Results for the year to 30 September 2023
Over the year to 30 September 2023, the Company’s net asset value per share (NAV) total return was 7.0% compared to a total return of 11.0% for the Comparative Index† (in sterling terms). The share price total return for the same period was 6.0% as the discount widened from 13.2% to 14.0%.
Past performance is not a guide to future performance. Total return information is sourced from Baillie Gifford/LSEG. See disclaimer at the end of this announcement. For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.
Keystone Positive Change Investment Trust plc (‘Keystone Positive Change’, ‘Keystone’ or ‘the Company’) aims to generate long term capital growth with the aim of the NAV total return exceeding that of the MSCI AC World Index in sterling terms by at least 2% per annum over rolling five year periods; and to contribute towards a more sustainable and inclusive world by investing in the equities of companies whose products or services make a positive social or environmental impact. The performance target stated is in no way guaranteed. Capital growth takes priority over income and dividends. Keystone is managed by Baillie Gifford & Co, an independent fund management group, which has around £217 billion under management and advice.
Keystone is a listed UK company. The value of its shares and any income from them can fall as well as rise and investors may not get back the amount invested. The Company is listed on the London Stock Exchange and is not authorised or regulated by the Financial Conduct Authority. You can find up to date performance information about Keystone at keystonepositivechange.com‡. Past performance is not a guide to future performance.
† The MSCI All Country World Index (in sterling terms) is the principal index against which performance is measured.
‡ Neither the contents of the Managers’ website nor the contents of any website accessible from hyperlinks on the Managers’ website (or any other website) is incorporated into, or forms part of, this announcement.
28 November 2023
For further information please contact:
Alex Blake, Baillie Gifford & Co – Tel: +44 (0)131 275 2000
Jonathan Atkins, Four Communications – Tel: +44 (0)203 920 0555 or 07872 495396
Nathan Brown or Matt Goss, Deutsche Numis – Tel: +44 (0)20 7260 1000
The following is the Preliminary Results Announcement for the year to 30 September 2023 which was approved by the Board on 27 November 2023.
Chair’s statement
Keystone Positive Change Investment Trust plc (‘Keystone Positive Change’, ‘Keystone’ or ‘the Company’) has two objectives of equal importance: to generate attractive long-term capital returns and to contribute towards a more sustainable and inclusive world by investing in companies whose products or services make a positive social or environmental impact. The Positive Change team has an investment horizon of five years and beyond to allow these structural themes to play out.
Performance
Over the year to 30 September 2023, the Company’s net asset value (‘NAV’) total return was +7.0% compared to +11.0% for its benchmark, the MSCI All Country World Index (in sterling terms). While it was encouraging that companies in the portfolio generally outperformed the index in terms of revenue growth, this was offset by the detrimental impact of higher interest rates on the valuation of companies over the period. Further details on the main drivers of performance are contained in the Managers’ review on the following pages.
The share price total return was +6.0%, as the discount widened slightly from 13.2% to 14.0%. Over the same period, the average discount of the Global Equity investment company sector (as defined by Deutsche Numis) widened from 9.8% to 14.5%.
Discount
The Board continues to evaluate the range of options at its disposal to address, where possible, the discount at which the Company’s shares trade relative to its NAV. The Board does not consider that buying back shares during periods when market sentiment is universally negative will necessarily improve the Company’s rating. It has the effect of shrinking the asset base which will also increase the Company’s ongoing charges ratio. That notwithstanding, the Board recognises that buying the Company’s shares at a discount is accretive to its NAV and may provide short-term liquidity when natural market buyers are in short supply. The Company has the power to buy back its own shares and will do so when the Board considers that such activity will benefit ongoing shareholders.
The Board retains conviction in the Positive Change strategy but recognises that shareholder returns have been disappointing since shareholders approved the change to the Company’s strategy in February 2021. The Board therefore commits that, at the annual general meeting (‘AGM’) in February 2027, being the AGM immediately following a period of five full financial years since the adoption of the Positive Change strategy, a Continuation Vote will be put to shareholders. Further details in relation to this proposal are set out below in the Outlook section.
