Ilaria Calabresi hosts a timely discussion on the sustainable investing landscape. Will this crisis reinforce the shift to sustainable investing? What are the related investment opportunities?
SUSTAINABLE INVESTING: WHAT ARE THE OPPORTUNITIES IN A POST COVID-19 WORLD?
Good afternoon and good evening to all of you with us today. On behalf of my partners, Ricardo - who runs our Italian business, Mateo - our Swiss business, Jorge - at Spain and Tara - the Middle East. Thank you for joining us today for our European webinar on 'Sustainable Investing: What Are the Opportunities in a post COVID-19 World?'
My name is Oliver Gregson, I'm the Head of the Private Bank for the UK, but I'm joining you today under the guise as co-lead of our Sustainable Investing Vision at the International Private Bank. And really, I could not be more excited today than to join you to talk about a subject which is something of a personal passion. As a member of the UK Finance Sustainable Committee and WEF's Sustainable Market Council I'm absolutely convinced that sustainability and ESG in its most widest sense is absolutely the most pressing issue of our times.
But let me first pause and start by recognising the difficulty that the past several months have caused us. Beyond the historic market volatility the personal nature of COVID has affected us all, I'm sure, in one way or another, so sincerely on behalf of everyone at J.P. Morgan I do hope you are all well and your families are safe.
As a firm we take our responsibilities with regards to COVID extremely seriously and are very conscious that we play our part in behind there and being part of the solution and we've been hugely proactive in our response. 45 billion in new loans provided to clients who have been most impacted by this globally. We issued a billion in new loans for small business clients in the first 60 days of the crisis. We've contributed over 30 billion to 250,000 businesses via various global support schemes. Our pre-eminent investment banking franchise has absolutely been at the vanguard in helping public and private companies access capital, well over a trillion dollars of issuance in the capital markets. And from our perspective, from our own balance sheet, over 250 million to help under-served small businesses, non-profit partners and philanthropic organisations deal with the impact of this awful pandemic.
At its core, COVID-19, the COVID-19 recession and impact is a health and societal crisis, but as the dust settles and the broader ripple effects are starting to become clear, there is really a multitude of factors that are being amplified by this pandemic which are combining, we think, to drive sustainability to, frankly, become the "new normal", with the "E" of ESG, that's Environmental, Social and Governance now being supported very much by the "S" and the "G", and they're concomitant and really exciting investment opportunities.
You really don't have to look very far to see this manifesting itself right now in the world around us, whether that's in the reaction to COVID in Canada, in part requiring disclosure for all companies leveraging the TSFD framework or, for example, closer to home in France, with the requirements that France placed on the bailout of Air France, KLM around their sustainability. Or, indeed, in the UK with Project Birch, which is going to look to require companies to behave, act and address a wide range of sustainability needs if they take any form of government and policy support.
It's clear for some time that the signs on this has become unequivocal, but now the policy, regularity and legal agenda is very much starting to catch up, and the EU is placing this right at the centre of their COVID response and their post COVID agenda and planning. I would go so far as to say you cannot be a long term investor without doing so through an ESG lens. And I think, quite frankly, in 10 years time you won't call it sustainable investing, it'll just be the way that things are done.
So I'm delighted to be joined today by Ilaria Calabresi. Ilaria is our sustainable investing lead for EMIR. She's going to moderate the conversation between two fantastic partners who are joining us today - Mark Hempstead of Head of Alternatives for EMIR. Mark is active right now on raising a really fascinating ecosystem private equity opportunity, and Lance who is our Senior Portfolio Manager and Head of our Sustainable Equity Strategy and our Sustainable Fixed Income Strategy, and has delivered nearly 400 basis points of out-performance on the equity strategy since inception.
But before I do hand over, I did just want to touch on a couple of things. Firstly, slide 3, please, Mohesh.
This is such an opportunity that we are going to make this very much a campaign. Many of you will have joined us for the inaugural Sustainable Investing Summit we hosted in London last year, joined by the likes of Mark Carney and many others. And we're going to replicate that, but in a virtual format in September and October. Some dates are on the slide in front of you, so please watch out for invites to that. Or, indeed, if you are interested please do reach out to your relationship manager.
But just before I hand over to Ilaria to get the conversation going it would be remiss of me, frankly, not to just cover what the firm is doing, particularly around diversity and sustainability.
So if we could just please quickly go to the Diversity slide on slide 6, and I think this is really important in the context of what is happening in cities across America and across the world in reaction to the murder of George Floyd. We take this really importantly, and you can see here what the firm is doing around diversity and inclusion, women, LGBT and veterans. And I just want to call out a few things because I think we're very proud of some of the steps that we've taken.
50% of the firms operating committee, that's Jamie Dimon's direct reports are women. 25% of our senior leadership are women, and nearly half of all our employees are women. The 'Women on the Move' initiative is also close to extending 10 billion in credit by the end of 2021 to female-led and female-owned companies. In terms of diversity and inclusion, again, some significant commitments that we have made both in response to recent events and in providing pathways for our employees and colleagues in advancing black pathways and advancing black leadership.
And then, equally, LGBT and veterans. In terms of sustainability just let me briefly touch on slide 7. I think it's important to start by saying that as a function of our size, our energy and our transportation portfolio there is much more as an organisation that we have to do. We have consciously taken the decision that divestment is not the right solution. We want to sit at the table, we want to play a part in helping accelerate the transition and guiding people to do so in a fair and just way as the Paris Accord obliges.
But we are also the world's biggest green bank. In 2017, we committed to deliver 200 billion in clean and renewable financing by 2025 and to source 100% of our own global energy needs from renewal sources by the end of 2020.
I'm really pleased to share with you all that both of these will have been met by the end of 2020. And now the firm is extending additional steps to address climate change and further promote sustainable development, and I want to highlight some of these just before I close.
Firstly, we've committed 200 billion, another for transactions that support Climate Action and the UN Sustainable Developments Goals by the end of 2020. We've joined something called the Climate Leadership Council, which calls for a revenue neutral carbon tax and dividend framework in the US. We've created our own development finance institution focused on scaling up finance for developing countries with over 100 billion a year committed. We've established an ESG solutions group to advise clients on reducing their carbon emissions. A new energy transition team to provide strategic and financial advice to corporate clients to support their carbon optimisation projects.
We've also expanded a whole host of financing restrictions, and I think these are important. No longer providing lending, capital markets or advisory services to companies mainly involved in coal, with a commitment to phase out existing exposure by '24. Not providing project finance or other forms of asset specific financing for coal power. And no project or asset specific financing for the Arctic. And lastly, we've also importantly signed the Climate Action 100 group to contribute over 2 trillion in our AUM to enhance stewardship, voting and company engagement.
This is not the end though. This really is the start of something and there's going to be more that we will share with you over the coming months.
And so really to close, there is more that we need to do, but I think it's an exciting time. And so to help tell you how you can get involved in what we see as one of the biggest megatrends and biggest investment opportunities, I'm going to hand over to Ilaria to moderate the conversation.
Ilaria, thanks so much. Over to you.
Great. Thank you, Oliver. And good afternoon everyone. I'm very excited today to be joined by Mark and Lance, two experts in the sustainable investing field. And what we plan on doing today is discussing some of the trends that we've been seeing in the sustainable investing market, as well as the implications that we'll see on this market from the COVID crisis, as Oliver was alluding to.
We'll also go through some of the key ways to capitalise on these trends, both in the public as well as private markets.
So if I start maybe giving everyone a reminder of what sustainable investing is as a broader term. We effectively define sustainable investment as those investments that include environmental and social considerations alongside the financial return objective. And there are many different ways to approach sustainable investing and how we define this within the private bank is in four ways. First of all, exclusionary screening, and this is typically where investors who started to tap space many years ago started. And it means excluding certain types of stock so, for example, tobacco or weapons from an investment portfolio. There's an ESG integration which has become much more popular in the past few years, which means integrating ESG, environmental, social and governance considerations into portfolio analysis.
