U Ethical’s investment philosophy is founded on a long term focus. Our investment decisions are made with a view that financial markets and the performance of underlying asset classes can be cyclical, but ultimately fundamentals will drive performance over time. Importantly, we recognise the value of delivering financial returns as well as non-financial benefits, and we therefore aim to select high quality companies set for long term competitive market returns.
Two holdings in our portfolio - Cochlear and Taiwan Semiconductor Manufacturing Company (TSMC) - typify the high quality companies we invest in. These benefit from robust balance sheets, resilient cash flows and good ESG profiles.
Cochlear, a holding in our Australian Equities Trust – Wholesale, is a global market leader in the hearing implant industry. In 2021, the global cochlear implant market size was valued at USD 2.2 billion and is expected to expand at a compound annual growth rate of 14% from 2022 to 2032.¹ The company operates through the Americas, Europe and Asia Pacific with a geographically diverse manufacturing structure spreading from Australia to Sweden.
Since inception, Cochlear has provided hearing solutions to thousands of adults and children suffering from severe hearing loss. A key characteristic of the hearing implant industry is its significant barriers to entry. Hearing implants are highly capital intensive to produce and a market leading position is critical to the ongoing success of any company in the industry. To this end, Cochlear has been a leader in the research and development of hearing solutions, and has a strong market share position of 50-60%.²
Given the current volatile economic environment, Cochlear remains an attractive investment due to its solid balance sheet, strong market share and consistent strategy.
The company has a good ethical story with strong female board-level representation and an improving ESG profile. Cochlear is an ESG Industry leader (AAA ESG-rated) and meets U Ethical’s investment policy criteria for several reasons, including:
- it has no involvement in ethically misaligned business activities;
- its demonstration of strong corporate governance and ethical corporate behaviour practices; and
- it has no public ESG controversies.
Looking at its corporate social responsibility initiatives, Cochlear supports the World Health Organisation (WHO) to prevent hearing loss. It donates to WHO’s program for prevention of deafness and hearing loss and is a member of WHO's World Hearing Forum and other community support programs.
Taiwan Semiconductor Manufacturing Company
Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC), a holding in our International Equities Trust – Wholesale, manufactures and sells integrated circuits and wafer semiconductor devices.
Its chips are used in:
- personal computers and peripheral products;
- information applications;
- wired and wireless communications systems products;
- the automotive industry;
- industrial equipment including consumer electronics such as digital video compact disc players;
- digital television;
- game consoles; and
- digital cameras.
Recently, demand for semiconductors has been high, partly as a result of stronger demand for chips from the computer industry, consumer electronics companies and the automotive industry, but also due to the high competition for wafer fabrication capacity. That is, the capacity to produce complete electrical or photonic circuits on semiconductor wafers in the semiconductor device fabrication process. TSMC's major sites in Taiwan make it the world’s largest pure-play semiconductor foundry. It is also currently expanding its operations into other geographies, including recently completing the construction of a facility in the US, and committing to develop a chip facility in Japan, thereby mitigating some of the geopolitical risk associated with its current operations.
Looking at TSMC’s corporate behaviour and governance, its strong code of ethics and practices, board effectiveness, industry experience and diversity policies resulted in MSCI ESG Research rating the company a market leader. It was also ranked a leader in terms of human capital development, scoring the highest in its industry for employee retention with a 94/100 compared to the industry average of 9/100. It also performs well in terms of training and development relative to peers. There is, however, room for improvement on its climate profile and this will be an area of focus for our stewardship activities.
Senior Investment Analyst – Equities, Sabina Ahmed commented that TSMC and Cochlear represent the type of holdings that deliver for both society and investors.
“One of the best ways to assess potential investment in a stock is to stress test its valuation under a range of different scenarios and assumptions. These two holdings are a product of this approach and our broader ethical investment process.” Sabina said.
To learn more about U Ethical’s investment approach and other companies we invest in, please get in touch