Generation’s investment process is based on the fundamental belief that the best way to produce superior returns over the long-term is to integrate sustainability into every aspect of the investment process. The Generation investment process is broken down into three key phases:
- Identifying companies for further analysis
- A series of global sustainability themes have been identified with the help of some of the world’s pre-eminent thinkers. These include pandemics (eg HIV and diabetes), climate change, water and demographics.
- The investment team develops ‘industry roadmaps’ which build sustainability themes into different sectors of the economy. The roadmaps also incorporate traditional investment issues.
- The ‘industry roadmaps’ provide insights into which companies will profit from the changes associated with sustainability and those that will face greater risks over the long-term.
- The ‘industry roadmaps’ serve as an idea generator for identifying companies for further analysis.
- Company analysis and selection
- Generation takes great care to understand each company before considering it for inclusion in the fund.
- Each company is subject to rigorous scrutiny across qualitative and financial measures from both individual analysts and the entire investment team.
- Sustainability research plays an important role in the assessment of both business and management quality.
- The result of this analysis is inclusion on what Generation calls its ‘focus list’, which is a list of around 100 companies Generation would like to invest in if the price meets Generation’s valuation target.
- Constructing the portfolio
- While there may be as many as 100 companies on the ‘focus list’, only 25-60 companies will be included in the portfolio at any one time.
- Generation will only invest when there is high conviction in the company.
- Companies that make the portfolio are those whose current share price is significantly less than Generation’s valuation of the company.
Name: BG Group
| Who |
- The BG Group is a world leader in natural gas with activities in exploration, production and distribution in 20 countries.
- BG group was formed as a result of the privatisation and split-up of the former British Gas.
- As a result BG Group inherited an enviously high quality natural gas reserve asset base which is characterised by long life and low decline rates.
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Factor
Sustainability themes |
Economic- High demand and scarcity of fossil fuels
- Population boom
- Low cost base
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| Why Generation invests? |
- Production rates are expected to remain strong for many years to come against a backdrop of depleting reserves of oil worldwide.
- With a global shift from oil to gas as the dominant primary fossil fuel, in particular in power generation gas prices are projected to remain at structurally higher levels.
- This view is supported by the high correlation between the price of gas and the price of oil.
- BG also enjoys amongst the lowest Finding & Development costs in the oil and gas industry.
- A combination of high prices and a low cost base relative to peers allows BG to generate strong returns.
- BG’s management team is highly regarded and their commitments to the highest standards of corporate responsibility are widely recognised, often ensuring a licence to operate before their competitors.
- BG’s attractiveness and relatively small size has also made it a possible takeover target, helping to limit the downside risk of investing.
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Name: Novo Nordisk
| Who |
- Danish-based company established in the 1920s providing pharmaceutical solutions for diabetics.
- Novo Nordisk is considered a market leader with a global insulin market share of 52%.
- It has manufacturing operations in 69 countries and markets its products in 179 countries.
Novo Nordisk has two key business segments:- Diabetes care (insulin and related products)
- Biopharmaceuticals
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Factor
Sustainability themes |
Health- Changing demographics
- Increasing incidence of diabetes
- Stakeholder engagement
- Energy efficiency
- Corporate culture and management
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| Why Generation invests? |
- Ageing populations worldwide and increasing healthcare demands from developing countries provide growth potential.
- About 180 million people around the world suffer from diabetes1 and this figures is expected to rise to 330 million by 20252 Novo Nordisk is one of only three companies operating in this market.
- As well as providing treatment for diabetes, Novo Nordisk is striving to eliminate diabetes worldwide.
- As part of that aim, it has developed detection and prevention programmes with the Chinese and Indian governments.
- It has sustainability fully embedded into its operations and undertakes triple bottom line reporting. This acknowledges the non-financial impacts of their operations on the communities in which it operates.
- There are substantial barriers to entry owing to patents, high capital intensity of insulin manufacture, complex injection devices and distribution networks.
- As such the company has good margins and has grown very consistently for a long period of time.
- Novo Nordisk’s flat organisational structure allows rapid decision making, which allows the company to respond more effectively to changes to patents.