And so Lance, who's here today, manages two ESG driven multi manager portfolios. There's then thematic investing so, for example, investing in targeted certain areas such as the environment. And finally, impact investing, which really means investing with the intent of creating a social or environmental impact alongside seeking a return.
And if we think about it really this is often very well accessed in the private markets, and so we'll have here today Mark discussing some opportunities in this space.
So if we start focusing on some of the trends that I was referring to that we've seen in this market. So first of all, I'd say that we believe that sustainability and sustainable investing are not simply trends that will be here for a few years and then ago away. We actually refer to these as the new normal. And so what do we mean by this? We mean, as Oliver was saying before, we strongly believe that today you can't be a long term investor without integrating ESG considerations into investment analysis.
And so I think it's important to understand some of the drivers behind sustainable investing, and what has really been driving capital and interest towards this space.
So first of all, I'd say if you think about it, and many of you must have been reading and hearing about this macro trend, so things such as population growth and climate change, which are very relevant today. On top of this I would say performance, and this is something that we'll go through in a few minutes, but I'd really like to call your attention to because in the past what investors believed was that in order to invest sustainably one had to forego some returns, and this is absolutely not the case.
And then I'd also mention regulators, as Oliver was just saying. Definitely the regulatory attention has been driving more and more interest and focus on this space.
And finally, institutional investors. So if you think about it, institutional investors are definitely not new to this space, they've been here for decades, but definitely they've accelerated the move and transition to sustainable investing over the last few years, allocating big amounts to capital, and also becoming much more vocal about it.
And so, as I said, it's not surprising to see the assets in the space grow exponentially, and so from 2016 to 2018 we saw assets in the sustainable investing space jump 34%, reaching over $30 trillion. Our own investment bank also predicts that by the end of this year, 2020, these will reach $45 trillion. So really a growth that is definitely exploding.
And what we'd like to do today, as Oliver was alluding to, is go through some of the implication that COVID will have, and definitely one of the things that we have observed is the increase in interest for ESG considerations and ESG investing. And we think this is particularly timely because of the fact that this crisis has really created some ripple effects on many different stakeholders. And so as we were discussing regulators, for example, they were focused on the space before, they're going to be much more focused today and we've been hearing this in many of the things that Oliver was mentioning.
And so on this slide I'd like to call out something that I think I was talking about the assets, but also it's pleasing to see that this year, despite the crisis, despite the draw down in markets, on slide 12, you've seen that actually investors have been drawn to the sustainable investing space. In fact, over the first quarter of this year we saw $45 billion flow into sustainable investing funds, and this is compared to the 390 billion that we saw flowing out. So as you can see on the chart, a big slump when markets were drawing down from outflows from traditional funds, and continuously positive flows into sustainable ETFs and funds.
So Lance, at this point I'd like to involve you in the conversation and really ask you about your observations on the implications of the COVID crisis and what this will mean for the sustainable investing market. And in your role, Lance, you're very close to managers as well as to watching companies, so can you shed a bit of light on what you believe the companies that will be successful over a longer term are doing right now and what they're doing well.
Oliver, first of all, that was a fantastic introduction. And Ilaria, thank you for your comments as well, and I want to thank all the clients and prospects joining today also.
Let me start off with a survey that our investment bank recently did as it related to ESG investing, and they determined through the survey that more than half of investors think post COVID-19 that this will reinforce the shift to ESG investing. And our investment bank is one of the many investments banks that are out there that are doing a tremendous amount of research into this space, and producing really, quite frankly, just a ton of content which is in my sense certainly reinforcing the longevity of this trend, as Oliver and Ilaria both described, as a megatrend.
Additionally, I want to talk about the UNPRI, which is the principle for responsible investing. They are the world's leading proponent of responsible investing. And I listened to the CEO of that organisation speak recently and she pointed out that through this COVID crisis they had the biggest up-tick in asset managers reaching out to them to rely upon their resources to really kind of understand from the PRI's perspective the best ways to be engaging with companies themselves. Again, very clear evidence that the trillions of dollars of signatories that are following the UNPRI are very engaged today in thinking more broadly beyond just the "G" and the "E", but really very much focused on a lot of the "S" issues, including issues of safety.
And I also want to kind of lastly say that from my perspective governance has always been an important aspect of what investment managers consider when they are making investment related decisions. [INTERRUPTION PHONE RINGS]
But more recently, at the beginning of this year, in particular 2019 and early 2020 when you had Davos, very clearly the environmental considerations have raised to the fore as the prominent issue that investors need to consider as investors consider both the transition issues, including a transition to a lower carbon economy as well as some of the physical risks associated with the environment, whether it be related to municipalities, considerations around floods, droughts, wild fires, et cetera.
But what we've seen with COVID is we've seen as opposed to social considerations move to the front seat and environmental considerations move to the back seat, you've seen social considerations join environmental considerations in the front seat.
And so, Ilaria, some of the observations that we've seen are some that certainly our clients have observed as well, key decisions that need to be made as it relates to furloughing employers, key decisions that need to be made adroitly to pay in general. We've observed across a number of issues whether it was a result of regulatory pressure or just really the companies themselves really being very proactive in doing things like suspending their employee buy-backs. All of these are happening real time and, quite frankly, COVID is not going to be a one-time event, this is going to be, in our opinion, something that companies need to really kind of consider on a go-forward basis.
Great. Thank you, Lance.
So greater connectivity between the "E", the "S" and the "G", and therefore the environment is not getting put back on a back seat.
So I think based on some of these things that we were discussing and some of the trends that we're seeing within sustainability more broadly I think two big ones stand out to me, being clean energy and the circular economy.
So clean energy, first of all, and this is something that's very close to my heart, this is where I started my career years ago, and I think I'm really excited about this space, and this is because it's very different from when I started in that space. And so why is this? If we think about it, over a decade ago renewable energies weren't cost competitive with traditional fossil fuels, and so it was very nice to have, but it was very challenging for investors. You needed an oil price of $140 for renewable energies to be cost competitive 10 years ago. Today, the costs have come down massively, by 70 to 90% over the past 10 years for wind and solar. And so really it's interesting to see this come and play out in the market.
And, in fact, last year for the European Union and this year for the US and the UK, wind and solar have surpassed coal as major sources of electricity generation. And so I think a big milestone. And I would say, why do we still think there's great opportunity, hasn't this already then happening, hasn't the ship sailed?
And I think it's important to consider that today less than 20% of electricity generated comes from renewables, so there's still massive opportunities. And in fact, there are estimates that by 2030, renewables will reach 40% of electricity generated, and by 2050 it will reach over 60%. So there's still a lot of opportunity for investors to look at the space, for sure.
On the other topics, circular economy, and this is something that maybe some of you are less familiar with, I'd say. Something that the European Union, for example, is very much focused on. And what is a circular economy? As opposed to a linear economy a circular economy is a model of consumption and production in which materials and products are reused, repaired, recycled, all these, to avoid creating great amount of pollutions and waste, and so to have a positive impact on the environment, and also obviously using renewable energies.
And so why is this beneficial, not only for the environmental impact, which seems clear, but also the benefits are really higher profitability and greater economic growth. And, in fact, the European Union, what I was just referring to, was a big plan around this, has actually done estimates that there will be greater cost savings for companies, as big as 600 billion euro of cost savings for companies, and over 580,000 jobs possibly created by stepping off to a circular economy.
And so again, why we see opportunity, because this is something that is still at very early stages. Just 9% of the global economy today is actually put on our circular model, and so we see a lot of upside here.
So Mark, I'd like to pull you into the conversation here, can you help us to understand how an investor today can look to capitalise on some of these themes, and really where do you think the greatest opportunities lie to do so.
Sure. Thank you. I would probably start out by saying that I think across the spectrum of potential investment opportunity the private markets or investing in individual private companies I think gives you the most direct way to invest in a lot of these themes that you've just mentioned. It's impact with intent investing. From all these different themes that you went through, different statistics, the fact that economics are now a catalyst to many of these opportunities, sustainability transformation, everything we've been talking about we think represents one of the single highest growth opportunities for investment today. This is happening across industries, it's happening in different sizes of companies, but the real innovation, the transformative growth that you're seeing is taking place in younger growing innovative companies. And these companies can become the next big thing in their own right. They could also become a major solution for larger corporations who are looking to become more sustainable over time. So in trying to achieve this positive measurable direct impact, private markets I think provide an extremely large opportunity.
