Consumer Staples
Consumer Staples |
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Responding to consumer demand
A company’s environmental and social policies can help drive its returns and manage risks. Companies that get it right differentiate themselves from competitors – in the eyes of both consumers and their own employees. Those that don’t can suffer reputational damage or punitive fines that undermine their ability to compound.
Many companies in the consumer staples sector seize opportunities to produce innovative goods that consumers want. Examples include products less harmful to the environment, healthier products, or those that appeal to an emerging demographic. By pursuing these opportunities, firms can increase market share or enhance their pricing power – both of which preserve or improve profitability.
INNOVATIONS IN PACKAGING
A number of the consumer staples companies we own are committed to developing and producing consumer-friendly, environmentally responsible packaging improvements. While PET (polyethylene terephthalate) bottle recycling is spreading globally, contamination caused by hard-to-remove sticky labels can reduce the quality and therefore usability of the end material. In an effort to encourage the growing circular economy, a German chemical and consumer goods company that we own has developed certified removable labelling adhesives to ensure the highest recycled plastic quality. Another of our holdings, a major American manufacturer of household products, has worked closely with its suppliers to create innovative packaging that can be easily recycled while still meeting products’ needs.
SUSTAINABLE SOURCING
A French personal care company that we own uses renewable natural ingredients in its products. This has a triple effect: good for the consumer, good for the supply chain, and good for those who typically cultivate the crops. For example, the company sources Argan oil from Morocco, shea butter from Burkino Fasa and galangal leaves from Vietnam. Most of the harvesting and processing of these ingredients is done by women. Acknowledging the harvesters’ many climate-related challenges – including water scarcity, poor soil health and desertification – the company has developed sustainable sourcing projects to help farmers overcome climate-related risks and improve their livelihoods. In doing so, this large cosmetic company is reducing the environmental footprint left by its primary cosmetic ingredients and protecting the supply sources of these ingredients in the future. It’s a great example of stakeholder alignment.
RECYCLING
An American soft drink manufacturer that we own was, in 1991, the first company to introduce plastic bottles with recycled content. 88% of their packaging (and 100% of PET bottles) is recyclable. They have invested heavily in recycling infrastructure; the recycling plants built in Mexico have helped increase the rate of PET bottle recycling from 9% in 2002 to 60% today. By 2030, this company aims to recycle 100% of packaging used. An American manufacturer of household products that we own has partnered with the Sustainability Packaging Coalition to include How2Recycle labels on their North American packaging, informing consumers how each package can be recycled. Over 20 billion padded mailers are used in e-commerce packaging each year, but bubble wrap mailers are not recyclable. A German consumer goods company has collaborated with key e-commerce players to create a new generation of all-paper padded mailers that can be recycled. Flexible pouches are used to package all sorts of consumables, from coffee to dishwasher tablets, but the layered nature of the packaging material means that the valuable aluminium within them is impossible to recover. Working in partnership with recycling companies and key flexible packaging manufacturers, the same German company has created unique adhesives that enable the separation of layers at recycling facilities, turning waste into value.
SOCIAL RESPONSIBILITY
The American beverage company we own has responded to increasing global interest in reduced sugar consumption by aggressively reformatting recipes to reduce sugar, promoting low- and no-calorie beverage options, and investing in systems to make smaller packages more available. As a result of this innovation, in the 2017/2018 period, the company removed 425,000 tonnes of sugar from its products. Another of our holdings, a multinational consumer goods holding, sets itself apart through its ‘purpose-led brands’. The company launched its Sustainable Living Plan in 2010, which lays out three goals. By 2020, they aim to help more than a billion people take action to improve their health. By 2030, their goal is to halve the environmental footprint of their products. By 2020, they hope to enhance the livelihoods of millions of people. The plan includes eliminating deforestation from the commodity supply chain by 2020, establishing sustainable agriculture as a mainstream initiative and universal access to safe drinking water. In 2018, this company retained its top ranking in the Sustainability Leaders survey from GlobeScan/SustainAbility for the eighth consecutive year. No other company has maintained top recognition for so long in the 20-year history of the survey.
These are some of the common themes we are seeing in our global portfolios from companies with environmental and social policies that are driving both revenues and consumer satisfaction.
RISK CONSIDERATIONS
There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, government regulation and economic conditions may adversely affect global franchise companies and may negatively impact the strategy to a greater extent than if the strategy's assets were invested in a wider variety of companies. In general, equity securities' values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. Stocks of small-capitalization companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. Option writing strategy. Writing call options involves the risk that the Portfolio may be required to sell the underlying security or instrument (or settle in cash an amount of equal value) at a disadvantageous price or below the market price of such underlying security or instrument, at the time the option is exercised. As the writer of a call option, the Portfolio forgoes, during the option's life, the opportunity to profit from increases in the market value of the underlying security or instrument covering the option above the sum of the premium and the exercise price, but retains the risk of loss should the price of the underlying security or instrument decline. Additionally, the Portfolio's call option writing strategy may not fully protect it against declines in the value of the market. There are special risks associated with uncovered option writing which expose the Portfolio to potentially significant loss.
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Managing Director
International Equity Team
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Signals Survey