Positive Change: investor letter Q4 2024

Your capital is at risk. 

Positive Change: Rising to the challenge

'Don’t be afraid to do something big.’ Jeff Maggioncalda, CEO of Coursera 1

Positive Change began with two ambitious goals: to beat global stock markets by 2 per cent p.a. over rolling 5-year periods, and to contribute towards a more sustainable and inclusive world. Much has changed since we launched in 2017, global challenges are becoming more pressing than ever.

Facing into these challenges, our ambition remains, and our mood is one of determination. Determination to deliver on our stated outperformance goal, and determination to play our part in delivering a better world for future generations. In order to achieve our goals, we are reflecting and adapting but not overcorrecting. We remain focused on investing in exceptional businesses with the potential to generate superior returns.

Our long-term track record on both fronts is good: since inception, our returns have been comfortably ahead of the MSCI ACWI; and our annual impact reports evidence the meaningful contributions that companies have made towards a range of environmental and social challenges.

Shorter-term progress has been more challenging. In terms of investment performance, it is pleasing that the portfolio has delivered positive absolute returns this year although they have lagged the benchmark’s strong returns. Over the most recent quarter the portfolio was marginally ahead of the benchmark.

In terms of impact performance, companies in the portfolio are delivering positive environmental and social progress. Last year, they enabled the avoidance of close to 33 million tonnes of CO2e, provided access to education or training for 227 million learners and provided treatment for 2.3 million patients 2. However, we know significant global challenges remain.

We explain below how we are rising to meet the challenges we see, where we are improving, and why we are confident for 2025 and beyond.

Rising to the Challenge: Exceptional investment performance

‘Try to take risks. If you have a view of something that is a contrarian view but makes sense to you, pursue it, but you need to be resilient and long-term focussed’ Marcos Galperin, Founder and CEO of Mercado Libre 3

When we began Positive Change eight years ago, the idea of managing a listed equity portfolio that would not only deliver exceptional returns, but also positive environmental or social impact was novel, and viewed with a degree of scepticism. The exceptional investment returns we delivered during the following 5 years was a powerful response. We acknowledge that market conditions for our style of investment management were relatively benign for much of that period: interest rates were low which allowed many less mature companies to invest heavily and to scale quickly, and market enthusiasm was high.

But today we see the reverse, following a difficult backdrop for growth and impact investors, market enthusiasm for many of the companies we like remains low. Markets this year have been dominated by sentiment around three key topics. Firstly, the year began with a small number of companies leading the AI charge (the Magnificent Seven) dominating returns. Secondly, as the year has drawn to a close, likely beneficiaries of the Trump presidency have captured enthusiasm. And throughout, concerns about protectionism and east-west tensions have continued to rise.

We think myopic short-term investors are missing perspective. Current levels of market concentration, with the top 10 companies comprising 20 per cent of the global index, are rare in a historical context, and we also observe that the US market is trading towards the upper end of its historical valuation range. Meanwhile in contrast, European and emerging markets look relatively compelling, and we have found some great opportunities as a result. Irrespective of geography, selective active management, and seeking out those companies which can deliver long-term earnings growth will be key to long-term success.

As for de-globalisation and east/west tensions, these are not new. Morris Chang, founder of the Taiwanese semi-conductor company TSMC, noted 5 years ago that TSMC would become a battleground, and that globalisation had died but it was vital for the company to continue to invest. Despite geo-political tensions, TSMC is up around 250 per cent in share price terms on a 5-year view thanks to its relentless investment and innovation, and the company now has facilities in Japan, Arizona and Germany. It is this sort of strategic foresight, investment and strategy that will allow companies in the portfolio to succeed over the years to come.

The long-term structural trends are clear, and they transcend current geopolitics and market sentiment. The climate transition is already underway. Data shows that already enacted climate policies have delivered a reduction in greenhouse gas emissions that have roughly halved the global warming trajectory 4. Still there is much more to be done to limit warming and to deal with its inevitable impacts. Companies which can lead this transition will have significant growth prospects; we must be selective about finding those that are well run businesses with sustainable competitive advantages.

The advances we see towards meeting other social challenges, generally underpinned by phenomenal technological innovation, continue: fintech is providing greater access to finance across emerging markets, next generation sequencing is underpinning new healthcare treatments, and greater access to the internet is enabling access to quality education through digital platforms and apps. Exciting and innovative companies that are driving progress within these megatrends will remain excellent investments. If just some of these ideas work out, we will be well set to deliver outperformance.

Regardless of where we invest, we know that superior growth underpins share price returns, and companies in our portfolio are certainly rising to this challenge. They have delivered 13.3 per cent sales growth p.a. over the past 5 years on average, relative to just 5.2 per cent for the index. Similarly, 5-year delivered earnings growth is 13.0 per cent vs. 7.7 per cent for the index, and a marked improvement on last year. Forecast earnings growth is nearly twice that of the index, at 18.6 per cent vs. 9.9 per cent 5. The growth rate of our portfolio has accelerated far more rapidly than the index, where 5-year delivered earnings have actually decreased.