Getting back to your direct question of where we think there's opportunities, the environment and the energy ecosystem I know there - I very much agree with Lance - that now a lot of the focus on social issues is coming more in line with the environment, but still think that it represents a significant opportunity for the long term.
When you look at this, innovation, technological advancements are usually the result of or a response to a challenge. You have a challenge and then you have an opportunity to figure out how to try to do something faster, more efficient, more cost effective, simply better overall. When you think about this in the concept of the environment we are faced with the challenge of satisfying growing populations and all of the increased consumer demands that come from that, and that has to be done against a world of finite natural resources and a continued over-dependence on the resources which continue to add to the problem.
And what is amazing in the world of private investments is how technology and scientific innovation is being used to address this challenge. So it's a long term shift, it is being driven by environmental necessity, but it's also being driven by economics and that's a big change.
So renewable energy, Ilaria, you showed that chart, solar, wind, hydro is now cheaper than coal and natural gas. You talked about the cost coming down. With that in mind it's not so much trying to find some new innovative or disruptive technology for solar, it's really about increasing that 20% number of the amount of energy that is powered by renewables today. So how it's how can technology, how can software be used to scale and increase adoption so that 20% number increases.
You have the future of transport, electric vehicles. It's not necessarily about trying to invest in Tesla or any future competitor, but how can you make charging more efficient, so more consumers adopt this? How can you look at electric vehicles being used in industrial or construction sites so they don't have to rely on large diesel combustible engines? So all of these are opportunity.
Agriculture for technology - this is a fascinating individual area for investment. We invested with a company last year that uses the confluence of technological and scientific innovation to grow plants using hydroponic farming, basically growing plants in skyscrapers. It uses less water, it reduces waste. It can be using non-toxic pesticides. It can be sustainable animal feed, which is a massive industry which today basically relies on cutting down forests to grow soy or over-fishing the oceans. So all different things that can be achieved through this innovation.
Circular economy is another one. We're looking at a company right now which has a post consumer recycled packaging company that is replacing Styrofoam. There are so many different opportunities within this space where actually, as Oliver mentioned, working with the fund right now that is focused on this broad environmental ecosystem.
And then I would also say that there are different opportunities. This is more of the social angle of increasing economic opportunity and reducing inequalities globally. And if you think of how you can solve some of the greatest problems that we have in the world today it is more of an access to basic healthcare and financial services, access to quality education.
At the end of last year less than half of the world had reliable access to the internet. If you can start to address some of these things at the base level using things like technology, software to help accelerate that growth these can be major changes. Impact investing is about finding interesting companies, supporting them and helping them grow so you open them up to the broader financial or capital market. So it's the multiplication impact of that original dollar, euro, pound that you're spending which can then grow and grow with further investment.
And it should be added in addition to Mark's points that these aren't just private companies, and obviously public companies as well, but also through the debt markets. There's been a big increase in bond issuance tied to achieving sustainable goals. And back to your earlier question, Ilaria, some of that is certainly tied to what we've seen as a result of COVID.
Ilaria, you might be on mute.
I'm happy to keep going, I've lots of ideas.
We're always happy to hear from you, Mark.
There are so many opportunities across the spectrum, and what is also interesting, and this is where public companies also come into play, is if you are a large corporation looking to make these transitions the private markets can be the main area which you can look to for strategic acquisition of different companies. So if you're looking to try to become more long term sustainable you can do that internally or you can look to the private markets and look to individual businesses that can help overall. A utility company buying software to help better manage their electricity grid and to increase adoption of electric vehicles. A consumer brand that is taking on healthier consumer based products, just all different ways in which the public and private markets interplay together as well.
Ilaria, I think we have you back. Maybe we could bring in Lance a little and think about some of the ways that he and his investment process works and some of the performance that's delivered, if you're back with us.
Thank you, yes. I'm not sure why you couldn't hear me anymore. Yes, thank you Oliver.
If you can hear me now, Lance, I think something in particular I'd like to tag on, maybe we can go over your strategy within that, I think is addressing the myth of sustainable investing under performance. And I think in the past investors had always looked at sustainable investing strategies and thought that in order to invest sustainably they had to forego some returns. And we've seen a growing body of research actually show that this is not the case.
And in fact, if we can pull off slide 14 what I'd like to show here, and as I was saying, a growing body of research shows that by integrating ESG factors into investment analysis, investors may enhance portfolio endurance by reducing volatility and limiting draw downs.
And so as you can see here, what we've put on this chart is global sustainable equities versus traditional equities. And global sustainable equities have outperformed traditional equities by 80 basis points per annum with lower volatility since before the financial crisis. We've seen this out-performance actually continue this year.
So Lance, what I thought it would be helpful is to have you discuss some of this, in discussing your ESG multi manager equity portfolio. Your strategy has seen over 300 basis points of out-performance here today, so amazing results. Can you talk a little bit about how you've done this, what the portfolio's objectives are.
Great, Ilaria, yes. So whether it be the equity portfolio or the fixed income portfolio both of our strategies are a benchmark to traditional benchmarks. So in the case of the equity strategy we're using MSCI to measure our out-performance. And there are ESG benchmarks out there but the reality is that the industry standard is to compare yourself to a traditional benchmark.
In terms of the way we think about our strategy and the excess performance we've been able to generate thus far, I would just make a couple of points. 1) - when you look at our portfolio we very much believe in ESG leaders, and by that I mean companies that are showing to be, quite frankly, better than their industry peers in areas of either the "E", "S" or the "G". So "E" could be things like energy efficiency, "S" could be things like safety or how you're dealing with suppliers, and the "G" could be whether it be accounting or traditional measures of other forms of governance, such as the composition of the board of directors and what not.
That emphasis in investment has often resulted in the businesses that you own being of a higher quality. And you can measure quality by metrics such as profitability, think return on equity, return on assets or it could be terms of lower levels of leverage. Those attributes which investors like myself often refer to as factors have been beneficial in and of themselves as measures of quality have out-performed the broader market here today.
Additionally, where you fish certainly matters in your ability to, quite frankly, catch fish. And so we have a couple of considerations outside of ESG that lead us to be in higher weights and areas, like industrials or in higher weights and areas like technology, and we've been under weight areas such as energy. All of that from a sector position prospective has additionally been helpful this year.
But then there are very company specific issues, such as idiosyncratic risk, and we've had tremendous success in investment such Clorox, which has had tremendous demand for their product, sanitary wipes for your home. Companies like 3M have done very well, which is a major manufacturer of protective gear and masks. And it's not always what you own, but it's also what you avoid. And so our portfolio hasn't owned things, businesses such as Wells Fargo and Boeing, both of which have remained challenged in this environment.
Right. Thank you, Lance.
Just to bring it back to the product side, Mark, back to you. So we discussed some of the things that you've been observing in the product markets, but really if one were investing in sustainability in a product market for the first time how would you do this today?
Where we have been investing today is through funds, fund managers. There's obviously opportunity to invest directly into companies. We believe that the best way to invest, the most diversified approach is through fund managers. It's a significant opportunity [inaudible] but many of the opportunities are still younger companies, they're in a particular area of the market which requires a unique expertise to understand and that can mean higher risk. And so we have been focusing on doing extensive research and diligence on who we think are expert managers, operators, entrepreneurs themself who are investing in funds that then go out and try to find some of these individual portfolio companies.
We're partnering with a manager right now, which Oliver mentioned at the beginning. We've been tracking this team for 2 years. We are doing a diversified solution at the end of the year with six or eight fund managers. We met with more than 150 individual funds to get to that six to eight.
So while I have a lot of excitement about the potential within it's a disparate universe too, and you want to make sure that you're partnering with those that are still delivering you those premium financial returns, but also delivering on the impact side as well, because that's an area where there is a lot of dispersion in terms of how impact is measured and reported, and these are all crucial factors. I think that doing so via some of the smartest fund managers is the best way to do it.
