Dubbed the ‘diesel dupe’, the US Environmental Protection Agency (EPA) found many VW cars being sold in the country had a ‘defeat device’ – or software – in diesel engines that could detect when they were being tested and change the performance to improve results.
The German car giant has since admitted cheating emissions tests in the US. “That is an example of where we are providing the solutions to something that might be bad for mainstream companies,” says Jenkyn-Jones.
Despite stellar stock picks, the fund scores below-average on the Morningstar Sustainability Rating, which measures the fund against current ESG-related controversies.
Jenkyn-Jones puts the low rating down to the portfolio’s focus on small- to mid-cap pure-play companies that have a low level of disclosure, making them less likely to be covered by the research agency.
“We have been engaging with Morningstar to recognise that their process does not incorporate the positive impact that a lot of these business are having,” he says.
A key trend Jenkyn-Jones pinpoints is the growing number of businesses providing solutions to social and environmental problems using the digitalisation of software.
Again, this is evident in the fund’s investment in companies such as Trimble, which pools weather, GPS and soil data to optimise planting regimes in agriculture, minimising the use of water, pesticides and fertilisers.
“It is an interesting development in agriculture. Two other companies on the list, Itron and Xylem, also use available data to allow utility companies to optimise their power and water networks and minimise the use of water within those systems,” he says.
Energy drive
A recent analysis of renewable energy by The Economist found the increasing adoption of green energy via wind or solar panels, with zero marginal cost, has led to declining returns in the sector.
Consequently, this is deterring investment in renewables, especially in key regions such as Europe and China.
Describing the issue as “very complex”, Jenkyn-Jones explains that when it comes to energy efficiency, which makes up the bulk of the fund (29%), the portfolio has a notable absence of solar companies because margins in the industry have been “rapidly eroded due to commoditisation of the product from China”.
“We don’t invest much in batteries, either. As stockbrokers, we are looking for business models with high barriers to entry where the product is not going to get commoditised.”
The fund’s second-largest holding, Austrian textile manufacturer Lenzing, is a good example of this, he says. The company converts plant-based cellulose into luxurious fabrics such as Modal and Tencel, and it is “constantly innovating at the front line” of its products, achieving “very high margins”, despite spending up to 10% on research and development, according to Jenkyn-Jones.
continued on the next page
