Q:  What is your investment philosophy? A : This Fund is about investing in what we see as Industries of the Future. These are ten investment themes that we seek to invest in and each is either an environmental or a social challenge that the world faces. The basic investment philosophy behind the fund is that sustainability challenges are creating a new generation of investment themes. It is about investing in solution providers to the world’s sustainability challenges that cross environmental and social issues. Q:  What are these ten investment themes and what kind of solutions providers are investment worthy? A : On the environmental side, Cleaner Energy is about our needs to move away from fossil fuels and select renewable and sustainable forms of energy generation. At the moment, only 2% of the power production is from renewable sources, but 18% of power investment is in renewable energy generation. We have investments in companies involved in solar in wind and we have potential as well to invest in fuel cells and possibly wave energy and bio-mass and other forms of renewable energy. Efficient usage of energy is not well recognized as a theme. Some 80% of energy produced is lost between production and consumption. Companies that find efficient ways of utilizing energy or other resources have a good prospect ahead. With rising energy costs, companies are looking for ways to trim wasteful expenditure. Environmental services are ways of recycling or reducing waste. It also includes effective treatment of waste and more effective ways of cleaning up land and landfill management. Particularly in the U.K., we have reduced the amount of waste that goes into landfills. In addition, we recycle more, and recycle more effectively. As commodity prices have gone up, people’s interest in the value of things that they are throwing away has increased as well. Water is another theme. People are saying water will be the new oil. Companies are finding ways of efficiently using water or producing water cheaper and more effectively, desalination companies that do desalination more effective, filtration companies, purification companies, as well as infrastructure. Sustainable Transport would include things like electric cars, vehicles, and products. It also includes other forms of transport that are more efficient and less polluting than cars and airplanes. Social Property & Finance includes financing education or financing people who do not find it easy to get financed elsewhere, property for first time buyers, property for people who are excluded from the property ladder. This includes projects governments are very keen to incentivize and promote. Currently, it is that brown field property. Health is the next theme. Health expenditures are projected to be substantial and expected to rise. We transfer some investing in companies that can provide treatment and other ways of reducing health spending while may be reducing but preferably improving the actual outcome in terms of health. We look for companies able to demonstrate they are saving money for their clients and customers and achieving better outcomes. In Knowledge or education, there is a huge need and demand for people to get more education as we learn more as a society and from the emerging economies as well. W We have investment in businesses that are providing education to people in Asia and in the U.S. and other places as well as software for education and home schooling, and preschool education. Quality of Life would include things like organic food, but also things like hospices and elderly care companies. In our Safety theme, we look for companies that test for toxic paint and make sure that these manufacturers are actually doing what they said they would do and check the quality of manufacturing. That applies to toys, food, and clothing. Q:  What is your research process? A : We have developed a universe of 1,400 companies that fit into one of these themes. We can use various concept screens in order to dive into that universe and generate ideas that might not be what the market is focusing on at any one time. We can look at companies that have been hit in recent market turbulence or companies looking undervalued on particular measures or companies whose earnings are not being downgraded or margins that are eroding. I also get ideas from members of the team that I work with and other teams at Henderson that I interact with in Japan, the U.S. and European. We look at corporate governance of the company we look to invest in. We check that the basic level of integrity and the way in which they do their business, in terms of their treatment of the environment, their employees, and other stakeholders and their ethical and governance practices. In terms of the financial analysis of the company, we spend considerable time thinking about the growth characteristics of the market that the company is in. It is a growth fund. The themes are selected for their growth opportunities. We think about growth of the company, the market that the company is in, how sustainable it is, and how it is likely to develop over time with other competitive forces and natures with their market share. We like to meet the management of the companies. We have some 300+ meetings with company managements per year as a team and we find those meetings very useful. It is a quick way to learn on their industry