Impact
The Company invests in listed and private companies that address a social or environmental challenge. Amid a backdrop of uncertainty, we continue to believe that investing for positive change is both important and full of opportunity. We aim to invest in exceptional companies whose products, services and behaviour generate meaningful improvements. Companies held in the portfolio must be positioned to make a significant contribution to solutions in one of four impact areas:
– Social inclusion and education;
– Environment and resource needs;
– Healthcare and quality of life; and
– Base of the pyramid (addressing the needs of the poorest four billion people in the world).
For a company to merit inclusion in the portfolio, it must meet both the anticipated financial return hurdle and the impact criteria. Further details of the Managers’ approach are provided on the following pages.
Two senior impact analysts form part of the investment decision-making team, with additional impact analysts providing support. Senior impact analyst Apricot Wilson joined in June 2023 replacing Michelle O’Keeffe who left Baillie Gifford to pursue a PhD. Apricot is a CFA Charterholder and holds an MBA from the China Europe International Business School in Shanghai. Prior to joining Baillie Gifford in 2022, Apricot worked for Investing for Development SICAV, a Luxembourg-based blended fund focused on development finance.
In August 2023, the Company published its second Impact Report, monitoring and measuring the impact that the products and services provided by companies within the portfolio are having on society and the environment. The Impact Report is available on the Company’s website, together with its companion document Positive Conversations, which outlines engagement on investee companies’ business practices.
Gearing
The Company started the financial year with net gearing of 10.6%, having drawn down £15 million of a £25 million multi-currency revolving credit facility provided by The Royal Bank of Scotland International Limited. At 30 September 2023, net gearing stood at 10.1%, with the only adjustments to drawings being currency rebalancing on the US$ tranche. The Company is expected to continue to maintain a modest level of structural gearing, which should enhance shareholder returns over the long term.
Costs
Under the current management arrangements, the annual management fee is 0.70% on the first £100 million of market capitalisation, 0.65% on the next £150 million of market capitalisation and 0.55% on the remaining market capitalisation. As the fee is calculated on market capitalisation, the Managers receive a smaller fee when the Company’s shares are trading at a discount to NAV than they would if the fee was charged on net assets. The fee is also structured so that, as the Company grows, the annual management fee will reduce towards the marginal rate of 0.55%.
Ongoing charges for the year to 30 September 2023 were 0.90% (2022 – 0.90%).
Dividend
The Company’s capital growth-focused portfolio is not expected to generate a significant or regular income stream. Dividends will be paid only to the extent needed to maintain the Company’s investment trust status. In accordance with the dividend policy, the Board is recommending a final dividend of 0.45p per share (2022 – 0.40p per share). This will be proposed for shareholders’ approval at the AGM to be held on 1 February 2024 and, if approved, will be paid on 8 February 2024 to shareholders on the register at close of business on 12 January 2024.
The Board
The Board is cognisant of good corporate governance practice and, as part of the normal process of refreshment, Ian Armfield will not seek re-election to the Board at the AGM to be held in 2025. The Board has commenced a recruitment process seeking to appoint an additional independent non-executive Director who will undertake the role of Audit Committee Chair following Ian’s retirement. An independent consultant will be appointed to assist the Board and we will keep shareholders updated as the recruitment process progresses.
The Company is compliant with the FCA’s gender representation requirements on company boards, which target that at least 40% of directors will be women and at least one of the senior positions on each board will be held by a woman. The recruitment process in 2022 had a shortlist that comprised 50% women and 33% candidates of a non-white ethnic background. Although Andrew Fleming was the strongest candidate on that occasion, the Board remains alert to the value of including diverse viewpoints to strengthen the Board.
During the year, Katrina Hart was appointed as the Company’s Senior Independent Director (‘SID’).
Annual General Meeting
We anticipate welcoming shareholders to the AGM in London on 1 February 2024, at The Conduit in Covent Garden. This venue was selected as aligning with the Company’s ambition to drive positive change, and in the hope of inspiring broader shareholder engagement. To ensure shareholder votes are fairly represented, the Board has decided to hold the voting on a poll, rather than on a show of hands as has previously been customary. I therefore ask shareholders to submit their proxy votes before the applicable deadline on 30 January 2024. This will not prevent you from submitting a polling card on the day but will ensure that your votes are counted should you be unable to attend. Any changes to the AGM arrangements will be announced to the London Stock Exchange regulatory news service and made available at keystonepositivechange.com.
