Equities

LOIM New Food Systems marks 1 year

LOIM New Food Systems marks 1 year
Conor Walsh, CFA - Lead Portfolio Manager, New Food Systems and Co-Portfolio Manager, Circular Economy

Conor Walsh, CFA

Lead Portfolio Manager, New Food Systems and Co-Portfolio Manager, Circular Economy
Matthew Watkins - Senior Sustainability Analyst

Matthew Watkins

Senior Sustainability Analyst

 

Last year we launched LO Funds – New Food Systems to capture equity opportunities created by the necessities of feeding a growing global population while remaining within, or helping restore, planetary boundaries. One year on, we assess the strategy’s performance against peers, profile companies aligned with our three investment themes, and describe major policy drivers supporting the investment case.

 

Need to know

  • In its first year, LO Funds – New Food Systems demonstrated resilience in a market with headwinds for both the asset class and the theme
  • The strategy, managed on our holistiQ sustainable-investment platform, invests across a highly pure thematic universe of companies that are accelerating or aligned with sustainable food production, consumption and enabling solutions
  • We profile three portfolio names – Ingredion, Compass Group and Graphic Packaging International1– and discuss how policy developments, such as those for cultivated meat and pesticides use, support the rise of new food systems

 

Resilient in a challenging market

Since launching on 7 July 2022, LO Funds – New Food Systems generated a net annualised return of 3.7% compared with 12.7% for the MSCI World ACWI reference index.2 It is important to note that this benchmark represents the broad global equity universe rather than the focused theme of new food systems. Compared with a group of peers who also concentrate on this space, our strategy placed fourth out of 11 for the period (see figure 1). In the year to date, its 5.9% net annualised return delivered top-quintile performance among this group.

 

FIG 1. Performance vs thematic peers since inception:3 LO Funds – New Food Systems

Source: LOIM, Bloomberg as of 17 July 2023. The peer group methodology cited herein is provided for information purposes only and may be subject to change over time. No fund/benchmark/index is directly comparable to the investment objectives, strategy or universe of our fund. Returns shown net of fees. The performance of a peer group shall not be indicative of past or future performance of any fund. For illustrative purposes only. This document has been prepared by LOIM employees who are encouraged to raise assets for their strategy and may have a conflict of interest.

 

It has been a challenging period for equity investors in this theme. At the asset-class level, headwinds included steep interest-rate rises, investor divestment from equities and inflation’s impact on consumers. In addition, the dominance of six mega-cap technology stocks – Microsoft, Apple, Google (Alphabet), Meta, Amazon and Nvidia4 – drove the performance of the benchmark to the detriment of smaller companies that are not in the IT and communications sectors.

This weighed on our thematic universe – but has also driven valuations to extremely attractive levels relative to large caps. In our view, this provides an entry point into SMID caps exposed to secular growth drivers and supportive government policies within the sustainability transition.

Throughout the year, we remained focused on attractively valued companies that show an ability to generate excess economic return (EER) without relying on capital markets for financing. The strategy’s 16.3% return on equity – an indicator of quality – exceeds the 14.3% of the index, and its earnings per share growth of 11.5% is greater than the index’s 8.0%.5,6 Its focus on value is reflected in the 14.6x one-year forward price-to-earnings ratio of the portfolio, which compares favourably with the benchmark’s 17.3x. In essence, we believe the portfolio offers a robust, thematic, quality-growth exposure at an appealing valuation.

When researching sectors for stock ideas aligned to new food systems, we look for companies that can be overlooked but where our understanding of the transition can identify potential value. Through our integrated sustainability and investment research, we refine a universe of about 200 names from the entire index. From this, we construct a thematically pure, high-conviction portfolio of 35-45 companies aiming to deliver strong performance and some diversification from all-cap benchmarks and strategies managed against them.

 

System changes follow an S-shaped pattern

New Food Systems is part of our holistiQ range of sustainable equity strategies, informed by the conviction that the transition to a CLIC® economy requires transformations in the energy, land and oceans, and materials systems, plus accelerated pricing of carbon and other externalities. We believe these 3+1 systems changes will fundamentally rewire the global economy.

With current food systems driving 80% of land-use change, 90% of forest degradation and 70% of freshwater use, our strategy is aligned with the need for the land and oceans system to return 1 billion hectares of land and 30% of oceans to nature by 2030 to meet the climate and environmental goals that many of the world’s most powerful institutions have committed to.

Economic transitions – from the adoption of the steam engine to automobiles and digital technology – typically chart an S-shaped curve. Change happens slowly at first, as innovations, policy support and capital expenditure lay the groundwork for economies of scale to build. These forces lead to a tipping point, where the superior functionality, greater affordability and expanding accessibility of new solutions enable mass adoption. This drives growth and sizeable revenue pools for the companies positioned to benefit.