So, underlying portfolio characteristics are extremely strong and have strengthened over the past couple of years. Share prices should follow in due course.

Challenging norms and driving innovation

'Our industry does not respect tradition. It only respects innovation’ Satya Nadella, CEO of Microsoft 6

Some of the challenge we face comes from accepted wisdom that one cannot do good and do well at the same time, that the trade-offs are simply too great. We think differently.

The strong overall operational performance of our portfolio has been underpinned by some exciting developments at the companies we hold. These companies are establishing entirely new markets by finding new and profitable ways to tackle challenges. Two of the top contributors this year, and over the quarter, Duolingo and Grab are two such examples.

Duolingo, the language learning app, was set up with a clear mission in mind. Its founder Luis von Ahn grew up in Guatemala, and during a recent meeting described the first 10 employees of the company as having been ‘zealots about free education’. He noted his proudest moment so far as when he noted users of Duolingo included both Syrian refugees and Bill Gates. Indeed, von Ahn set up Duolingo to help the hundreds of millions of people who are learning English to get out of poverty.

But to provide and scale a high-quality free proposition, von Ahn knew he had to make the platform profitable. As a result, the company has successfully grown revenues from advertising and paid premium subscriptions. It is expecting 40 per cent revenue growth this year, monthly active users now surpass 110 million and there has been strong growth in paid subscribers.

Grab, purchased in February, has also been a strong contributor to relative performance. We bought shares in the Southeast Asian super-app following extensive work on the impact of the company. We engaged 60 Decibels, an impact consultancy, who undertook on-the-ground surveys for us in Grab’s key markets of Indonesia and the Philippines to understand whether the financial services offered via digital platforms truly drive better development outcomes. The results were striking, with over 80 per cent of the 1,600 Micro, Small and Medium Enterprise owners who were interviewed noting improved financial resilience as a result of access to these products. Pleasingly, the company is seeing strong growth across its platform, and has moved into profitability.

Joby Aviation, one of the earlier stage companies in the portfolio, has also finished off the year on a high, and was one of the top contributors over the quarter. Its founder JoeBen Bevirt set out with strong intent: ‘In 2009 I founded Joby to change daily transportation, aiming to bring the dream of flying mobility into our daily lives’. As fanciful as this sounds, progress has been impressive. Joby makes Electric Vertical Take off and Landing (eVTOL) vehicles and has the potential to revolutionise mass transport in an environmentally friendly manner.

This quarter has seen a change in the US’s Federal Aviation Authority rules, allowing for the integration of eVTOLs into airspace – an important milestone on the road to success. And Joby completed its first vertiport, and first exhibition flight with partner Toyota in Japan. There now appears to be growing recognition of Joby’s leadership in what could be a transformative new market.

Of course, not all developments have been positive. Moderna has been a key detractor this year, and during the most recent quarter, as sales from its Respiratory Syncytial Virus (RSV) vaccine have disappointed, earnings guidance has been missed, and profitability pushed further into the future. With much bad news priced in, we have held onto the shares and are monitoring performance closely. It is critical that Moderna is able to effectively commercialise its technology. Management changes have the potential to place the company back onto a stronger footing. We will watch the pipeline of new drugs (which we still think is underappreciated) carefully.

Bank Rakyat Indonesia, the Indonesian microlender, has also been weak following an increase in non-performing loans due to a combination of operational missteps and a challenging macroeconomic backdrop including higher food price inflation. This follows a long and profitable track record of lending. Pleasingly, we are seeing stabilisation, with improving asset quality and the bank remains well-capitalised. In addition, the bank has hired 400 additional loan officers and tightened up underwriting policies. Nonetheless, we are closely monitoring progress and strategy.

Finally, not owning NVIDIA, the dominant manufacturer of AI-related chips, has been a headwind to relative performance given NVIDIA is the second largest constituent of the index and has seen a trebling of its share price over 2024. We have challenged ourselves to think broadly about the impact that AI will underpin, but have found other companies in this area, notably TSMC, ASML and most recently Microsoft, more compelling from an impact and valuation perspective.

Challenging ourselves to improve

'We need to continually be stretching ourselves, stretching the brand, stretching the products, stretching technology.’ RJ Scaringe, founder and CEO, Rivian 7

Despite good operational performance and a strong long-term track record, we know that returning to outperformance is critical, and the volatility delivered has made outperformance over our 5-year time horizon more challenging. We are learning and adapting to challenging market environments, but we do not want to overcorrect or compromise our growth and impact focus. 

We have therefore worked closely with our colleagues in the Investment Risk team to refresh our approach to portfolio construction. We have identified three key areas with room for improvement: our valuation discipline, moving on from companies where the investment thesis has weakened, and missed opportunities.