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1http://www.who.int/mediacentre/factsheets/fs312/en/
2International Diabetes Federation 2006 Diabetes Atlas
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Name: Johnson Controls Inc
| Who |
Johnson Controls is a US-based manufacturer of:- Building efficiency control systems and batteries for hybrid vehicles (50% of the business)
- Automotive interiors
Founded in 1885, the company operates in more than 1,000 locations with customers in 125 countries. |
Factor
Sustainability themes |
Environment- Building efficiency
- Fuel economy
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| Why Generation invests? |
- Increasing demand by consumers for energy efficiency as the focus on the environmental issues grows.
- Leading worldwide supplier of control systems that automate heating, ventilation and air conditioning in buildings.
- The building sector accounts for about 30% of all carbon dioxide emissions.
- Demand for Johnson Control systems is expected to increase as the price of oil rises.
- It holds a dominant position in the automotive industry and is one of only a handful of players in the emerging hybrid battery market.
- Johnson Controls holds an annual energy efficiency conference and recently joined the Clinton Climate Initiative to reduce carbon dioxide emissions in 40 cities worldwide.
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Name: Blackbaud Inc.
| Who |
- Blackbaud Inc. is a US-based company providing software and consulting services for non-profit organisations with offices in the US, UK and Australia.
- The company was founded in 1981 and has more than 15,000 clients - from small grassroots organisations such as local food banks to large multi-site charities such as the Red Cross.
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Factor
Sustainability themes |
Social- Philanthropy
- Human resources management
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| Why Generation invests? |
- Blackbaud Inc. has achieved double digit profit growth over the past five years and is well placed to continue that growth.
- The company builds most relationships around its management software tool called Raiser’s Edge which helps non-profit organisations to communicate more effectively with their donors.
- Raiser’s Edge has dominant market share (estimated at greater than 80%) of branded software solutions for non-profit fundraising.
- Its key management priorities include steadily growing revenue, good cashflow management and maintaining a culture of responding to clients’ needs.
- Blackbaud has achieved loyalty from its customers which has resulted in strong, predictable revenue.
- Existing customers make up 75% of Blackbaud’s business, with cross selling to existing customers making up 25% of revenue.
- It is not reliant on any single customer for its profit growth - no customer makes up more than 2% of the company’s revenue.
- Blackbaud’s management has also successfully developed a culture of philanthropy within the organisation which has resulted in a loyal, motivated workforce.
- About 60% of employees say that the company’s culture of giving and volunteering was important to their decision to join the company.
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Name: Northern Trust
| Who |
- US-based company that provides private banking and custodial services to institutional and high-net worth clients around the world.
- Northern Trust has achieved 118 years of sustained growth since being founded in Chicago in 1889.
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Factor
Sustainability themes |
Governance- Human resources management
- Culture
- Demographics
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| Why Generation invests? |
- Northern Trust is a high quality, well managed company with strong positions in market segments where significant barriers to entry exist.
- The private client business has a strong presence in affluent market segments. For example, 22% of the Forbes 400 Richest Americans are among Northern Trust’s clients.
- Northern Trust services the US wealth management market (defined as families with at least $1 million of assets to invest), which is estimated to grow at 9% pa over the next five years.
- The super high-net worth client segment, where Northern Trust is particularly strong, is expected to grow at around 10-12%. Northern Trust is well positioned to benefit from this growth.
- Northern Trust’s custodial business has recently integrated Baring Asset Management’s financial services division, acquired in 2005.
- Supporting this approach to asset growth, Northern Trust has a distinct management culture that fosters a client focused approach to business and a clear focus on values and ethics.
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*Stocks mentioned above are held within the Generation Global Sustainability Fund, current as at 30 September 2007. They are not recommendations to buy, sell or hold and should not be considered advice.
This is general information only and does not take into account your individual objectives, financial situation or needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. The Generation Global Sustainability Fund is available through FirstChoice and is issued by Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468. Generation Investment Management LLP is the investment manager for the fund. The relevant Product Disclosure Statements (PDSs) describing this fund are available from Colonial First State
