Sustainable Growth monthly bulletin

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April has been a tough month for equity markets, with persistent inflation and interest rates continuing to weigh on long-term growth for businesses. Returns for both the Sustainable Growth portfolio and the benchmark were negative in April, with the portfolio marginally lagging its relative benchmark.

Money transfer platform Wise was a detractor over the period. Wise is a mission-driven company focused on providing low-cost, transparent, and efficient cross-border transactions for individuals and small to medium sized enterprises. By reducing remittance costs and easing the financial burden of living across borders, the company fosters greater financial inclusion. Wise has struggled in recent months with stagnating demand in its business customers due to well-flagged onboarding issues in Europe. It temporarily stopped offering business accounts to new customers in some European markets due to high demand. On a more positive note, Wise has recently signed a deal with Latin American fintech Nubank to power its new global account and card program. This represents continued growth for Wise in Brazil, having already issued more than one million Wise cards within 15 months of launching in the country. 

Some of the healthcare and biotech names in the portfolio are continuing to struggle in the short term. Illumina, Sartorius Stedim and Denali Therapeutics have all detracted from performance in April. Illumina is a global leader in gene-sequencing and faced challenges in 2023 after its attempt to acquire cancer diagnostics business GRAIL without regulator consent. The market continues to focus on these execution errors however we have engaged extensively with management and are confident in the long-term growth opportunity that lies ahead, topping up the position in recent months to become a top 10 holding – a reflection of our conviction.

Sartorius is enabling biologic drug advancement by providing equipment which is less energy intensive than reusable equipment. The share price has been negatively impacted after a mixed earnings report at the end of Q1. Net profits were lower than this time last year, with muted investment activity by customers. More importantly though, orders were up by more than 10 per cent in all regions except China – where a clampdown on drug pricing is contributing to a weak Chinese biopharma market. Its consumables sector has seen a faster recovery than expected, which is a positive sign for the destocking of inventory we’ve seen post-pandemic.

Denali Therapeutics is pioneering next-generation treatments for neurodegenerative diseases such as dementia and forms of motor neurone disease (MND). Its share price has taken a hit due to widespread negative market sentiment as well as a failed trial for ALS treatment (a form of MND). Despite this, Denali has recently managed to secure $500m for further research and development, extending its cash runway out to 2028. We remain confident in the long-term growth case for Denali and believe it has the potential to revolutionise healthcare for one of the most significant medical challenges of our time.

One of the top contributors to performance in April has been US company Wabtec. Wabtec is a provider of equipment, technology and services to the freight and rail industry, with a particular strength in US freight where its locomotives are ~80 per cent of the active fleet. It has a very strong aftermarket and servicing business, which is a source of recurring, resilient revenues. Through its leading investment in emissions reduction technology, Wabtec should play a significant role in supporting carbon emissions reductions within the rail industry. Wabtec reported an increase in sales by 13.8 per cent year-on-year including a 30 per cent increase in equipment sales. The US rail industry is sitting on a repair backlog estimated to cost roughly $45bn which provides a long growth runway for the company.

Spotify has been another top contributor to performance over the period. Through its music streaming platform and support ecosystem, Spotify is significantly contributing to the growth of the creative economy, through democratising access to income opportunities for artists and creators, and enabling decent job creation and entrepreneurship within the music and entertainment industries. Spotify has been expanding margins through operating expenditure cuts and has seen continued improvement in its average revenue per user. This continued growth has meant that in 2023, 50,000 artists generated at least $16.5k income from Spotify – including independent labels which received more than half of the total royalties for the first time.

After a recent review of the upside of our top holdings, we’ve maintained our position size in Alphabet – another top contributor to performance this month. We see significant upside remaining in a firm that has ample data to fuel efforts in artificial intelligence (AI). The company currently has nine businesses with more than a billion users each, with search advertising revenues dominating (73 per cent). To double earnings over the next decade, it will require a big contribution from the nascent cloud-based enterprise services. We think there is a good chance of the firm challenging Microsoft with its productivity suite where it has ~20 per cent share, not least by leveraging AI expertise.

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