We have increased the frequency and depth of interactions with our Investment Risk team, and introduced a wider range of risk tools to support our risk analysis based on our four pillars:

1. Situational Awareness, including more granular valuation heatmaps and correlation analysis which allows us to model the impact of new holdings pre-buy
2. Portfolio Resilience, a continuation of the good work we started back in 2021 to ensure our companies are financially resilient against a more challenging environment
3. Behavioural Analysis: analysing our trading patterns, monitoring the total capital we commit to names to prevent repeated adding on weakness, and better milestone monitoring for names that are not working out
4. Idea generation: using various tools to support our search for new names, and looking at missed growth opportunities.

Coupled with our strong stock-picking abilities, we think these improvements to portfolio construction further strengthen our ability to deliver long-term returns.

New Ideas: Healthy challenge for a place in the portfolio

'The most crucial part about reinvention now is to question ourselves continuously.' David Vélez, CEO and founder of Nubank.

This year, we have redoubled our efforts to find a strong pipeline of diverse new names to add to the portfolio. As a result of our efforts, rolling annual portfolio turnover has ticked up to just over 20 per cent, in line with the top end of our indicative range. This means we’re still holding companies in the portfolio for five years on average, and we remain long-term in our outlook, but the increase in turnover reflects the range of opportunities we’ve found.

In the most recent quarter, we’ve invested in the New York Times, which is providing high-quality reporting and investigative journalism in an age when we can no longer take the truth for granted, Savers Value Village, a profitable and growing second-hand clothing retailer, and Ashtead Group, one of the world’s largest construction and specialist equipment rental companies (there are compelling environmental benefits to rental rather than ownership). Most recently we took a position in Sea which through its ecommerce and digital financial services enables socioeconomic development in Southeast Asia, Taiwan and Brazil. These names add to an already eclectic mix of new companies identified this year.

This quarter we have also purchased shares in Microsoft. We challenged ourselves on whether we had underappreciated the growth and impact potential of well-established dominant businesses. The growth case for Microsoft is compelling: its immensely strong competitive moat is accompanied by an adaptive and innovative culture led by a visionary leader which make it uniquely positioned to benefit from the two very big and important technology shifts: Cloud and AI. From an impact perspective, we were struck by its commitment to responsible AI, digital inclusion (which aligns with 70 per cent of the 169 SDG targets) and the ability of cloud computing to support increased computational efficiency, innovation and reduced carbon emissions which contribute to several SDGs. Microsoft’s powerful technological knowhow is a good example of the ‘enablers’ we hold in the portfolio, which we think underpin systemic change across a range of other industries.

The greatest challenge of all: Achieving sustainable development

‘We’re just getting started’ Matt Oppenheimer, CEO of Remitly 8

Aside from our ongoing quest to deliver our two objectives, it is critical we acknowledge that impact investment is more important now than ever. This year, the UN published a report on progress towards the Sustainable Development Goals which makes for sobering reading.

Despite very long-run positive progress on reducing inequality, poverty reduction and life expectancy, the report notes that progress has ground to a halt or been reversed across multiple fronts. An additional 23 million people were pushed into extreme poverty and over 100 million more suffered from hunger in 2022 compared to 2019. Global greenhouse gas emissions and atmospheric concentrations of carbon dioxide reached new records and educational attainment, the bedrock of progress, has slipped 9.

However, the opening letter of the report also notes that innovation and increased access to life-saving treatments, as well as the internet and the transformational possibilities of AI carry great hope.

"Time and again, humanity has demonstrated that when we work together and apply our collective mind, we can forge solutions to seemingly intractable problems... It is still possible to create a better, more sustainable and more inclusive world for all by 2030. But the clock is running out. We must act now, and act boldly."

We are determined to rise to the challenge. Are you?

1 Coursera is a digital education platform. Held in Positive Change since March 2021.

2 Baillie Gifford Positive Change Impact Report 2023 https://www.bailliegifford.com/en/uk/individual-investors/positive-change-impact-report/ 

3 Mercado Libre, a Latin American fin tech and ecommerce platform. Held in Positive Change since March 2020. 

4 Based on information from Our World in Data, using Climate Action Tracker.

5 Based on Baillie Gifford Investment Risk Analysis at end December 2024. 

6 Microsoft is a global provider of software, services, devices and solutions. Held in Positive Change since October 2024.

7 Rivian, electric vehicle manufacturer. Held in Positive Change since February 2024.

8 Remitly, is an online remittance service. Held in Positive Change since December 2022.

9 https://www.un-ilibrary.org/content/books/9789213589755c002/read

*Inception date: 31 January 2017

Source: Revolution, MSCI. US dollar. Returns have been calculated by reducing the gross return by the highest annual management fee for the composite. 1 year figures are not annualised. 

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