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Keystone Positive Change reports on transition year

Keystone Positive Change (KPC) has announced its annual results for the year ended 30 September 2021, a period that marked a new beginning for the trust as its management moved from Invesco to Baillie Gifford and it adopted its positive change mandate. Over the year KPC’s NAV total return was 17.3%, compared to a total return of 24.5% for the Comparative Index (in sterling terms). However, reflecting the positive reactio0n to the change in management arrangements, KPC’s share price total return for the same period was 40.9% as the discount narrowed from 17.3% to 0.9%. KPC says that it has experienced improved secondary market liquidity in its shares since the change of strategy and manager was announced in December 2020.

Baillie Gifford took and the reins of the portfolio on 11 February 2021, and the portfolio was reorganised completely in the second half of February 2021. At 30 September 2021, the new portfolio comprises 36 investments, of which three are private companies: Northvolt, Spiber and PsiQuantum.

Manager’s comments on the portfolio

“Your portfolio invests in 36 companies whose products and services are providing solutions to four impact themes:  social inclusion and education, environment and resource needs; healthcare and quality of life; and base of the pyramid (addressing the basic and aspirational needs of poorer members of society).  We invest with a long-term time horizon – at least five years – and would encourage that we are judged over rolling five year periods.

We are delighted to provide you with an update on portfolio activity over the course of the eight months we have been managing the portfolio as a means to introduce you to the companies we invest in on your behalf and some of the exciting areas we are researching.

We need to rapidly decarbonise energy generation.  As the world’s largest offshore wind farm operator, Ørsted plays an important role in the shift towards more renewable energy sources and is a key contributor to making wind generated energy cost effective through its adoption of larger turbines, its standardisation of the supply chain and innovative ways of maintaining and operating wind farms.  Given the long runway for growth and its market leadership, we have added to our position during the period.  Renewable energy generation will enable electrification in many industries, the most prominent one currently being transportation.  Along with supportive legislation and government funding, Tesla has played an incredibly important role in catalysing action in the traditionally sleepy automotive industry.  Sales of pure electric and plug-in hybrid passenger vehicles are on track to double in 2021, taking penetration up to nearly 9% compared to just 3% two years ago and it is worth highlighting the extremes – Norway’s electric vehicle (“EV”) penetration is circa 75%.   Not only has Tesla helped shift an industry into action, it has made terrific operational and financial progress at pace over recent years.  It is a great example of how investment returns and positive change are complementary.  Last year the company delivered nearly half a million vehicles and has delivered nearly 630,000 so far this year; profitability has improved despite reducing the price of its vehicles; and it established a factory in China in less than ten months.  This has been accompanied by tremendous share price appreciation.  We like to run our winners to capture the asymmetry inherent in stock markets, but we are also vigilant in testing our hypothesis and Tesla was no exception.   Through our most recent analysis we concluded that the probability of Tesla meeting our investment hurdle (we seek companies with scope to double over five years with a significant growth opportunity thereafter) has reduced following share price appreciation.  The investment thesis from here is more reliant upon success in less developed and potentially exciting opportunities such as energy storage and autonomous vehicles.  As such, we reduced the position during the period.

Batteries are a key enabler of the shift from fossil fuels in transportation (and other industries) and are a key differentiator for automotive manufacturers as they can determine price and performance.  We were delighted to have the opportunity to participate in Northvolt’s recent private funding round as it embarks on its ambition to become Europe’s largest manufacturer of EV batteries and to produce the world’s greenest batteries by using renewable energy and recycled raw materials.  The company, founded and led by an ex-Tesla engineer, has already secured contracts with several leading automotive manufacturers as it embarks on this ambitious journey.  Electrification in the transportation sector is not limited to ground transportation.  There is a great deal of investment and innovation going into developing electric flying vehicles (the technical term being electric vertical take-off and landing vehicles, or eVTOLs).  Joby Aviation has developed a prototype electric flying taxi which could transform city transportation while reducing emissions, saving commuter time and freeing up more green space.  We provided primary capital that will be used to help it commercialise its product.

Over the years we have discussed and researched what a sustainable food system might look like, with a growing appreciation of the complexities around food security, resource degradation and human health.  Deere, which is best known for its iconic green tractors, is helping address the challenge of ever more mouths to feed while reducing the environmental implications of farming through its precision agriculture products.  For example, its ‘see and spray’ technology uses cameras, sensors and machine learning to determine what is plant and what is weed and then applies herbicides accordingly, both increasing crop yields and reducing the use of herbicides, sometimes by up to 80%.  As our conviction in the opportunity in precision agriculture increases, we have added to the holding.

