Sustainable Growth monthly bulletin

Capital at risk.

The Fund has delivered robust absolute returns in May, ending the month ever so slightly below the MSCI ACWI Index which remains sensitive to interest rates, US inflation data, and the question of cuts later in the year.

Top performer is MercadoLibre, the largest online trading ecosystem in Latin America, and a leading fintech platform. It posted strong first quarter results driven by growth in its core ecommerce platforms in Brazil and Mexico, despite weakness from Argentina due to its challenging economic background. Continued growth in both Brazil and Mexico is attributed to 'improved user experience, strategic infrastructure investments, and effective marketing.' Furthermore, take rates are up one per cent since the year prior which has been driven by seller fees and advertisements. And margins have improved, something which was welcomed by the market after there was slight contraction on margins the quarter before due to higher logistics costs. MercadoLibre is trying to solve a key problem across 18 countries in Latin America, aiming to provide better, and easier, access to credit and banking services for an underbanked population - around 30 per cent of Brazilians, and 60 per cent of Mexicans do not have bank accounts. Furthermore, its ecommerce arm is the main source of income for over one million families. In a community where the total population is somewhere close to 650 million, with rapidly growing internet and e-commerce penetration, the chance for further growth and scale is huge.

Elsewhere, Warby Parker, an eyewear company based in the US and Canada, has seen robust results. Revenues have accelerated driven by greater revenue per customer and higher margins, illustrating that cost-discipline in, for example, their marketing efforts, has been measured. With particular strength in retail sales, we remain comfortable with the investment going into the 41 new store openings that it has made over the last year. We believe it will continue to take share in the eyecare market through its higher quality products at lower cost, and with greater convenience than is currently available. This is enabled by a vertically integrated model, strong offline and online offerings, and outstandingly good customer service that ensures loyalty and stickiness.

And Japanese media giant, Recruit Holdings also saw its share price appreciate over the month and year to date, up around 12 per cent and 34 per cent respectively. It bounced following its results announcement which demonstrated impressive cost control and resilience, especially in its human resources technology arm (Indeed.com and Glassdoor) where margins expanded from already record levels, despite revenues declining slightly. Particular focus is being paid to streamlining and reducing duplicated tasks and roles within Indeed.com, which should enable them to respond quicker when the market inflects upwards again. Not only do we think that the company is very well positioned to benefit from an improving macro environment over time, but its platforms are performing a key task in the global workforce. Through its impressive technology, these platforms help to improve transparency and efficiency in the labour market, reducing economic hardship from frictional unemployment.

On the other hand, gene-sequencing giant and top ten holding for the Fund, Illumina saw its share price weaken in May. Results showed that consolidated group revenues declined one per cent compared to the same period the year before. Markets also continue to react badly to the unsuccessful GRAIL acquisition, which Illumina is divesting from, despite management's aim to finalise these terms by the end of the second quarter this year. Despite these short term challenges, we have conviction that Illumina will continue to be the leader in gene-sequencing - an area that is acting as one of the primary gateways to unlocking future healthcare innovations and treatments. It continues to innovate, recently releasing its 'fastest, highest quality, and most robust sequencing by synthesis chemistry to date', and has launched a more cost-effective technology that will effectively help to understand and resolve the most complex areas of the genome. We see these as positive signals that the company is refocusing on its core business.

Relatively new holding, Inspire, offers a revolutionary way of addressing obstructive sleep apnoea (OSA) - a condition affecting millions of people. Shares dropped at the start of May despite results that, in our view, were thesis confirming. We think part of this reaction could be down to some recalibration post the rapid emergence of weight-loss drugs. A significant proportion of individuals who are obese also suffer with sleep apnoea, thus, with effective weight-loss treatments now starting to take hold, this brought into question the longevity of Inspire's products. We don't believe this to be a threat to the market over the next five + years, mainly due to the lack of compliance, lack of reimbursement for current weight-loss drugs, and the fact that the sleep apnoea market remains underpenetrated. This latter point is key to our investment case. The US is a market that is large, growing, and where OSA is becoming easier to diagnose. As many as 80-90 per cent of sufferers are thought to be undiagnosed, costing the US ~$150bn a year alone. The existing first-line treatment is more obstructive, intrusive, and unpleasant than Inspire's device, thus opening up a huge untapped opportunity for the disruptive company.

Finally, Canadian e-commerce company, Shopify's share price dropped at the start of May. It was a stellar performer for the Fund in 2023 and into the start of 2024. As such, we reduced it twice on strength but also taking into consideration valuation grounds. Following such strength, we have questioned its ability to double from here in the next five years. In particular, we felt like we were having to stretch take rates in order to see the upside required. The most recent results reaffirmed this view, with take rates roughly flat. We recognise that this is only one data point however, and believe that the value Shopify is bringing to merchants and customers alike is hard to disrupt. 

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