Janus Henderson

We are strong advocates of the thesis that there is a fundamental alignment between sustainable development, innovation, and growth. We also approach investing with a multidisciplinary mindset that seeks to avoid cognitive biases. These approaches combine to identify companies that are firmly embedded within the framework of long-term secular trends driving towards a more sustainable world, as well as growing wealth over time. Three companies currently demonstrating the approach in action are: ride hailing platform, Uber, semiconductor microchip manufacturer, ASML, and IT outsourcer, CGI.

Our research process starts with two simple questions:

Is the world a better place because of this company?

Can this company grow wealth over time?

We then apply a multidisciplinary approach, which marries together the incorporation of rigorous sustainability analysis with traditional financial analysis, and allows us to assess a company’s impact on the triple bottom line – planet, people, and profits.

The approach aligns with the thinking of the late Charlie Munger, former Vice Chairman of Berkshire Hathaway. Munger’s philosophy revolved around the idea of a multidisciplinary approach to life, which he credits for much of his success. In particular, he emphasised the importance of thinking beyond one’s own scope of expertise, drawing knowledge and wisdom from a wide range of fields, or taking “the big ideas” from all the different disciplines. In the same way, we endeavour to frame our thinking broadly, rather than falling prey to the narrow compartmentalisation of ideas, which we believe limits investment success.

If you skillfully follow the multidisciplinary path, you will never wish to come back. It would be like cutting off your hands.

 

Charlie Munger, former Vice Chairman of Berkshire Hathaway

The following examples provide some insight into the different types of business models that we believe display varied yet pivotal roles in propagating a more sustainable future.

Network effects and winner-takes-most dynamics

Ride hailing platform Uber falls neatly into the theme of sustainable transport. The company’s platform drives higher utilisation of vehicles, thereby fuelling a circular economy dynamic, while its ride sharing products allow riders to reduce their travel costs. Independent research suggests that it also has a direct role in improving passenger safety by reducing drunk driving and alcohol-related traffic fatalities in the US.

With regards to its carbon footprint, Uber has committed to being a fully electric zero-emissions platform by 2030 in Canada, Europe, and the US, and by 2040, globally. The platform already has 74,000 monthly zero-emission vehicle drivers active on its app in the US, Canada, and Europe.

The company upholds a traditional network effects/winner-takes-most business model, where the returns profile can be considered convex; ie, once a certain ‘tipping point’ is crossed in scale/market share, the ensuing dominance of the platform paves the way for accelerated cash generation. Scale begets scale, as the flywheel effect is in motion when there are more riders on the platform because pick-up times are shorter, which is due to having more drivers, who are on the platform because there are more potential customers, and so the feedback loop continues.

Uber’s fixed cost base, which is largely comprised of central costs, doesn’t tend to increase proportionately as its top-line grows. As a result, the company has a hockey-stick-like cash generation profile, whereby very little incremental costs have to be deployed in order to propel the flywheel. The company is moving into a new harvesting phase now, having already established scale in its key markets, which we believe offers Uber the right-to-win.

Difficult-to-replicate competitive advantages

ASML is a global manufacturer of semiconductor microchip-making equipment. Its products enable the advancement of Moore’s Law towards ever smaller, cheaper, more powerful and energy efficient semiconductors which, in turn, results in increasingly powerful and capable electronics. ASML also plays a vital role in decarbonising the semiconductor industry, which relies heavily on energy, having reduced energy use per exposed wafer pass by 37%, with goals to reduce this by 60% by 2025.

ASML has developed multiple layers of competitive advantages, which we believe will be difficult to disintermediate. The company’s most significant competitive advantage is its technological leadership; the business invests heavily in research and development, and it is constantly pushing the boundaries of what is possible in the field of lithography. For example, its patent-protected extreme ultraviolet (EUV) lithography is essential for the production of advanced microchips. Currently, ASML’s machines are the only ones capable of producing these advanced chips, giving the company a significant edge versus the competition and creating what some might consider to be a ‘one-horse race’ in the field of lithography.

Strong customer relationships are another key tenet to ASML’s success. Long-standing partnerships with some of the largest semiconductor manufacturers in the world – including Intel, Samsung, and TSMC – allow the company to tailor its products to meet its customer requirements. Some customers have even undertaken the costly endeavour of redesigning their fabs to make them suitable for EUV led by ASML.

Owing to its dominance in the market, ASML has achieved economies of scale that its competitors cannot match. This allows the company to produce its lithography machines at a lower cost than its competitors, which in turn allows it to offer more competitive pricing. As such, we believe ASML upholds difficult-to-replicate competitive advantages that mean it is unlikely to be displaced from its prime position in the foundry space.

Owner-operators with ‘soul in the game’

According to a study completed by Purdue University’s Krannert School of Management, founder-led companies in the S&P 500 tend to be more innovative. Such firms generate 31% more patents on average, and moreover, the patents they do tend to create are more valuable. Additional studies show that founder-led firms outperformed on crucial risk and return metrics, given that founders often see their companies as life-long projects and are more motivated to fight through any obstacles. Not only do they have ‘skin in the game’ but also ‘soul in the game.’

CGI is the world’s fifth-largest independent IT services and outsourcing provider. The company provides end-to-end digital transformation services and solutions to help clients design, implement, operate, and maintain the technology required for efficient business operations, ultimately leading to more streamlined customer outcomes. The company has a strong history of creating shareholder value, which we believe is a result of the involvement of the company’s Chairman and founder, who owns c11% of shares outstanding.

CGI appears to benefit from its founder mentality, as it has remained attuned to the latest technological advancements and focused on developing and enriching its intellectual property platform, differentiating itself as a digital transformation provider. We like CGI’s approach of addressing its employees as “members”, which instils a sense of accountability and ownership within the employee base by adding pride to performance.

Overall, we hold that an owner-operator business model can lead to a more robust governance structure that is truly aligned with shareholders – an element that we contend is imperative to the sustainability and ESG profile of a business, through its impact on influencing incentives to take a long-term view.

Conclusion

As a team, we continue to hold that attractive results are only achieved through non-consensual thinking. Albert Einstein, an exemplar exponent of “out-of-the-box” thinking, once quipped: “Insanity is doing the same thing over and over again and expecting different results.”

Espousing a multidisciplinary approach in our research process, by drawing on various disciplines, is instrumental in the collation of an investable universe of companies that is differentiated. In particular, the class of multidisciplinary approach that we endorse is the amalgamation of insights arising from thinking deeply about sustainability with thorough diligence in conventional financial analysis.

There is no guarantee that past trends will continue, or forecasts will be realised.

This information is issued by Janus Henderson Investors (Australia) Institutional Funds Management Limited (AFSL 444266, ABN 16 165 119 531). The information herein shall not in any way constitute advice or an invitation to invest. It is solely for information purposes and subject to change without notice. This information does not purport to be a comprehensive statement or description of any markets or securities referred to within. Any references to individual securities do not constitute a securities recommendation. Past performance is not indicative of future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

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