I can see that Ilaria's been having great fun, everyone, with internet, the joys of working from home.
Can you hear me now? I think my internet is patchy, apologies, everyone.
So Mark, I was saying why don't you then give us an example of one of the companies that the manager will invest in. So you don't invest directly in companies, but the managers will do. And maybe if we pull up slide 17, which ties us back to some of the themes we were discussing, could we call out an example of a company as one of these?
Yeah, sure. There's many. Look at transportation. So we talked about the future of transport. You showed a chart earlier which talked about the potential increase in sales of electric vehicles. The fund that we're partnering with now looked at this and said okay, we look 10 years into the future and think there'll be more electric vehicles on the road, but then we look at consumer demand and don't feel that adoption has met that overall demand. So in research with consumers they found that it was because charging was a bit of a pain, there wasn't enough charging stations and infrastructure in local communities. And when they did more research they found out that utilities were actually ones that kind of pushed back a bit because they feared increasing the number of charging stations would overwhelm their local energy grids. So this manager tried to combat the solution. They went out and basically they found a software company which - I'm skipping through a lot of this or over-simplifying - but it helps to manage the charging demand across a utility grid, so it can take strain from one area and balance it out with another. It essentially avoids that problem that they thought would come of overwhelming the electricity grid. You clear that hurdle and now it allows for increased charging stations to be put in communities, increased adoption overall.
So that's one quick example, but it's taking the broad electric vehicles, which we know is a theme in the future, but then looking at a specific problem that is perhaps prohibiting or slowing growth in adoption and seeing how you can use technological innovation to address that.
Ilaria, when I look at this chart one of my immediate reactions is these things aren't necessarily mutually exclusive. When I think of renewable energy, efficiency and transportation there are certainly companies that are participating effectively in all that, and the managers who are making these investments are certainly considering that as a broader theme.
And when I think back to your question that you posed earlier, and I mentioned some of the sector relative bets that we have in the portfolio it's because...
I'm very sorry, Lance, to interrupt, maybe if we can go to slide 22 on that, so we can see how some of these are embedded in your portfolio, thank you.
Yeah, thank you. We certainly haven't raised this concept of a transition to a lower carbon economy. And if I think back to a portfolio I ran years ago, focused on emerging markets, we took this long term view that what you see in emerging markets was a growth of the emerging market consumer. The consumer sectors were at the time - this is 10 years ago now - very under-represented in the index. And I would say similarly you have a number of companies that are under-represented as it relates to their potential to providing solutions, whether revenue generating or cost savings, and the transition to a lower carbon economy.
So when we look at our portfolio we have more companies that have better sustainable impact than the board index, as we've made investments with managers such as Impax, as well as with Mirova that have more of a dedicated focus towards some of these themes. And examples would include companies like Schneider Electric or Waste Management or American Water Works to kind of name a few. Not that I'm endorsing those businesses, but those are examples of companies that the managers that we invest with have had investments in today.
Lance, I'd make one more comment, I know I'm jumping in, but I think the most striking thing about across public and private markets is we say this is not a trend, this is not a sector vertical of I can invest in sustainability or other sectors. This is a horizontal covering every single sector. It is a mobilisation of capital across industries and I think that is what is so promising and so exciting about trying to find investment opportunities as it can be from industrial to consumer products to healthcare, to technology, software, e-commerce. It really is seen across the spectrum and that's what it is so exciting about trying to find opportunities toady, because they are robust.
Great. Thank you, Mark.
I just want to be mindful of time. I was checking we had received a question from the line around the UN sustainable development goals. Mark, so I think this is more linked to you - how the UN sustainable development goals can be used as investors, especially in the private market, as an investment framework. And so maybe broadening this question, Mark, can you help us to understand how does investment opportunities that you were just talking about really create an impact and how one can measure, actually, the impact that is being created?
And maybe pop up slide 16, Mohesh.
So the UN sustainable development goals are a fantastic thing. I mean it sets the guide posts, it's the blueprint, it's the generally agreed consensus on what are the most important factors that we need to advance. It's also broad. It covers a number of different areas. So we've taken those and you can see a lot of these here and tried to segment them into tangible areas of potential investment. So climate solutions, the environment, that's one I talked about. Health and wellness that I think incorporates a lot of the food systems which is a massive issue and a massive, I guess, opportunity for improvement going forward. And then inclusive growth, that's financial services, that's quality education, gender equality, all these different factors.
So this is giving the blueprint for where we try to find opportunities and that feeds into that page which we showed before with those individual investment teams which permeate through public and private markets.
I think an important factor which maybe isn't your direct question, but impact investing has seen a number of new entrants, increased engagement by investors, that's all incredibly promising, but that also comes with challenges. It's easy to measure financial return, it's far more difficult to measure impact in trying to distinguish genuine impact versus with the term that people use as green washing.
UN sustainable development goals give the necessary focus on where to look, but I can invest in McDonald's in the name of Zero Hunger, that's a much different story from trying to really look at the broad impact that you can have. I think it's crucial to get that piece right. A lot of the funds are participating in ways to try to reach some type of guidelines or a consensus in measuring the impact. But it's also where we're spending a lot of time. You speak about trying to have direct positive measurable impact against strong financial performance. The latter's easy, the former is what really takes digging and what we spend a lot of our time and diligence and research in looking at when we're considering who to partner with.
Great, thank you.
Ilaria, I just want to comment. Many of Oliver's comments up front, one of which talked about J.P. Morgan, which as everyone knows is one of the world's largest and most prominent companies, as noted earlier some of what we're doing are specifically tied to the sustainable development goals. The sustainable development goals give companies a framework in the same way that the Sustainable Accounting Standards Board does, in the same way that the TCFD does. So what you've really observed here and the way I think about this, and regulators were mentioned up front, is regulators whether they be non-government organisations or true government based regulators, they are very much recognised that account owners, so think endowments, foundations, et cetera, asset managers, that they can impact them to ensure that money is being directed to and energy is being directed towards environmental, sustainable - excuse me - ESG, environmental, social and governance related goals.
And so that is very much impacting how investment is being made today, including in areas tied to sustainable development goals.
I would also just add, if I may, Ilaria, that on slide 20 I think we sort of capture both the theoretical, practical, quantitative, qualitative element of actually how we go about trying to onboard investment opportunities and managers within this space. I think the team have absolutely put right at the very centre of the manager selection process which Lance and his managers leverage, this process here which walks through the requirements that we ask of fund managers if they want to be part of our platform and part of our opportunity set for our clients to invest in.
This is a really rigorous process where we make sure that things like green washing, which is an issue where investments or opportunities can be made out to look more sustainable and more orientated to ESG than they actually are. And with the growth that we have seen and will continue to see for all of the underlying structural reasons that we will mention, that represents a very big risk I think for our audience listening today. So making sure that you've got a strong, rigorous and robust process that ensures the impact and application of the investment is true and that the integrity is there I think is very valuable.
Great. Thank you, Oliver.
And I think you're right and this is absolutely a thing that we very much focus on. We have today more than $8 billion in our sustainable investing platform at J.P. Morgan, with over 96 strategies. And this process that Oliver was describing is really key to this.
And I'd add also to what Lance and Oliver were saying before, that this is something that will integrate much more also in the analysis of our traditional funds, because this is something that we believe that is not going away, as we said, and it's important to understand also how traditional managers are addressing some of these very important considerations.
So I just want to pause a second, unless there are other questions or comments from Oliver, Lance or Mark, any of you on the line, because in the interests of time, if not, I think we wrap it up here.
So maybe we do wrap it up. And what I'd like to say is I'm very glad we had this time today with Oliver, Mark and Lance to go through some of these very interesting and timely topics. And I think what we all walk away with today, and personally I think it's very clear to me, is that there are a lot of trends within the sustainable investment market, and there are tremendous opportunities for investors to capitalise on these. And so we believe, as we said, that this is the new normal, and a great way to achieve both successful long term outcomes, as well as strong risk adjusted returns.
