Criterion: In fostering truly sustainable investments, ELM waters the flowers and not the weeds

• ELM Responsible Investments’ quest is to find the most ‘sustainable’ companies – but not by ticking ESG boxes
• The fund is keen on Australian healthcare stocks and AI driven data centre plays
• As with most forms of stock picking, returns are driven by the minority of outperforming ‘flowers’

The CEO and founder of ELM Responsible Investments, Jai Mirchandani, notes the confusion between the niche fund’s stock picking approach and environmental social and governance (ESG) investing.

“We get lumped in with the ESG guys,” he says.

“We focus on companies that operate in important sectors and have products and services that are innovative and driving the world to a more sustainable future.

“That’s very different to ESG.”

With roughly $30 million under management across both funds, ELM’s charter is to find the most sustainable companies: “the most impactful companies with the best long term growth prospects.”

Many stocks in ELM’s Australian and global portfolio wouldn’t pass muster with the ESG purists.

“Corporate governance is important, but if you flip it on its head do you invest in any company with good governance? The answer is no,” Mirchandani says.

“A fossil fuel or gambling company might have great governance structure, but … they are destroying lives, society and the environment.”

Tend the flowers, not the weeds

So where does ELM’s sustainability quest begin?

“We invest in sectors like healthcare, technology and digitisation, housing and renewable energy and climate change abatement,” Mirchandani says.

“We view technology favourably, because it improves efficiency and lowers costs and that is generally good.”

Rather than using metrics such as price-earnings multiples, the fund assesses companies on long-term discounted cash flow measures (typically out to 10 years).

But the long-term focus only goes so far.

Abiding by the maxim of avoiding cutting the flowers while watering the weeds, the fund will cull underperformers.

“Most of the returns come from a handful of companies and our portfolio shows that as well – so let’s find the few companies that truly outperform,” he says.

“Sustainable sectors have a natural tailwind behind them, but you need to find the right companies.”

Healthy focus

ELM’s local fund includes ResMed (ASX:RMD), Kiwi based Resmed rival Fisher & Paykel Healthcare (ASX:FPH), radiology homegrown hero imaging ProMedicus (ASX:PME) and lung imaging upstart 4D Medical (ASX:4DX)

Having merged with Chemist Warehouse, Sigma Healthcare (ASX:SIG) also passes the firm’s multifaceted screening process.

Pro Medicus was a portfolio constituent of the local fund when it started in 2019, but Mirchandani had followed the stock in his previous role at JCP Investments.

“I wish I had bought more.”

ELM’s other local investments include ‘cloud’ accounting software innovator Xero (ASX:XRO), family tracking house Life360 (ASX:360) and logistics software provider WiseTech Global (ASX:WTC) .

“Improving transport and logistic efficiency is a good thing, especially given the carbon emissions and waste from that sector,” Mirchandani says.

Wisetech has its well-aired governance issues around the conduct of founder Richard White – which flared again this week’s office raid by the Australian Federal Police and the Australian Securities and Investments Commission.

Mirchandani reasons that if you’re outside the tent, you can’t push the board to lift a company’s game.

“While this week’s revelations are disappointing, we have accounted for governance risks in our valuation,” Mirchandani says.

“Provided the expected returns remain sufficient, we continue to see merit in staying invested in Wisetech.”

He adds: “With everything in life nothing’s perfect – and there are tradeoffs.”

The next Amazon?

Mirchandani says the US-focused Life 360 is still in its “monetisation infancy” and could emulate the growth of Amazon.

As the company’s subscriber numbers grow, it can use this platform to expand into revenue areas such as advertising.

“Because they already have their distribution in place, their profit margins are incredibly high.”

The owner of Canberra data centres (DCs), Infratil (ASX:IFT) is well placed to deal with sensitive government information.

ELM is also invested in Microsoft and the obscure Iren, which listed here before migrating to the US.

“We are seeing incredible demand [for AI driven DC capacity] and in Australia I expect we will see that level of enthusiasm shortly,” Mirchandani says.

As with all active funds, ELM won’t get all of its calls right.

The firm liked Afterpay owner Block, Inc (ASX:XYZ) as the next big thing in banking, but the sector has proved more competitive than expected.

Like that exotic background creeper, sometimes the weeds look like flowers.