before delivery and implantation into the patient. This expands the pool of organs available to patients and reduces the number that were not able to be assessed. Alongside this, TransMedics offers a logistics program, that effectively provides outsourced organ retrieval and management for transplant centres and hospitals.
The company is one of the most volatile names in the portfolio. Following the launch of the fund, the shares halved in a matter of months. Since then, the company has reported three quarters of earnings, each time beating consensus estimates and positively surprising investors. The shares went on to quadruple from the lows and are now up an impressive 87% since the inception of the fund in July 2023.
Safer and more resilient: Morningstar ($12 billion market cap) – Morningstar is held under our Saving for the future theme. Morningstar provides both quantitative and qualitative research to the investment industry, with databases and analytical tools covering private markets, ESG, credit ratings, equity valuation, and more. On the client side, it provides software and investment management services to financial advisors and institutions.
The business is constantly trying to create new products or services that leverage existing expertise and thus create scale. For example, the investment management and model portfolio services it provides leverage the extensive equity, credit, ESG, and even private market research that it already has underneath its roof. After a difficult start to 2023, in the second half of 2023 the company returned to growth, managed its expenses prudently, and demonstrated strong operating leverage. Following what was clearly a difficult time for the sector, we believe the company was trading on trough earnings at the time we launched the Fund in July. The shares have risen a pleasing 46% since launch and its strong position helping individuals save and manage their future investments gives us confidence in the trajectory of growth ahead.
[1] Source: Baird
[2] Source: Bloomberg as at 8th July 2024
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