Sorry, go on Ilaria. I just had a few final thoughts at the end if that's alright.
Why don't you go ahead, Oliver.
I wanted to take the opportunity to thank really you, Mark and Lance for joining us today. The conversation is super interesting. There's so much content on this and it's clear that we could have talked much more. So I do want to take the opportunity also to thank all of you joining us today. We've got a wide-ranging audience from across Europe.
There is a lot more here to this. If this is of interest we have absolutely produced a number of very interesting thought pieces, investment opportunities and solutions that you can engage in this subject and in this content with. So please do take a moment to reach out to your relationship manager or your advisors to ask for any further information.
We will make the slides and the replay available. And perhaps just to close, going back to slide 3, as I mentioned at the beginning because of the opportunity that we see from this we are absolutely going to continue talking about this megatrend, the new normal, and these will be other opportunities for you to engage on this subject matter with us and a whole host of well-known third party speakers and experts on this subject matter.
Thanks very much for joining us, and hope to see you all again for our series starting in September. Have a good day. Thank you.
"INNOVATION IS NOT JUST TECH"
Hello everybody. I'm Efi Georgiadou, senior investor at J.P. Morgan. On behalf of all us here I thank you so much for joining us today to discuss 'Innovation is Not Just Tech'.
I will be the moderator for you today. We have the pleasure to have with us Manish Goyal, who many of you know. A lot of you have the opportunity to meet, and most of you are invested his performance. For those who would welcome a brief introduction, Manish is a portfolio manager for the digital evolution, and the innovative strategy here at J.P. Morgan. He has 20 years experience researching and investing in technology and innovating companies.
And we thought actually that it is a timely call to listen to his views while he takes us through all the work that he has been doing tirelessly to actively manage both portfolios.
You should have a raised hand icon in your devices, possibly in the bottom of the screen. Press click on the icon if you want to play the question, and also on the slide right now in front of you, if you don't want to raise a question you can also email it to us in the email you see right now in front of the screen.
So good morning, Manish. It is an early morning for you in New York. Thank you very much for joining us.
Good morning, good afternoon everyone. It's my pleasure to be here.
Thank you. Now before I start this interesting conversation, please allow me to take 30 seconds to share with our participants today three striking numbers. Now, first of all, in 2020, healthcare data used in research and development clinical trials, precision medicine is estimated to double every 73 days. Number 2, artificial intelligence valued at by 2030 is expected to be more than the size of China's GDP. And number 3, for those looking for a new trend that is conversational commerce, what we call c-commerce. 25% of companies will be using virtual customer assistance this year. This number was 2% in 2017.
So Manish, I will pass it on to you as you know better than anybody to put context in these numbers. And I will start the conversation with all this question on and around Covid-19. Covid has accelerated the change in technology and innovation to a more sort of, say, digital world. Entire industries have been transformed, and are transforming right now. So the key question to everybody is asking how will Covid change our lives, and more specifically what are the big trends that you are seeing in the consumer and the enterprise base?
A good point to start with. What we have learned from history is crisis always force people to do things differently, and initially there is a lot of resistance when people have to change the ways how they do things. And a lot of times, you know, later people rely on the new way of doing things is a better way of doing things. So if you look at the history, women joined the workforce after World War II, and the global productivity increased significantly, that was a new way of doing things back then. There was big social change, but it turned out to be for the better.
If you look at SARS, post-SARS, e-commerce took off in Asia, that was a better way of shopping. And similarly, you know, it became kind of socially acceptable to wear face masks. Now investment world we don't see people walking around wearing masks, I go to Asia four times, five times a year to visit companies. It is common to see people wearing masks on the train, in the office and when they are walking. And, you know, so Covid forced companies to let people work from home. No company had contingency plan where they thought 98% of the workforce will be working from home at a two week notice. But now 110 days into it most companies are operating well. I mean especially banks like ours, we have done a phenomenal job in terms of while people are working from home.
So this will have significant implications as we look forward. What I see is over the next 2 to 5 years there will be significant productivity that we have not seen in the last 5 years, and that productivity will result in shareholder value creation. The service technician from ASML doesn't have to fly to Korea to provide that service, he can do a lot of things online or over the video.
A lot of internal corporate trainings will move towards online and video, people don't have to fly from one continent or one coast to the other. I don't have to spend 2½ hours everyday commuting to work. These things will collectively translate into significant productivity gains.
Much of the selling in the US, in Europe or in Asia, most of the selling requires meeting the client or the customer in person. I believe that we are moving towards an area which I have coined the term digital trust, where the customer or the client will be willing to buy things or sign for product or service after a virtual conversation. So the trust could move towards a virtual setting. Now not all products and services, you know, there are software products, medical device products, there are financial services products, and there will be some line where you can draw on, but a lot of selling could move towards virtual selling.
Again, a significant improvement in sales for productivity. If you look at the consumer from my perspective, cash is dead. I am not comfortable handing out dollars to my kids, 9 years, 13 years, or even my son, who knows who was touching it, who was sneezing on it, and I'm just not comfortable. That will accelerate the transition towards non-cash payment solutions, and we will talk more about this. If you look at the consumer today much of the video interactions are like casual conversations, like the Snapchat or WhatsApp conversation with friends and family living abroad, but high value interactions will move towards video. Having a tele-medicine session with your doctor, kids taking online learning school in a virtual setting on video.
Yoga class, maths class or, you know piano lessons, they all are moving towards online. In all of these examples cash exchanges hands, there is a financial transaction happening that is high value. Again, a shift in mindset in accepting that as a okay way or a new way of doing things.
Now what does this all mean? This all means that the building block of technology, like 5G, Cloud, artificial intelligence, augmented reality, the adoption of these technologies will accelerate significantly because we are starting to do things differently. There will come a time when, depending on the type of the business, 30, 40, 50% of people will start working from home a lot more than what they were doing before Covid, and that may reduce the need for commercial risk.
So I think we have just seen how Covid further highlighted the importance of technology in our lives. We are all connected today in this setting with clients from various continents, and usually I have to fly obviously to meet the clients, but we are doing this on a virtual setting.
Thank you, Manish, that's quite interesting. Now I'd like to move on to two topics actually, dislocation and valuations. We have seen in massive dislocations in the market as a result of Covid with the SMP showing the highest in its concentration in nearly 40 years. So what opportunities are you looking at and also how are you thinking about valuations?
So the current crisis has created significant dislocation in the market. You look at the top five, six tech companies, [inaudible], plus Apple, plus Microsoft. All these companies are up for the year, and they're up like 10, 11% collectively speaking. But when you look at Russell 1000, Russell 1000 is pretty much flat, down for the year, modestly down for the year. 1200 basis points of data. When you look at Russell 2000 the data is closer to 18%, 1800 basis points.
Maybe the market was right in terms of gravitating towards companies who are very dominant in their position, like Apple, Google, Facebook, Amazon or Centra, maybe even benefitting from Covid, and they have very strong balance sheets. But the question we should ask is are these going to be best investments over the next 3 to 5 years? And especially with dislocation in the market where we have seen other stocks, especially on the mid caps side, maybe there is better opportunity there.
So if I look at VES for a second, our allocation to fan stocks used to be close to 25%, and today we are down to like 11, 12%. our allocation has come down because we are finding opportunities outside, more compelling opportunities outside.
Now on valuation, look, generally I talk about valuation on a forward [inaudible] basis. Today I will take a slightly different route. In 2008, the prior recession, that 10 year bond was about 3%, today the 10 year bond is less than 80 basis points. In other words, the 10 year bond is trading over 100 times earnings. Let's take a second to think this information. The 10 year bond is trading over 100 times earnings. So what should be the market multiple when 10 year bonds is trading over 100 times earnings? I don't have an answer. 15 times, 20 times, 25 times? It is not 15, that much I can tell. Now is it 20, 25, 100, I don't know the answer. So the point I'm trying to drill here is when we are looking at equity valuation, generally we take price divided by earnings. I'm just saying that we need to consider the interest rate environment where we are today.