If you hold shares through a share platform or other nominee, we would encourage you to contact these organisations directly as soon as possible to arrange for you to submit votes in advance of the AGM. Alternatively, the Association of Investment Companies’ (‘AIC’) website www.theaic.co.uk/how-to-vote-your-shares has information on how to vote your shares if you hold them via one of the major platforms. The following link will also take you through to the AIC website where there is information on how your platform can help you attend the AGM in person www.theaic.co.uk/aic/ready-to-invest/shareholder-voting/attending-an-agm.
Outlook
When considering the change of strategy, in late 2020, the Board chose a global strategy investing in listed and private companies with a clear impact objective that would allow shareholders to access strong returns while investing in the social and environmental health of the world in which they live. The Board is sensitive to the tides of market sentiment, which flowed towards ‘green’ investments and now appear to be in retreat. While environmental, social and governance (‘ESG’) concerns are obviously given due weight in the Company’s approach both to investing in and engaging with the companies held in the portfolio, we are keen to emphasise that Keystone’s ambition is more tangible than ‘do least harm’ and strives to ‘do most good’ – prioritising active pursuit of positive change over passive screening of negative influences. In doing this, the Company will continue to seek leading technologies addressing difficult areas. We accept that individual company outcomes will be mixed, but financial returns from the successes should be several multiples of the losses from those that fail, and society as a whole cannot afford to lose out on the solutions those successes will deliver.
The Board retains conviction in the Positive Change strategy and believes it should be accessible within a closed-ended structure, which enables the Managers to invest primary capital in private companies, to invest in less liquid public companies and to utilise gearing. Given that the Positive Change team has an investment horizon of five years and beyond, we believe it is appropriate to conduct a fundamental review of financial performance over a similar time horizon and assess the success and viability of the strategy at that point. The Baillie Gifford Positive Change open-ended fund remains a top performing fund over five years. However, we recognise that Keystone’s shareholder returns have been disappointing since shareholders approved the change to the Company’s strategy almost three years ago. Considering the underperformance, the share price discount and a five year investment time horizon, the Board commits that at the AGM in February 2027, being the AGM immediately following a period of five full financial years since the adoption of the Positive Change strategy, a Continuation Vote will be put to shareholders. If, at that time, shareholders decide not to support the Company’s continuation, we will consult with shareholders and propose an outcome that we believe to be in the best interests of shareholders as a whole, which will include a return of capital at close to NAV.
Karen Brade
Chair
27 November 2023
Past performance is not a guide to future performance. Total return information is sourced from Baillie Gifford/LSEG. See disclaimer at the end of this announcement. For a definition of terms used see Glossary of Terms and Alternative Performance Measures at the end of this announcement.
Managers’ review
Philosophy
In a world where ageing populations, increasing geopolitical tensions and rising protectionism present challenges to economic growth, seeking out industries that are vital for the transition to a sustainable and inclusive future should be a fruitful way to search for growth. For example, to combat climate change, we need to rapidly build out renewable energy capacity, invest in the grid and commercialise a range of technologies that can help to decarbonise industries. According to Bloomberg New Energy Finance, investments in renewable energy reached US$358 billion in the first half of 2023, a 22% increase from the same period last year and yet to keep global warming well below 2°C, the world needs to invest more than US$8 trillion in renewable energy between 2023 and 2030, or US$1 trillion per year1. Decarbonising industries also present significant opportunities. Wood Mackenzie estimates that decarbonising iron and steel production alone will require US$1.4 trillion of investment2.