We see a number of solutions within the rise of new food systems approaching such tipping points, from sustainable agricultural practices to diets and enabling technologies. As the entire food value chain is reinvented, innovative companies are disrupting markets and accessing new or shifting profit pools.

 

FIG 2. Inflection points for selected sustainable food solutions

Source: Systemiq, LOIM analysis. For illustrative purposes only.

 

Case studies: investing in the future of food7

To invest in the transition to new food systems, we use three themes encompassing food production, consumption and enabling solutions. Which portfolio companies illustrate these themes and helped drive performance over the past year? We profile three from our top 10 holdings.8


 

Policy drivers for cultivated meat, food ingredients, pesticides

Influential policies that support the themes in our investment approach arise continually. Here we consider three – concerning lab-grown meat, food ingredients and pesticides – that are likely to impact exposed companies. This will affect the investment opportunity set and inform our convictions about the transition to new food systems.

 

Lab-grown meat approved in the US

The US fully approved lab-grown meat in June 2023. This milestone allows two companies, Good Meat and Upside Foods, to sell meat and poultry cultivated from animal cells and should presage a wide variety of new food products becoming available to US consumers in coming years, in our view.

The US approval is extremely relevant to our projections on alternative proteins, of which cultivated meat is one key technology. We expect the market for alternative proteins to grow from USD 81 billion in 2022 to USD 201 bn in 2030, and for cultivated meat to reach price parity with animal-sourced protein by 2032.12 Cultivated meat has significant capacity for growth and presents many benefits over conventional agriculture: no animal slaughter is required; production requires less use of land and water; there is no need for antibiotic treatments; and it potentially reduces greenhouse gas emissions at various stages of the supply chain.

Our sustainability analysis on the topic also meant that ahead of the approval, we researched what equipment would be needed for the cultivated-meat industry to gain scale. We found existing technology that is already being developed and applied in the pharmaceuticals sector, and took the view that these suppliers would be the leaders in providing equipment to the lab-grown meat sector. This showed us one type of ‘picks and shovels’ company that stands to benefit from growing revenue pools in this nascent area as first-movers seek scale. 

 

Food labelling and sugar reduction

In developments impacting ingredients, policies that promote nutritional labelling and less sugar in foods have both found support. A global push to reduce sugar consumption means taxes on sugary drinks now span five continents. In Europe, the European Public Health Association is backing Nutri-Score for EU-wide implementation to help reduce the harm resulting from unhealthy diets. The labelling system grades foods according to how healthy they are, and is already used on a voluntary basis in countries including France, the Netherlands and Germany.

Once evident in supermarkets, such legislation influences consumer decisions and compels manufacturers to reformulate their products into healthier goods. After introducing a sugar tax in 2014, Mexico observed an approximate 14% decrease in sales of sweet drinks, while purchases of bottled water and beverages without added sugar increased by 4%. The 2018 UK sugar tax on soft drinks led to the stock of drinks with sugar volumes exceeding 5mg/100ml to fall from 49% to 15%. In the Netherlands, the Nutri-Score has resulted in a significant decrease of content in more than five product categories, including from bread and margarine.

 

EU Green Deal

The EU Green Deal targets 50% and 20% reductions in pesticide and fertilisers, respectively, by 2030. The proposal follows the EU’s Farm to Fork strategy, aiming to ensure the resilience and security of food supply by promoting practices for integrated pest management so that sustainable, biological, physical, other non-chemical methods and low risk pesticides are used to protect crops.

We see such policies as being among the primary drivers for the greater use of precision agriculture and biotechnology aimed at improving efficiency and reducing adverse environmental impacts. By 2030, such techniques could provide up to 200 million more tonnes of crops. Using more biofertilisers and biopesticides would also help to enrich soil health and increase resilience to drought and flooding, while helping to offset the negative impact of synthetic fertilisers and pesticides.

 

One year into a multi-decade transition

In its first year, LO Funds – New Food Systems showed resilience amid macro and market headwinds. Moving forward, we continue to apply three themes – sustainable food production, consumption and enabling solutions – to identify companies generating excess economic returns that are positioned to benefit as sustainable solutions achieve mass-market adoption.

The transition to new food systems is a long-term phenomenon. As an instrumental part of the land and oceans systems change required for a CLIC® economy, it will reshape the food value chain and help restore planetary balance. With a long-term understanding of the transformation ahead, and visibility of the innovations underway and solutions gaining scale, we invest with conviction in opportunities today.