In this interest rate environment I would say equity valuation ought to move up, just because our discount factor is lower, and on top of that we have to think about - especially when you're thinking about tech - that we have just seen the importance of tech go up. So these assets probably are likely to be built up because the business is running because of tech. So we have to think a little bit in terms of how the equity value should not be changed during this low interest rate environment.
Great, Manish. That is a very interesting introduction, and also a very interesting approach to valuations. That will lead us to discuss both portfolios. And before I do that, and knowing you and knowing that you will take a humble approach in terms of performance, I would like to take the liberty to share year to date numbers for both digital evolution and the innovators' portfolios. So the digital evolution strategy is 18% up year to date. It's beating its benchmark by 600 basis points, and the innovators' portfolio is up 11½% year to date, beating its benchmark by 1,100 basis points.
So great results. Let's first discuss technology and digital evolution. There is a massive digital transformation taking place. Now more than any other time the consumer seems to be moving entirely online. So can you bring us up to speed with what is happening with digital payment? Are you seeing the end of cash?
So as I said, first of all, thank you for bringing up the performance, this year has been kind to us. We are very excited about it. We navigated through this reshape recovery without many scars on our backs so I'm happy about that. Talking about digital transformation in payments it is going to accelerate the way we have never seen before. People will not be comfortable handing out coins or cash to their kids, to their family members, and we will move towards non-cash payments.
Now companies who benefit from non-cash payments are the credit card companies, like Visa, Mastercard and other issuers. Then there are digital payment companies, like Paypal, Square, et cetera. And there is a whole eco chain, eco system, companies who uphold the supply chain who work within this payment system, like European companies like [inaudible] or US companies, like FIS, who are merchant acquirers, et cetera. They always benefit as the market moves away from cash to non-cash payment solutions. And this is an area where we have significant exposure. And if you look at e-commerce companies, of course, like Amazon or [inaudible] et cetera, they all will have the onward benefit, because they don't really take cash, they will all move towards non-cash payment solutions.
That's a very interesting development really, and it's great we have these type of companies in the portfolio. So all of that is very interesting. So we have Cloud computing, data analytics, 5G, artificial intelligence, cyber security, all big enablers of the digital transformation. What are the key trends in the technology sector for you.
So let's take a look into what happened in the last 5, 10 years. We believe that during the last 5, 10 years consumers who are driving a massive amount of technology adoption they were driving a digital lifestyle, they were adopting a digital lifestyle. I talk about this mobile phone. I have an iPhone in my hand, it was introduced 10, 11 years ago, and since then what we have seen is more and more things have gone digital in our life. Music, media, they all come from companies like Apple Music or Spotify or Netflix or Hula. And we don't buy DVDs, we don't buy CDs anymore. We search for things online, pay online, review them online, deal with customer service online. And in the process of doing all of that a massive amount of shareholder value was created in the stock market. Apple, Google, Facebook, Amazon, Alibaba, Netflix, TENCENT, I am close to $5 trillion. Massive shareholder value. This is while consumers were adopting a digital lifestyle. And it is not over yet. You know, only 20% of US retail is online. And I don't know the point of equilibrium, whether it is 30/70, 60/40, there is a lot more room for innovation, there is more room for growth. But the bigger opportunity, in my view, is on the enterprise side.
Today enterprises are adopting a digital process. Today, enterprises are moving towards Cloud. Enterprises are moving applications towards Cloud. Covid only accelerated that. There is a very important call for [inaudible] It's not verbatim, but something along the lines that we have seen more digital transformation in the last two months than we expected over the next 3 years. I mean this guy is serious guy, very measured with his words. And companies have to now really think hard in terms of how many applications they had that were not accessible by people while they were working from home? How many applications clients are not able to access. And they may have to move a lot of these applications into the Cloud. So this will accelerate the transition towards Cloud. The simple reason why enterprises want to move to Cloud is because it is a more elegant solution which improves employee and customer satisfaction and reduces cost. It is virtually a win/win situation for everybody.
Instead of having islands of capacity of your computer storage, digital networking all around the world where usage is very low or under-utilised, if you have it in a Cloud environment, in massive data centres, you can increase the utilisation rate while reducing the operating costs on an on-going basis.
Now digital processes, what does that mean? If you look within a company there are 30, 40, 50 processes depending on the type of the business that can be totally digitalised. Why is it important? It is important because, again, improved efficiency reduces mistakes and really increases the through put of how to do certain processes.
Let me give you one example. In US if someone were to go into a branch and to get a mortgage, home mortgage, that entire paperwork is digital. The paper is not printed all throughout the process, even for attorney to view or signing the documents. Completely digital. They use signature capability, digital signature capability from a company called Docusign. 400,000 people from J.P. Morgan working from home. You know, if I have an IT issue I can't track down the IT guy from our floor, because there are hundreds of other people calling him. So we submit a ticket in a system, one closest to provided by a company from service now. So these are digital processes. And a lot of the processes within a company will continue to move in a digital format, away from manual. And this is going to be a big area of growth and investment for companies to confer in multiple years time in future.
The last point, when you look out 3 to 5 years out, there are two very important technologies, 5G and artificial intelligence. These two technologies will be very critical in driving growth in the autonomous cars, industrial revolution 4.2, healthier services, smart cities, smart farming, a lot of multiple industries and making a profound impact, and we'll talk about this more in subsequent slides.
Perfect Manish, thank you very much. I kept Cloud and I kept 5G, but before we move on discussing those I want to ask you a very quick question. Your [inaudible] semi-conductors has served very well. Companies like NFC microchip have done very well for the portfolio, so what's your thesis from here?
So if you take a step back and look at 2019, chip companies were shipping less than the consumption. Last year, late in 2018, US imposed tariffs on China. The chip distributors in China got spooked, they were not sure what the end demand look like. Just for those not familiar with the chip supply chain, US chip companies sell semi-conductor components to Chinese distributors, these distributors sell components to tens of thousands of customers in China. They could reach from small product manufacturers like [inaudible] et cetera, to all the way to handset servers, laptops et cetera.
So these distributors who are not sure what the end demand will look like in the US they didn't want to take the inventory risk, so they depleted their inventory, they were buying only [inaudible] So the bookings and shipments at the US chip companies saw a significant slowdown. They were shipping less than the consumption. Earlier this year, due to Covid and due to work from home, a lot of people were forced to buy laptops, monitors and desktops because they had to work from home and their personal computers are not up to date. Enterprises were forced to buy machines for their employees. That created a vacuum for [inaudible] inventory. I'm trying to buy a 34 inch monitor and, believe me, a lot of those places are out of those monitors. So now when I look at where we stand the inventory levels for components are low, the inventory levels for [inaudible] is low.
So I expect as the economies open up, as the markets open up we will see a significant recovery in bookings for the semi- conductor companies. Those companies supplying to the industry have changed, those companies supplying into 5G and to computing, they all will benefit as economies grows or begins to recover and businesses begin to open up. In particular, companies exposed to 5G, companies exposed to broader industry trends they will see significant recovery in their bookings. That's why we continue to like semi-conductors. Semi-conductors are roughly 13% of the benchmark in the US, and we have a rather large position in semis, about 25.6%.
That's great, Manish, thank you very much for that. I will go back now to Cloud. You've mentioned it before, you talked a little bit about Cloud, and it is very clear that Cloud is a winner from Covid-19. So how does the portfolio capitalise on this trend and what kind of companies benefit from Cloud beyond the usual suspects, like Microsoft, Google, Amazon?
So most of the time when people think about Cloud from an enterprise perspective, they think about Google, Microsoft, Amazon. But the investment opportunity in Cloud is much bigger than that. You know, a large bank, pharmaceutical company, industrial company, they are not going of buy all of their Cloud need from those three companies. Think about it. I live in the US and if I knew that I have to spend 250 nights in London it will be much more economical for me to buy an apartment there than to stay in a hotel.
So a large company who has significant computing needs, they don't necessarily need to pay 29% operating margin to Amazon, they can build their own Cloud and data centre because they have internal scale [inaudible]. So large companies may keep 60, 70, 80% capacity in-house and they can use Cloud or public Cloud for FLAX and other applications or for needs in other countries depending on the type of the business.