Education is another good example. With technologies such as AI and automation impacting the economy, the need for training and upskilling is increasing. According to Morgan Stanley, the global higher education and lifelong learning market is expected to exceed US$3 trillion by 20303. In healthcare, innovations are improving treatments for noncommunicable diseases, which are increasing in prevalence owing to an ageing population and better diagnosis. The global oncology market is expected to reach US$250 billion by 20244. Not all industries are conducive to profitable growth, given that the level of entry barriers and technology differentiation will vary. However, we are confident that valuable companies will emerge from some of these areas. Focusing on companies that have defendable business models should increase our chance of delivering superior long-term investment returns.
Performance
Over the past twelve months, the Company’s NAV total return was 7.0% and the share price total return was 6.0%. In comparison, the benchmark MSCI All Country World Index returned 11.0% (in sterling terms). The underperformance is disappointing, but we continue to focus on the long term and believe a period of five years is the appropriate time horizon to judge our performance.
Although many companies in the portfolio demonstrated strong operating performance over the period, this was not always reflected in their share prices. Over the past twelve months, the median revenue growth of portfolio holdings was 14.3%, compared to 11.3% for the benchmark. More importantly, we believe companies in the portfolio are well-positioned to deliver attractive levels of growth in the future.
Shopify is a platform that makes it easy for merchants of all sizes to sell online. The company provides a range of services, including online storefronts, payment processing and financing. Shopify has a strong competitive position and has been gaining market share. In 2022, merchants on Shopify recorded Gross Merchandise Value (‘GMV’) of US$197 billion. Despite its size, Shopify continued to grow at a healthy pace. In the most recent quarter, GMV grew by 17% year-over-year and revenue grew by 31%. Over the past year, Shopify was our largest positive contributor to performance.
Remitly is a mobile remittance company. Compared to offline remittance services provided by incumbents such as Western Union, mobile remittance is cheaper and faster. The cost of sending remittance payments with Remitly is roughly half of that of Western Union, ensuring more of migrant workers’ hard-earned income goes to their family and friends. This is especially impactful as 75% of remittance goes towards essential goods and services, including food, rent, and healthcare. Because of the advantages of mobile remittance and Remitly’s strong execution, the company has grown revenue by at least 40% year-over-year since its IPO in 2021. Furthermore, there are signs that the competitive advantage is strengthening. Remitly’s gross margin has expanded by 8 percentage points over the past two years as the company has benefited from economies of scale and lower fraud losses. Remitly currently serves 5 million active customers and has processed US$34 billion of remittance payments over the past 12 months. In comparison, there are 270 million international migrants and the global remittance flow to low- and middle-income countries exceeds US$600 billion annually, which offers significant growth ahead. Over the past year, Remitly was our second-largest positive contributor to performance.
MercadoLibre is Latin America’s largest ecommerce company and a major financial technology (‘FinTech’) business. MercadoLibre helps Latin America’s merchants to reach more customers by selling online and its FinTech products help to improve access to finance, especially for low-income consumers who have historically been underserved by incumbent banks. In the most recent quarter, MercadoLibre’s revenue grew by 31% and its operating margin reached 16%. This continued a strong run of long-term performance. In an environment of higher interest rates, aggressive competitors such as Shopee have started pulling back to conserve capital, which has allowed MercadoLibre to exploit its competitive advantages to gain market share. MercadoLibre was our third-largest positive contributor to performance over the past year.
In addition to the top contributors, several other holdings have shown good operating progress. Duolingo, the developer of the popular language learning app, saw monthly active users increasing 43% year-over-year and revenue growing 47% in FY2022. Dexcom, the maker of continuous glucose monitoring devices, achieved revenue growth of 19% year-over-year and its operating margin reached 13% in FY2022. Coursera, the online education platform, added 21 million new registered learners in FY2022, helping to support an annual revenue growth of 26%. Climeworks, a carbon removal company, announced that the US Department of Energy had selected its applications for direct air capture hubs for grant negotiation, with the largest project eligible for funding of up to US$600 million.
While many portfolio holdings have demonstrated pleasing operating progress, a few companies have experienced more challenges.
Safaricom provides telecommunication and mobile money services in Kenya and has recently expanded into neighbouring Ethiopia. The investment in Ethiopia has hit near-term profits and Kenya’s macroeconomic challenges have resulted in a depreciation of the country’s currency. In these tough conditions, Safaricom still grew its revenues, especially for its mobile money service, M-Pesa, which demonstrated the resilience of the business and its importance to customers. Nevertheless, Safaricom’s share price declined significantly in sterling terms. Safaricom was our largest detractor from performance last year.
