ELMRI ANZ Conviction Fund

The Elm Responsible Investments (ELMRI) ANZ Conviction fund invests in innovative growth companies that are striving for positive change and delivering social and environmental outcomes, whilst also aiming to achieve strong returns for investors.

We invest in Australian and New Zealand listed securities, typically in mid and large cap companies that are included in the S&P/ASX 300 Index. We may also invest in securities expected to list on an Australian or New Zealand exchange within 18 months. If a security changes its listing from an Australian or New Zealand exchange to another exchange, and if the Fund already has a holding in that security, we may continue to invest in that security. 

The ELMRI ANZ Conviction fund aims to outperform the S&P/ASX 300 Accumulation Index (Benchmark) on a net fees basis. We have a long-term investment horizon of 5-7 years, taking concentrated long-only positions without reference to the Benchmark. Therefore the returns of the Fund may differ significantly from the returns of the Benchmark. We are not permitted to invest in derivatives, borrow cash, or short-sell securities. We employ a fully invested strategy, with a low cash balance.

Our strategy is to identify stocks following ELMRI’s proprietary Investment and Sustainability Frameworks. The Investment Framework is focused on identifying high-quality companies with compelling investment return prospects. The Sustainability Framework is guided by the United Nations Sustainable Development Goals (UN SDGs) and focuses on identifying companies that make a positive contribution to the environment, society and all other stakeholders.

By following these frameworks, we believe we can construct a portfolio that targets strong returns for clients whilst also investing in companies that facilitate the transition to a more sustainable future. 

We incorporate fundamental research, behavioural finance and empirical evidence into our investment process to build a concentrated portfolio (typically 10–30) of high-quality local companies underappreciated by the broader market: companies we believe are the most likely to deliver strong long-term returns.

Our Investment Framework (outlined below) helps us identify such companies, and construct a portfolio that is best placed to outperform the Benchmark.

• We first identify high-quality companies by focusing on their operational performance, with a particular focus on management and culture, industry structure and sustainable long-term competitive advantages.
  
• We then analyse a company’s financial performance by looking primarily at return on capital, free cash-flow generation and growth. The financial performance is an output of the operational performance, and helps us compare the operational quality of each company in our universe.
  
• Once a company is deemed high quality, we draw a road-map for how further shareholder value could be created and realised by the market. We look to various valuation methodologies including DCF, EV/EBITDA, EV/Sales, P/E (at both stock and industry levels), but an explanation of how a re-rating could occur is more important than the absolute valuation. We call this the Value Opportunity.

We only invest if we can identify and articulate the Value Opportunity.

• We still incorporate Environmental, Social and Governance (ESG) factors into our Investment Framework as we believe that companies that have leading ESG policies (governance in particular) are more likely to create value for shareholders.
  
• We refer to data and studies to guide our research efforts and help evolve our process.
  
• We maintain a long-term investment horizon, behave like business owners and manage a concentrated portfolio of companies. We are not stock traders. 

Our multi-step Sustainability Research Framework helps us identify the most impactful companies.

In order to narrow the vast universe of publicly listed companies to only the most impactful ones, we start with an AI Powered Screen.

With automation, we lose context… so to delve deeper, our Analysts are guided by the results from the AI powered screen to conduct further analysis. The analysis is based on the Impact Management Project’s (“IMP”), considering the impact achieved across five dimensions: What, Who, How Much, Contribution, and Risk.

After considering the five dimensions, we can then classify each company along a spectrum of impact: Causing Harm, Act to Avoid Harm, Benefit Stakeholders, Contribute to Solutions.

We target approximately 10–30 positions, with no reference to the Benchmark.

Although we seek to diversify across sectors and geographies, our priority is to invest in our highest conviction ideas, which may mean that we have a concentrated exposure to some industries and no or low exposure to others.

Each individual position size ranges typically from 1–20% of the portfolio value. Our largest position is typically 15–20% of the portfolio value, but the investment will need to have numerous and deep sustainable long-term competitive advantages, backed by strong and improving financial results, a strong management team and culture, and a clear, low risk and significant Value Opportunity on offer.

The smallest positions are typically 1–2% of the portfolio value and are usually a way for us to learn more about a given opportunity before we take a more meaningful position, or exit the position.

Alternatively if a company exhibits only a few favourable attributes and also elevated risk, we may choose to invest at the low-end of the weight spectrum. There are other investments that fall between the typical maximum and minimum levels. 

Renewable Energy, Employment & Education, Software & Services, Biotechnology, Medical Devices, Digital Wallets, Health Technology, Property & Social Infrastructure, Housing & Sustainable Building Products

This note has been prepared by ELM Responsible Investments (‘ELMRI’) ABN 70 607 177 711 AFSL 520428, for Australian wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth).

The information is not intended for general distribution or publication and must be retained in a confidential manner. Information contained herein consists of confidential proprietary information constituting the sole property of ELMRI and its investment activities; its use is restricted accordingly.

This note is for general informational purposes only and does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of preparation and presenting and all forecasts, assumptions, opinions, data and other information are not warranted as to accuracy or completeness and are subject to change without notice. This is not an offer document and does not constitute an offer or invitation of investment recommendation to distribute or purchase securities, shares, units or other interests to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this note. Any potential investor should consider their own circumstances and seek professional advice.

ELMRI funds, its directors, employees, representatives and associates may have an interest in the named securities.

Past performance is for illustrative purposes only and is not indicative of future performance.