So when you start building your own Cloud you are looking to buy microprocessors, graphic processors, you are looking to buy high speed memory and communication chip, infrastructure hardware, infrastructure software, a variety of applications. You want to put your HR system on the Cloud you [inaudible]. You want to put your customer management into Cloud you go to
sales force. You want to put your PBX in the Cloud you go to [inaudible]. So depending on the type of application you want to go to the Cloud, you want to move to the Cloud, you create infrastructure behind it.
Then there is security layer, then there is analytics layer. So we see significant investment opportunity in Cloud which extends well beyond Microsoft, Google and Amazon.
That is interesting, and I think we're going to see probably a lot of other companies in the following few months on that aspect. I'll move on to 5G.
Just one more quick point here.
When consumers adopted a digital lifestyle much of the shareholder value was concentrated within 8 or 9 or 10 companies. You [inaudible] you pretty much did well, but as enterprises are moving towards Cloud, enterprises are moving towards digital processes, that's a very fragmented market. I give you examples for multiple companies, chip companies, infrastructure, hardware, software, et cetera. You don't have one or two or three names that you can own and say okay, I'm done. There is a lot of digging required to figure out which applications are more important. So the time of consumer adopting a digital lifestyle is very different from enterprises moving to Cloud and digitalised processes.
Sure. Thank you, Manish. Heading into 2020, 5G was a big theme for everybody. I do remember that we started talking about 5G at J.P. Morgan back in 2018. It is expected to impact almost every industry. Are you still excited about 5G?
Absolutely. 5G will be a very critical piece of technology that will be deployed and used into multiple new applications over the next 5 years. Consumers will be the first to adopt later this year. I expect Apple to introduce 5G phone some time during the fourth quarter of this year in US. AT&T Mobile rival they will all start marketing their 5G plans. And it will be yet another major replacement cycle. But 5G will be far more critical in non-consumer applications, just the traditional voice and data application in new applications.
So let's spend a second and understand why 5G is so important. 5G speed will be 10 to 15 times faster than LTE, the 4G that we are using today. Theoretically, it is 20 times faster, but practically it will be 10 to 15 times faster. There is virtually no latency. So when you are watching a YouTube video and you get that buffering sign, that buffering goes away. In Netflix a video that takes 7 minutes to download will take a few seconds. But there are far more critical applications that can be had with over 5G network.
And if you are riding in your brand new Tesla and going at a 100 miles per hour and you slam the brake, your Tesla will be kind of enough to communicate with my Prius in the back so that I don't come and rear end your car. Vehicle to vehicle communication will be possible because of the speed of the network and reliability of the network.
Soon New York will be able to perform surgery in Des Moines, Iowa, which is about a 1,000 miles away from here. The image will be instant, it will be more, the network is reliable and those services will be possible.
And we have given multiple examples in multiple different industries from healthcare to smart factories. Imagine precision manufacturing, entire floors which are connected by wired networks today all moving towards wireless, highly reliable, it will improve the use of the factories, it will improve the efficiencies and make a big difference in terms of creating shareholder value.
So the real value of 5G will be realised as enterprises start to deploy 5G forward for their personal networks.
Thank you, Manish. It's truly fascinating how lives will change completely when 5G is totally implemented within our lives and different aspects.
That actually leads us to innovation, and the innovators' portfolio that you have launched more recently. Now following the portfolio over time I would say, and I would say that loud and clear, that innovation is truly not just tech, it's pretty much everywhere. So please talk us through your framework for identifying these innovative companies, and also how you look beyond tech for opportunities.
So some good ideas come from within J.P. Morgan, and sometimes greater, better and great ideas come to us from clients. A couple of years after the launch of VES, one or two of the large VES clients said to me that, Manish, you're doing a good job in capturing all the innovation going on in the technology sector. But, you know what, I see innovation all around me, in every aspect of my life, at work and at home. The strategy that will capture innovation in all the sectors of the economy. I thought that was a great idea. So we came back, we
take at look at like, okay, how do we go about finding innovation, what is innovation, because innovation could be different. Something that is innovative to me may not be innovative to you. And then what is the systematic approach to management even, you are using the lens of innovation.
And most importantly, is there even empirical evidence that investing in innovative companies creates [inaudible] returns. So we looked at all of these things. We [inaudible] portfolio for about 2, 2½ years, and last year in the fourth quarter we launched the strategy called the Innovators' Strategy.
The mandate here is to invest in companies, in any sector of the economy where we see innovation, and these companies ought to produce a product or service which is truly outstanding, innovative and has moved around it. Now how do we define [inaudible]. It all starts from the leadership. There are some CEOs and their management team who are boldly committed to be the leader, to be the innovator in their respective industry. They want to come up with products and solutions which others have not really thought before. And then you see a whole bunch of companies which are fast followers. And then there are even a greater number of companies who really don't care as much about innovation, they are just [inaudible] companies. We want to focus on those leadership, those management teams who are truly, truly committed for innovation, their conversations are tied to innovation and they have demonstrated in the past that they are the true innovators.
The second thing is about investments. Innovation cannot be created in vacuum. It requires investment, it could be R&D investment, it could be capital spending, and what we'd like to do is to look at those companies who are efficiently investing in R&D. Just because you invest in R&D does not ensure success. Nokia was investing nine times more than Apple in R&D and we all know how it went down for Nokia, how it went down for Apple.
And the third piece of it is product and service. What kind of products and services have they launched in the last 3, 4, 5 years? Do these products create shareholder value? Are they able to capture transitions? We pay attention, and that requires a lot of fundamental [inaudible] equity analysis in terms of looking at that.
So that is, broadly speaking, our framework. In short, I could say we use the same lens that we have used to analyse technology companies, and we apply the same lens to all the sectors to figure out [inaudible].
Sure. It is a very unique approach to investing, and a question that very frequently comes up in our conversations is whether there is any data, suggesting that investing in innovative companies generates excess return.
So before I do that, I want to spend a couple of minutes to talk about how innovation is not limited just to technology, and then I can address that question. When I use the word innovation most of the people think about the technology sector. Rightly so, rightly so. And in the last 10 or 15 years much of the technology sector grow a lot of innovation, but innovation is not limited to technology. Again, I go back to my iPhone. This device is loaded with technology. This is a pure tech product and 6 months from now it will be a 5G phone and then it will be updated and it will have more technology. When I am talking to Alexa or something it's pure tech product. But when I want Uber and I want to go from point A to point B, that is a tech enabled device. I just want to use a car that will take me from point A to point B.
When you are doing a tele-medicine call with the physician you want to speak to the physician. Technology is only enabling that. When you're shopping on Amazon or e-commerce or omni-commerce, you want the product, tech is only enabling that. So we are interested in tech products, we are interested in tech enabled products. And more importantly, we are very much interested in innovation which has nothing to do with technology.
You've got pants coming from Lululemon, there is a tremendous amount of research that goes behind it before Lululemon figures out which fabric will perform better in dry climate, in wet climate, how can they enhance an athlete's performance, et cetera.
Cosmetics coming out of Estee Lauder, whether it is lipstick or whatever, they employ hundreds of PhDs. They want to have cosmetics for a variety of skin tone, from Caucasian skin to African skin to Chinese, and they like to use local ingredients to make the best products possible. They have done a phenomenon job in product introduction, a phenomenon job in branding and even better job in marketing those products.
You look at healthcare, significant innovation going on in healthcare which has very little to do with the [inaudible]. If you go to the next page what we have tried to do here is we have tried to put a few sectors and name some of the innovations that we are excited about in each sector, healthcare, liquid biopsy, probiotics available to our health, and there's innovation all around us. So we are using the lens of innovation, applying that lens to all the sectors to figure out which companies are truly innovative in their respective field, and maybe there is investment opportunity there.
That's great. The takes us to the question on the data, and suggest that investing in innovative companies, do they actually generate excess cash?
So this is the framework we used for the innovators' strategy. Companies invest in R&D to create a differentiated innovative product. There is only one reason why a company invests in R&D, to create a differentiated and innovative product. If we are both selling this glass we will end up competing on price. If you are investing in R&D you have a better glass that can be microwaved, that is thinner, better designed. You have innovative products, you will have higher sales, better profit and you will create more shareholder value.