Ørsted, the Danish renewable energy company, faced challenging operating conditions in the offshore wind industry, especially in the US, where inflation, higher interest rates and supply chain disruption resulted in some projects becoming less valuable than before. While the challenges were not unique to Ørsted – other developers pulled back or exited projects – the impact was more noticeable on Ørsted, given its higher exposure to the offshore wind industry. The company recently flagged up a likely impairment on its US assets. While we are confident in the long-term growth of the renewable energy sector, we are reviewing whether the industry structure still supports profitable growth. Ørsted was our second-largest detractor from performance over the past year.
Illumina, the maker of genetic sequencing equipment, saw revenue growth stagnating in FY2022. In addition, the company’s acquisition of Grail received legal and regulatory scrutiny while the board and management team faced pressure from activist shareholders, which resulted in the departures of the company’s chairman and CEO. While we are still confident in the long-term growth opportunities for gene sequencing, we are closely monitoring the developments at Illumina. We are also researching other companies in the genomics industry to help us understand Illumina’s competitive position. Over the past twelve months, Illumina was our third-largest detractor.
Portfolio
During the past twelve months, the Company invested in six new companies. The purchases of Autodesk, Remitly and HDFC were discussed in the Interim Report. In addition, we invested in Boston Metal, WuXi Biologics and Daikin Industries. The latter was sold after the reporting period end in response to new information that we received.
Boston Electrometallurgical Corporation (‘Boston Metal’) is a private company commercialising a novel technology for producing green steel. Whereas many other technologies for decarbonising steel production, such as carbon capture and storage (‘CCS’) and green hydrogen, are likely to increase the cost of steel production, Boston Metal’s technology, based on direct electrolysis, could produce cost-competitive steel as it removes the need for chemical reductants and is able to use low-grade iron ores.
There are still technology (scaling up inert anode) and execution risks, but the potential impact and financial returns could be very high if Boston Metal succeeds. Boston Metal’s technology can also recover high-value metal from mining waste. The company has constructed the first facility for high-value metal recovery in Brazil and is starting pilot production.
Boston Metal is a good example of the opportunities that exist within private markets, which the investment trust structure is well-positioned to support.
WuXi Biologics is a Chinese contract research, development and manufacturing organisation focusing on biologics drugs, listed on the Hong Kong stock exchange. It caters to small biotech and large pharma companies and provides services from drug discovery to commercial manufacturing. By leveraging its scale and expertise, WuXi Biologics helps to save time and costs in drug research, development, and manufacturing. This is particularly valuable for biotech companies, which are often less well-capitalised compared to large pharma companies. As a result, WuXi Biologics helps to support innovation and competition in the pharmaceutical market. Between 2017 and 2022, WuXi Biologics’ revenue compounded at 57% per year and its operating profit margin rose from 21% to 36%. The company benefits from favourable access to talent, a differentiated business model and investment in manufacturing processes. The uncertainties with the investment case include geopolitical tensions, the cyclicality of the industry and whether the labour advantage could diminish over time as wages rise in China and WuXi Biologics expands abroad. We will continue to monitor those areas. However, given the significant growth opportunity, strong management track record and attractive valuation, we believe the company deserves a place in the portfolio.
Daikin Industries has a leading position in the heating, ventilation and air conditioning industry (‘HVAC’). We were encouraged by Daikin’s innovation and environmental leadership in air conditioning and also its growing heat pump business. Before purchasing the stock, we recognised that Daikin derived less than 1% revenue from the defence industry and we asked the company about its exposures. We were satisfied with the information provided and purchased the stock. Subsequently, we were notified that Daikin is involved in the production of white phosphorous smoke bombs for the Japanese Ministry of Defence for training purposes. White phosphorus can have controversial use cases so we undertook further research and engagement. Having carefully considered the activities of the company, we decided to sell our holding post year-end.
