Update on... Echiquier Positive Impact Europe | July 2024
Adrien Bommelaer, Paul Merle and Luc Olivier, CFA, Fund Managers of Echiquier Positive Impact Europe, La Financière de l’Echiquier
Echiquier Positive Impact Europe is an impact fund that seeks alignment with the UN’s Sustainable Development Goals (SDGs). The strategy has a long-term objective: to deliver financial returns by investing in companies operating activities that offer solutions to sustainable development challenges and that stand out for the quality of their governance and social and environmental policies. We select companies that contribute to the achievement of the SDGs, display quality environmental, social and governance (ESG) characteristics, and offer attractive upside potential. In addition to stock selection, we initiate a long-term dialogue with business leaders and share progress areas with companies to help them improve their impact and their ESG practices. 2024 began well for the fund, after a positive year in 2023. The prospect of lower interest rates and a soft-landing for the economy, as well as easing inflationary pressures, were important tailwinds for the strategy. In this environment, the fund’s investment strategy proved particularly effective. The fund benefited from our stock selection within industrials and healthcare, through quality stocks such as Relx (SDG 16 Justice and Peace), Wolters Kluwer (SDG 16) and Novo Nordisk (SDG 3 Access to Healthcare). Its over-exposure to technology also contributed positively to returns year-to-date. While the fund suffered a little from its non-exposure to banking and energy stocks, two sectors that are excluded, its overexposure to technology has been positive since the beginning of the year.
Portfolio activity
Economic outlook
Echiquier Positive Impact Europe is a conviction-driven fund. The macroeconomic outlook has little impact on our investment strategy. However, we trimmed our mid-cap envelope to 15% over the past few months, from a historical average of 25-30%, as we believe the asset class will continue to struggle until interest rates are considerably lowered. To compensate, we re-initiated a position in Novonesis (SDG 12 Responsible consumer goods), as growth is picking up for this world leading enzyme specialist; we also strengthened our exposure to resilient, high-quality companies with strong pricing power[1] such as Novo Nordisk and ASML (SDG 9 Innovation and infrastructure) and to financials Munich Re (SDG 3) and Allianz (SDG 3).
Fundamentals
The post-Covid market regime is very different to the 2009-2019 period, which ended with the pandemic and the inflation issues that followed. The characteristics of this new market regime are high interest rates and inflation levels above those observed during the previous decade. In this environment, over the past few months, we sold stocks displaying free cash flow margins[2] we felt were too low, such as EDPR within renewable energy.
Investment strategy
Our investment strategy remains unchanged: overexposure to healthcare (17% of the portfolio), industrials (32%) and technology (22%), with a focus on companies developing solutions within the areas of sustainable mobility, energy efficiency, and digitalisation. The fund is not exposed to banks, real estate or telecoms, as their impacts are more difficult to measure. In the second half of the year, we expect the fund to maintain its style bias, with 68% exposure to Growth, 16% to Cyclicals and 15% to Value. The portfolio’s turnover remains limited (15%) demonstrating our long-term commitment to supporting our investee companies.