and business strategy. It allows us to understand how they manage the business, how they intend to manage their business, how they compete, who they see their competitors are, who are their suppliers and customers, and how they see them. Sometimes we learn more about other companies in those meetings than we do about the company itself. We spend time thinking about valuation of the company. We use a range of techniques depending on the business, growth area it is in, how established it is, its market position, and the comparables there might be in the market. We are skeptical of discounted cash flow analysis and generally not give lot of credence to it. We think about the timing of investing in a company. The timing is from a stock market perspective and from the perspective of the business cycle the company is in and what news or events may affect the company’s share price in the coming months that might prove catalyst for us to invest or not. Q:  What are some examples of the companies that you have found through the research process? A : An example in the clean air energy theme would be JA Solar Holdings Co Ltd., a Chinese manufacturer of solar cells listed in the U.S. We bought the company when it listed in the IPO a couple of years ago. We liked the company because it has strong silicon supply contract. Silicon availability is a bottleneck for the industry at present and it has constrained the growth in the solar panel industry. We think they have got sustainable cost advantages in the industry from their positioning in China and from excellent manufacture practices for their cells. For example, they have a breakage rate of 1% versus the industry average of 2% to 3% breakage rate in their manufacturing process. They have been expanding their capacity very rapidly and we have continued to think the valuation does not reflect their growth prospects. We have taken profits along the way as the share price has quadrupled over that time and then come back in volatility recently. In the efficiency theme, we like Itron, Inc. the U.S. based company makes meter reading systems where, instead of somebody knocking on your door to read your meter, a technician could drive pass and read the meter wirelessly or over the Internet. This clearly saves costs for the companies, saves emissions and electricity usage, and allows better planning of peak loads and planning for good reliability. We think they are the market leader in this area and the scope for them to get more contracts from major utilities to put their meters in their customers’ homes. They have recently had some big contracts like that and we think there are prospects for them to get more contracts and they could see another 20% to 30% earnings growth over the next few years. A company in Europe that we invest in the quality of life theme would be Orpea SA, French company that provides elderly care homes. In France, there is a shortage of elderly care homes and as the population ages the demand for care homes is increasing. This company has opportunity to expand its homes and is a market leader in providing homes. The valuation of the company, I think, does not reflect the increase in property value that has been seen in France. We think it is a very well managed company. We have met the management several times. We believe the company has a lot of growth prospects and demand is sustainable in the future. Q:  How do you decide in terms of number of holdings that you have and how do diversify them? A : When it comes to portfolio construction, we have about 90 to 100 holdings spread across 10 themes and across all geographies as well. We have a broad geographic exposure so you are getting a genuinely global fund. Our benchmark is the MSCI World Index. We do have a range of market cap exposures as well. About 50% of the fund is in companies that qualify for the MSCI World Index. Another way of looking at it is to say that 70% to 80% of the fund is in companies over $2.0 billion dollars market cap and 80% to 90% is in companies over $1.0 billion dollars market cap. Q:  Industries that are rapidly growing or expected to have a broader growth ahead of them, they tend to be expensive in terms of the market valuations on a PE basis. Do you pay significant attention to valuation or how do you reconcile that? A : I do pay attention to a valuation. However, it is a growth fund so we are looking at companies that have a higher growth in the market. One analysis that we have done is to look at the PE of a fund that we manage against the MSCI World Index. We have found that the PE is higher than the MSCI World Index, but the earnings growth forecast for the companies we own is commensurately higher. The price-to-earnings ratio to growth rate of the companies that we own are about the same or a little less than of the MSCI World Index. You are actually getting about the same or even a little bit cheaper than the MSCI World Index. Q:  How do you deal with a situation like ORPEA or JA Solar? They both had a certain peak and they have dramatically corrected from their historical peak in the last one year. How do you deal with that? A : I have a long-term perspective. I try not to get distracted too much by market volatility. Having said that, when something is clearly overvalued, we will sell it and I will try to look at market volatility as an opportunity to add to my positions.