The Company sold five companies over the past twelve months. In addition to the sale of Berkeley Lights, which was discussed in the Interim Report, we sold Nibe Industrier, FDM, Peloton Interactive,and Teladoc.
Nibe Industrier is a manufacturer of heat pumps, stoves and elements. It has enjoyed strong share price performance over recent years and is the second top contributor to performance since the take-on of Keystone. The outlook for the adoption of heat pumps is favourable owing to growing awareness of the need to transition heating systems away from fossil fuels and the supportive regulatory backdrop. However, looking forward, despite Nibe’s admirable track record and the runway for growth, our analysis points towards a more competitive environment and we feel that at the current valuation it will be more challenging for the company to meet our return hurdle over the coming years. Therefore, we have sold the shares and redeployed capital into companies where we have higher conviction.
FDM recruits, trains and provides career opportunities to graduates, ex-forces personnel and returners-to-work, placing them with clients who require IT expertise. It is proving more challenging for the company to unlock growth than we had initially expected. It is taking longer for potential customers to appreciate FDM’s offering and the company appears more vulnerable to external events than anticipated. Another consideration in our decision is the succession risk. Overall, we believe that FDM’s ability to drive positive change by providing jobs that enable upward social mobility will be more limited and growth will be harder to realise.
Peloton Interactive sells at-home exercise equipment and digital content. We believe the long-term opportunity in digital fitness remains exciting and the company can maintain market leadership. However, the previous management team at Peloton made execution missteps against a difficult operating backdrop, elevating the cost base and making the company’s financial characteristics increasingly unattractive. While the new management team has made admirable progress in recapitalising the business and reducing the rate of cash burn, we believe growth and cash management will be at odds for the foreseeable future.
Teladoc provides virtual healthcare services. Virtual care has great potential to bring efficiency, cost savings and a better quality of care to all parties in the system, from patients and payers to providers. During the Covid-19 pandemic, demand for virtual healthcare accelerated and benefited Teladoc. However, in more recent years, Teladoc has made underwhelming progress in growing its business. This is partly owing to increasing competition attracted by the growth of virtual healthcare and in part owing to the difficulties Teladoc faces in dealing with multiple stakeholders in a very complex system. Our confidence in management was also weakened after the US$6.6 billion impairment charge linked to its acquisition of chronic care management company Livongo in 2020. Overall, we no longer have sufficient conviction that Teladoc will meet our dual objectives over the long term.
Impact
We released the Keystone Positive Change Annual Impact Report in August, which can be found on our website. The report details the impact of the products and services of the portfolio holdings. Our thesis is that impact and investment go hand-in-hand, and the good operating progress for many holdings has been mirrored by their growing impact. For example, in 2022, MercadoLibre had 64.8 million unique users of its digital wallet and the company granted 5.2 million loans to sellers, of which 49% were women. Tesla delivered over 1.3 million electric vehicles and deployed 6.5 GWh of energy storage. Tesla’s products enabled customers to avoid emitting 13.4 million tonnes of CO2, up from 8.4 million tonnes in 2021. Dexcom’s continuous glucose monitoring devices helped 1.7 million people manage their diabetes more effectively.
The Impact Report also provides aggregate data at a portfolio level and maps the portfolio to the United Nations Sustainable Development Goals.
Outlook
In the past year, members of the Positive Change team have been on investment trips to the US, China, India and Europe. We have a rich research pipeline that spans: AI in healthcare; genomics; energy transition; circular economy; and sustainable agriculture. We believe those areas will present exciting investment opportunities over the coming years and decades.
Over the past twelve months, many of the portfolio companies have demonstrated strong revenue and profit growth. However, share prices have yet to appreciate in tandem, as rising interest rates have put growth stocks out of favour with the market. Once global interest rates are on a more stable trajectory, long-term investment returns should be driven primarily by profit and cash flow growth. The transition towards a more sustainable and inclusive future will present large growth opportunities for purpose-driven companies. By investing in a subset of them with outstanding management teams and the potential to build durable competitive advantages, we continue to believe that the Company can generate attractive long-term investment returns for its shareholders and contribute towards a better future.
Kate Fox
Lee Qian
27 November 2023