We are living in a material world but the current system is unsustainable – we can’t continue on this linear system of extraction, use and disposal, particularly of materials derived from petrochemicals.  We need to use better materials and keep goods in the system for longer – we need to move from a linear to a circular economy.  Northvolt joined Umicore in the portfolio as a company intent on recycling batteries from EVs (Umicore is already the world’s largest recycler of precious metals), so helping us move to a circular system.  Spiber is an exciting private Japanese company we recently invested in which uses synthetic biology (applying engineering techniques to biology to make products with desirable properties) to make biodegradable fibres that share the attractive qualities of animal fibres (such as cashmere) or petrochemical based products.  It is early days for Spiber, but we are encouraged by its vertically integrated approach, its progress to date in preparing for scaling production and the partnerships it has established which ought to help it commercialise novel fibres that are more sustainable alternatives to the status quo.

Synthetic biology could have broad and profound implications across many industries – we could be on the verge of an industrial revolution, enabled by our deeper understanding of biology and tools that help us read, edit and write DNA.  Such tools also have scope to improve our understanding, diagnosis and treatment of diseases.  Within our healthcare and quality of life theme we have unearthed some exciting companies such as the recently purchased AbCellera, a single cell screening company helping improve the speed, and potentially the quality, of antibody discovery, thus helping reduce the time and costs associated with developing antibody therapies.  It played a key role in the antibody discovery process for Eli Lily’s antibody therapy for Covid-19.  AbCellera joins a handful of companies in the portfolio which provide tools and services that aid understanding of biology and diseases.  Investments that address the healthcare and quality of life impact theme vary – from vaccine provider Moderna (our largest holding) to Peloton, another recent purchase.  Through a combination of its content, hardware and brand, Peloton has carved out a unique position in the interactive fitness market and has a huge runway for growth as it strives to reach 100m subscribers.  By reducing the friction of keeping fit, Peloton is helping prevent the onset of several conditions such as heart disease and diabetes.

In 1997, Kofi Annan, the former Secretary-General of the United Nations said that ‘knowledge is power. Information is liberating.  Education is the premise of progress, in every society, in every family’.  Finding an education provider that meets both of our objectives has been challenging over the years, so we are delighted to have participated in the IPO of Coursera, an online platform providing a range of educational content from short courses to online degrees.  Coursera is unique for appealing to different stakeholders in the education system: learners, academic partners and corporations.  Its 87 million registered learners help it attract content (from both academic and corporate partners) which in turn attracts more users. By providing online content, Coursera is helping improve access to learning through lower costs and greater convenience and helping provide relevant qualifications in an ever evolving job market.

PsiQuantum is another private company we have supported by participating in its recent fundraising.  PsiQuantum is developing a quantum computer.  Quantum computing could be one of the most important innovations of the 21st century as its extreme (unthinkable!) processing power could solve complex challenges from drug development to climate change – it could revolutionise industries and create entirely new ones.

Additions and purchases have been spread across three of our four impact themes with the Base of the Pyramid impact theme remaining challenging to identify companies that meet our dual objectives.  We have been researching financial inclusion as a means to improve resilience and create opportunity, along with associated microfinance and remittance companies that could perhaps join existing holdings such as Bank Rakyat Indonesia and Safaricom, a Kenyan mobile operator and provider of the M-Pesa payments system, in addressing the needs of those with lower incomes.

In addition to the reduction in Tesla, we sold the positions in Alphabet and Glaukos.  Our two objectives are of equal importance so there are no compromises.  Our conviction in Alphabet’s potential to deliver positive change through providing access to information has largely played out, its ‘Other Bets’ which could have driven change have underwhelmed and while progress has been made in its business practices in some respects such as its climate commitments and tax, its approach to ethics in Artificial Intelligence (“AI”) and monopolistic behaviours are disappointing.  In contrast to Alphabet, the reason for selling Glaukos concerned our conviction in the investment case, in particular the competitive environment in novel ways to treat glaucoma. We also reduced the position in M3, which provides online doctors’ portals, and NIBE, a leading provider of ground source heat pumps.  For both of these companies the valuation had outpaced the fundamentals and so we trimmed the positions to bring them more in line with our level of enthusiasm while putting the proceeds to good use in some of the companies mentioned above.

There are several interesting areas of research and a number of companies mentioned here which might give the impression of high turnover.  However, please be reassured that despite it being a rather fruitful period to find new ideas, the turnover of your portfolio remains in line with our long-term investment horizon.”

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