Sources

[1] Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document
[2] Performance shown is for the for the NA USD share class of LO Funds – New Food Systems. The index is the MSCI All Countries World Index USD. Past performance is not a guarantee of future results.
[3] Past performance is not a guarantee of future results.
[4]  Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document.
[5] Earnings per share calculated at a two-year compound annual growth rate.
[6] Source: LOIM as at 30 June 2023. Past performance is not a guarantee of future results.
[7] Important information on case studies. The case studies provided in this document are for illustrative purposes only and do not purport to be recommendation of an investment in, or a comprehensive statement of all of the factors or considerations which may be relevant to an investment in, the referenced securities. The case studies have been selected to illustrate the investment process undertaken by the Manager in respect of a certain type of investment, but may not be representative of the Fund's past or future portfolio of investments as a whole and it should be understood that the case studies of themselves will not be sufficient to give a clear and balanced view of the investment process undertaken by the Manager or of the composition of the investment portfolio of the Fund now or in the future.
[8] Holdings and/or allocations are subject to change
[9] Source: LOIM analysis; based on FOLU (2019) Growing Better: Ten Critical Transitions to Transform Food and Land Use
[10] Source: Ingredion.
[11] Past performance is not a guarantee of future results.
[12] Source: LOIM, Systemiq analysis at July 2023.

important information.