Those companies who do not invest effectively in R&D it doesn't matter. Automotive companies are the largest spenders in R&D, but they don't create value because they don't invest money effectively.
So the key point here is to invest in R&D to create an innovative product. Now the question is where is the empirical data to show that. Let's go to the next slide. What we are looking at here is Russell 1000. We look at Russell 1000, within Russell 1000, roughly speaking, 40% of the companies report R&D on a quarterly basis. Those companies out-perform the rest by 340 business points annualised over the last 15 years. Massive out-performance by companies who invest in R&D.
So we are fishing in the right pool. We are looking at those companies who are innovating. And if we do our jobs right we should be able to create significant access returns.
That's a great approach to that. What I'd like to do now is I would like to dig a little bit further, and in the interests of time, if you can share with us a couple of high conviction positions within the [inaudible] portfolio. You mentioned healthcare before.
So if I look at healthcare one of the biggest trends today is liquid biopsy. You take a little sample of the blood and you go through a variety of analysis to figure out if a recovering cancer patient you are beginning to see cancer cells in the blood again. So instead of going through a very invasive procedure, invasive testing, you can capture that through liquid biopsy. Similarly, they can capture things like Down Syndrome in a child by taking the fluid from the mother's womb and, again, significant improvement there. We have multiple investments in that area.
If you look at robotics there is [inaudible]. And we made some changes in the portfolio due to Covid, what we saw was there was a sharp drop-off in elective procedures, so hospitals that were taking Covid patients they were not taking elective procedures. So if you had a knee replacement, hip replacement, those out-patients didn't want to go to hospitals, and now what we are going to see is a sharp recovery in elective procedures, companies like Zimmer are going to benefit from that. We have a pretty large position, we especially added to our position significantly and even the stock goes down.
Elective procedures are not perishable demand. You know, it's not a cosmetic procedure that I can change my mind. If I don't go to Starbucks today I'm not going to drink twice as much coffee tomorrow. But if I'm deferring a hip or knee replacement, although already I am in pain, I may defer it by a month, two months, three months or so, then ...[loss of sound]... So we see that more as a deferred demand as opposed to perishable demand.
I have a 13 year old who is very wearing braces to straighten his teeth. You know, they're required to go back to the orthodontist every three or four weeks to get them adjusted. We ran into this company called Align Technology which makes clear aligners that reduces your visit to an orthodontist by 50% or more, without really impacting the bottom line of the orthodontist. In a Covid environment that's a great solution where the patient doesn't want to go to the orthodontist, the orthodontist has to practice social distancing so, again, we have quite a large position there.
So healthcare is going through [inaudible] which a company who provides a platform that benefits from having like a virtual [inaudible]. So these are some of the key investment ideas that we have played with, which some of them are more secular and some of them are benefitting from Covid.
This is fascinating what's happening within healthcare, and healthcare innovation is actually one of our mega trend discussions this year. There are hundreds of other questions we'd like to place right now, but I'm conscious of time, so I'd like to open up for questions if there are any please.
If you'd like to place a question please raise your hand on the application, on the device, or otherwise you can email the question to the email address that you see on the screen.
I think I'll give it a few more seconds just in case we have a question.
We don't have a question so far, but I'd like to place one more question, Manish, if I may. We talked a lot about technology. It's a massive beneficiary, there's no question about that. Is tech an all-win sector?
Look, the technology sector - depending on the industry - if you look at semi-conductors the leader makes 85% of the profits, number two company makes 10, 15% of the profits. And C company they rarely break even. And then D, E they don't make money. So the leader clearly has a dominating position. In software that's not really the case. Usually one company brings a very large portion of the market, and then there is another company, and then there is C, D, they don't exist.
There is only one gold medal, there are no silver medals, no bronze medals. For all practical purposes there is one search company - Google. For all practical purposes there is one social media company - Facebook. For all practical purposes there is one professional network company - LinkedIn. There is a very dominant position by Amazon in the e-commerce world. The network effect tries the big to get bigger, they capture more market share, mind share and market share value.
So it depends on which piece of technology we look at but, broadly speaking, if your question is about is tech a winner, tech is a winner, because today any product differentiation or service differentiation is driven by development. If you were buying a car, the car is being differentiated by integration of technology in the car. It is [inaudible].
If you were buying a simple thermostat, the new thermostat can be operated by a mobile phone and it has a lot more technology than its preceding generation 3 or 5 years old. Again, it is the integration of technology in industry products. So it is the technology integration which is driving product differentiation, that is why the importance of tech continues to grow higher.
Perfect. We've received a question and I'd like to very briefly ask you what is the overlap between digital evolution and the innovators' strategy, please?
So innovators' strategy is a technology sector strategy. Sorry, I misspoke. Digital evolution strategy is a technology sector strategy. Innovators' strategy is an all sector strategy. The scope is much bigger than DES - digital evolution strategy. So tech sector is about 30% of [inaudible] a little less for Russell 1000. So the overlap between DES and innovators could range from 15% to 20, 25%, depending of the [inaudible]. So, you know, we like to come up with the best ideas for both those strategies. DES tends to be a little bit more tactical in approach, where we can trade around a quarter, But for innovators we are taking a little bit more longer approach, because there, you know, investments are more long term, thinking about the R&D considerations. But, you know, from a [inaudible] perspective about 15 to 20% overlap for two strategies is not much, especially when [inaudible] stocks are such high potential for the market capital.
Which effectively means that one complements each other to cover the entire spectrum. So I will conclude with one more question, and that is the obvious question around risk. So what sort of risks do you see in the world in the market? We see a lot of developments. Do you feel that they are risks that can impact the portfolios?
So clearly there are always risks when we are dealing with equities. There dual political risks, like the two largest economies, like US and China, at war with each other, a trade war with each other. That can escalate further. We just went through a massive pandemic. It's not over yet. It could re-emerge and it can have a very significant impact on global economies again. Parts of the world may have to shut down.
But for me, but from a broader perspective, you know, what I see is generally central banks have done a very good job in terms of infusing liquidity. Interest rates are very low. So there are positives to be had. On the other hand, dual political risks [inaudible] and re-emergence of Covid are probably the biggest risks in the market today.
Agreed. And I know for a fact you keep an eye on them. So with that we passed our time in location for this webinar. We will conclude here.
Manish, thank you very, very much for your time.
Efi, I want to make one concluding comment if I may.
Yes, of course.
So if you look into the history, the last 5 or 10 years, I ask myself did innovation and technology change my life? Emphatically. I couldn't walk out of the house without my phone. My entire life rotates around this phone, mobile phone device. In the process of doing that the stock market created trillions of dollars of shareholder value, and in the last five years we have done a good job in capturing more than our fair share from that shareholder value. [inaudible]
How is the innovation pipeline, how is the technology pipeline when I look in the next 5 years and 10 years? Massive innovation in the pipeline today. We discussed 5G, we didn't go deeper into artificial intelligence. Artificial intelligence is the biggest science project in the world today. A variety of industries will be backed, from autonomous cars to healthcare to you name it. I'm very excited about all this innovation. Will this innovation change our lives? I bet it will. And in the process of doing that, trillions of dollars of shareholder value is most likely to be created again. And we have two very strong solutions to take advantage of those innovations coming. Covid and other things will only accelerate such innovation and adoption.
So those interested in purely technology sector orientated we have a solution - DES, and those looking for a [product] market, like a solution which is representing [inaudible].
So we will be there to capture that innovation through that advancement through those two strategies. With that, thank you.
Thank you, Manish. Actually, these are very valuable insights to finish off this webinar. And there's a lot of change for us all to experience and also the portfolios to [inaudible].
Thank you so much for your time. Thank you for taking good care of our client assets and all the thoughts that you shared with us today. To all participants, on behalf of all of us here at J.P. Morgan, thank you for joining. We would be delighted to discuss further with each one of you individually. So keep well and safe. Thank you very much.