For professional investor use only

This Marketing document has been prepared by Lombard Odier Asset Management (Europe) Limited and is issued by Lombard Odier Funds (Europe) S.A., a Luxembourg based public limited company (SA), having its registered office at 291, route d’Arlon, 1150 Luxembourg, authorised and regulated by the CSSF as a Management Company within the meaning of EU Directive 2009/65/EC, as amended; and within the meaning of the EU Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD). The purpose of the Management Company is the creation, promotion, administration, management and the marketing of Luxembourg and foreign UCITS, alternative investment funds ("AIFs") and other regulated funds, collective investment vehicles or other investment vehicles, as well as the offering of portfolio management and investment advisory services. This document is approved at the date of the publishing.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
The Fund is authorised and regulated by the Luxembourg Supervisory Authority of the Financial Sector (CSSF) as a UCITS within the meaning of EU Directive 2009/65/EC, as amended. The management company of the Fund is Lombard Odier Funds (Europe) S.A. (hereinafter the “Management Company”), a Luxembourg based public limited company (Société Anonyme SA), having its registered office at 291, route d’Arlon, L-1150 Luxembourg, authorized and regulated by the CSSF as a Management Company within the meaning of EU Directive 2009/65/EC, as amended. The Fund is only registered for public offering in certain jurisdictions. The management company of the fund may decide to terminate the arrangements made for the marketing of the Fund. The articles of association, the prospectus, the Key Investor Information Document, and the subscription form are the only official offering documents of the Fund’s shares (the “Offering Documents”). They are available on http//www.loim.com or can be requested free of charge at the registered office of the Fund or of the Management Company, from the distributors of the Fund or from the local representatives as mentioned below.
Austria. Representative: Erste Bank der österreichischen Sparkassen AG, Am Belvedere 1, 1100 Vienna, Supervisory Authority: Finanzmarktaufsicht (FMA) - Belgium. Financial services Provider: CACEIS Belgium S.A., Avenue du Port 86C, b320, 1000 Brussels, Supervisory Authority : Autorité des services et marchés financiers (FSMA) - France. Representative: CACEIS Bank, place Valhubert 1-3, F-75013 Paris, Supervisory Authority: Autorité des marchés financiers (AMF) - Germany. Representative: DekaBank Deutsche Girozentrale, Mainzer Landstraße 16, D-60325 Frankfurt am Main, Supervisory Authority: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) Ireland. Facilities Agent: CACEIS Ireland, One Custom House Plaza, International Financial Services Centre, Dublin 1, Ireland, Supervisory Authority: Central Bank of Ireland (CBI) – Italy. Paying Agents: Société Générale Securities Services S.p.A., Via Benigno Crespi, 19/A - MAC 2, 20159 Milano, State Street Bank International GmbH - Succursale Italia, Via Ferrante Aporti, 10, 20125 Milano, Banca Sella Holding S.p.A., Piazza Gaudenzio Sella, 1, 13900 Biella, Allfunds Bank, S.A.U., Milan Branch,Via Bocchetto 6, 20123 Milano, CACEIS Bank S.A., Italy Branch, Piazza Cavour 2, 20121 – Milano, Supervisory Authority: Banca d’Italia (BOI) / ConSob - Liechtenstein. Representative, LGT Bank AG Herrengasse 12, 9490 Vaduz, Supervisory Authority: Finanzmarktaufsicht Liechtenstein (“FMA”) - Netherlands. Representative: Lombard Odier Funds (Europe) S.A. – Dutch Branch, Parklaan 26, 3016BC Rotterdam, Supervisory Authority: Autoriteit Financiële Markten (AFM) - Spain. Representative: Allfunds Bank, S.A.U. C/ de los Padres Dominicos, 7, 28050, Madrid, Supervisory Authority: Comisión Nacional del Mercado de Valores (CNMV) – Sweden. Representative: SKANDINAVISKA ENSKILDA BANKEN AB (publ), Kungsträdgårdsgatan, SE-106 40 Stockholm, Supervisory Authoriy: Finans Inspektionen (FI) – Switzerland. Representative: Lombard Odier Asset Management (Switzerland) SA, 6 av. des Morgines, 1213 Petit-Lancy; Paying agent: Bank Lombard Odier & Co Ltd, 11 rue de la Corraterie, CH-1204 Geneva, Supervisory Authority: FINMA (Autorité fédérale de surveillance des marchés financiers) - UK. Representative: Lombard Odier Asset Management (Europe) Limited, Queensberry House, 3 Old Burlington Street, London W1S3AB, Supervisory Authority: Financial Conduct Authority (FCA),
NOTICE TO RESIDENTS OF THE UNITED KINGDOM The Fund is a Recognised Scheme in the United Kingdom under the Financial Services & Markets Act 2000. Potential investors in the United Kingdom are advised that none of the protections afforded by the United Kingdom regulatory system will apply to an investment in Lombard Odier Funds and that compensation will not generally be available under the Financial Services Compensation Scheme. This document does not itself constitute an offer to provide discretionary or non-discretionary investment management or advisory services, otherwise than pursuant to an agreement in compliance with applicable laws, rules and regulations.
UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation scheme does not apply in respect of any investment or services provided by an overseas person.
Singapore: This marketing communication has been approved for use by Lombard Odier (Singapore) Ltd for the general information of accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the Securities and Futures Act (Chapter 289). Recipients in Singapore should contact Lombard Odier (Singapore) Ltd, an exempt financial adviser under the Financial Advisers Act (Chapter 110) and a merchant bank regulated and supervised by the Monetary Authority of Singapore, in respect of any matters arising from, or in connection with this marketing communication. The recipients of this marketing communication represent and warrant that they are accredited investors and other persons as defined in the Securities and Futures Act (Chapter 289). This advertisement has not been reviewed by the Monetary Authority of Singapore.
Hong Kong: This marketing communication has been approved for use by Lombard Odier (Hong Kong) Limited, a licensed entity regulated and supervised by the Securities and Futures Commission in Hong Kong for the general information of professional investors and other persons in accordance with the Securities and Futures Ordinance (Chapter 571) of the laws of Hong Kong. 
A summary of investor rights and information on the integration of sustainability risks are available on https://am.lombardodier.com/home/asset-management-regulatory-disc.html.
An investment in the Fund is not suitable for all investors. There can be no assurance that the Fund's investment objective will be achieved or that there will be a return on capital. Past or estimated performance is not necessarily indicative of future results and no assurance can be made that profits will be achieved or that substantial losses will not be incurred. Where the fund is denominated in a currency other than an investor's base currency, changes in the rate of exchange may have an adverse effect on price and income. All performance figures reflect the reinvestment of interest and dividends and do not take account the commissions and costs incurred on the issue and redemption of shares/units; performance figures are estimated and unaudited. Net performance shows the performance net of fees and expenses for the relevant fund/share class over the reference period. This document does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before making an investment in the Fund, an investor should read the entire Offering Documents, and in particular the risk factors pertaining to an investment in the Fund, consider carefully the suitability of such investment to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. 
This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This document contains the opinions of LOIM, as at the date of issue. The information and analysis contained herein are based on sources believed to be reliable. However, LOIM does not guarantee the timeliness, accuracy, or completeness of the information contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices indicated may change without notice. Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Important information on benchmarks
Any benchmarks/indices cited herein are provided for information purposes only. No benchmark/index is directly comparable to the investment objectives, strategy or universe of a fund. The performance of a benchmark shall not be indicative of past or future performance of any fund. It should not be assumed that the relevant fund will invest in any specific securities that comprise any index, nor should it be understood to mean that there is a correlation between such fund’s returns and any index returns.
LOIM does not provide accounting, tax or legal advice.
Important information on case studies
The case studies provided in this document are for illustrative purposes only and do not purport to be recommendation of an investment in, or a comprehensive statement of all of the factors or considerations which may be relevant to an investment in, the referenced securities. The case studies have been selected to illustrate the investment process undertaken by the Manager in respect of a certain type of investment, but may not be representative of the Fund's past or future portfolio of investments as a whole and it should be understood that the case studies of themselves will not be sufficient to give a clear and balanced view of the investment process undertaken by the Manager or of the composition of the investment portfolio of the Fund now or in the future.
For more information on Lombard Odier’s data protection policy, please refer to www.lombardodier.com/privacy-policy 
No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Funds (Europe) S.A. prior consent. ©2023 Lombard Odier IM. All rights reserved.