Founder and Chief Investment Officer of Ethical Capital.
We work hard to identify and invest in companies that generate positive real-world impact in the same way they generate revenue.
This isn’t just about feeling good. For one thing, we consider companies with a positive, well-established role in a broader system to be more resilient than their competitors. They tend to be good stewards of their corporate assets, with well-established governance procedures and clear processes to mitigate conflicts with shareholders.
With that said, companies are social organisms with living, breathing components. Which makes it difficult to capture what makes them special with mere statistics. Fortunately, concentration is one of the hallmarks of our investment style. Which means it’s possible for us to pull together brief narratives about our holdings which you can read through at your leisure.
This approach differs significantly from the way investment firms typically talk about impact.
The tendency is to produce reports which focus on a handful of issues like climate, waste, and water usage. But unfortunately, this can prevent clients and other stakeholders from developing a holistic view of how the portfolio’s holdings interact with the world around them. This conventional approach can also focus your attention on data that is easily comparable and readily available, which overlooks much of the nuance of a deeper analysis.
Our approach has downsides too. It’s more unwieldy than a slick infographic, short on portfolio-level statistics, and long on my own exposition. We are always looking to refine and improve our approach to this, so I hope you’ll share your thoughts with us on how we can do better.
What’s In This Strategy?
We think of the holdings in our flagship Global Opportunity strategy as belonging to one of four verticals: Infrastructure, Innovation, Lending, and Real Estate.
The criteria for each is relatively straightforward:
Real Estate companies generate revenue through the sale and rental of real estate,
Infrastructure holdings generate revenue directly from a fixed physical asset or by selling goods and services to the operators of those assets,
Innovation holdings generate revenue through novel products or business practices, and
Lending companies generate revenue by charging interest.
Relative to our benchmark (The MSCI ACWI), we remain significantly underweight non-us companies at the moment, with roughly 78% of our overall holdings domiciled in the United States.
We are also significantly overweight Real Estate, Industrials, and Financial Services stocks, and have no current positions in the Basic Materials, Energy, Healthcare or Utilities Sectors, which are roughly 22% of our index.
The strategy’s historical performance is shown below.
Inside the Verticals
Breaking our portfolio down by industry verticals is helpful when analyzing our strategy. The table below shows some summary statistics for each of these four components, as well as their weight within the strategy overall.
Our focus on companies with solid business models that generate free cash flow is immediately evident from this comparison. Our strategy has more than three times the ratio of free cash flow to market capitalization of its benchmark, which indicates that our holdings are extremely well-placed to make strategic investments or return capital to shareholders over the coming years.
Trading at roughly 60 times earnings, our Real Estate vertical might seem richly valued at first glance. We believe that current accounting earnings are not the best indicator of value for these asset-based businesses, especially in the midst of structural headwinds for the real estate industry. Our holdings are extremely well-positioned with high occupancy rates, deeply integrated into their local communities, and have been weathering the industry’s recent stresses with aplomb.
We continue to see opportunity in each of our verticals, and our due diligence pipeline is full of high-impact lenders, innovative companies with misunderstood opportunity sets, and infrastructure investments that should benefit from significant secular tailwinds.
Vertical
Weighting
Dividend Yield
PE Ratio
5 Year Revenue CAGR
FCF/Market Cap
Real Estate
13.85%
5.27%
59.38
21.07%
6.27%
Infrastructure
24.95%
0.74%
20.50
10.62%
6.01%
Innovation
41.53%
0.08%
30.81
32.52%
3.50%
Lending
18.74%
2.84%
9.76
12.86%
25.90%
Cash
0.93%
N/A
N/A
N/A
N/A
Total
1.48%
27.95
21.48%
8.68%
Benchmark
1.73%
23.10
N/A
2.45%
Source: Koyfin, Ethical Capital.
Top 5 Holdings
The following five companies were the largest positions. These five positions comprised 42% of our overall holdings in this strategy as of June 3rd, 2024.
Agricultural Mortgage Corporation
Vertical: Lending
Known as Farmer Mac, this Washington D.C. based lender is a remarkable example of impact in action. Its core purpose is to increase the availability of long-term credit at stable interest rates for America’s rural communities.
The company estimates that farmers and ranchers invest $2 locally for every dollar they save on interest expenses, which means the company’s impact reaches deep into areas of the country that are just plain difficult to access.
In addition to that, the company is focused on growing its portfolio of loans to rural electricity cooperatives, which is a profound opportunity to compound their impact over time.
The Investment Case: Farmer Mac’s core financial equation is a thing of beauty. They have delivered consistent returns on equity in the high teens, and more than 90% of their revenue is recurring. On top of that, the company is well placed to serve growth markets in renewable energy, fund investments that will be necessary to increase agricultural sustainability and productivity, and deepen the resilience of our agricultural system.
Alexandria Real Estate
Vertical: Real Estate
This Real Estate Investment Trust (REIT) is focused on creating and maintaining the mission-critical lab space that innovative biotechnology companies require to develop life-changing therapies.
It was the first REIT to adopt this focus, and roughly three-quarters of its annual revenue comes from “clusters” of market-leading lab space in key centers of pharmaceutical R&D like Boston, San Diego, San Francisco, and North Carolina’s Research Triangle.
The company’s tenants were responsible for 50% of novel FDA-approved therapies in the ten years ending 2023, which is nothing if not profound impact. And to our nerdy delight, the company has won numerous awards for the quality of its disclosures and financial reports in that period as well.
The Investment Case: Office real estate is in the doldrums at the moment, but lab space is uniquely insulated from the industry’s high-level challenges because the work that happens inside of them can’t generally be done from home. The company’s revenues and cash flows are growing at healthy double-digit margins, but we have been able to purchase stock at valuations unseen since the financial crisis while other investors have been fleeing the industry.
Duolingo
Vertical: Innovation
Duolingo’s mission is to provide a private tutor experience to everyone on the planet through technology. Initially focused on just language learning, they have expanded their focus to include math and music in recent years.
Each of these areas unlocks significant economic opportunity for the learners that participate in them. Learning a new language is arguably the single most effective way to enable an individual to improve their economic situation since communication is necessary for most forms of high value work.
Beyond this, the company has used its power in the language learning market to introduce a new, lower cost, and more accessible language assessment test which is displacing the legacy Test of English as a Foreign Language, or TOEFL, which is a profound additional benefit.
The Investment Case: Duolingo is a longstanding market leader in commercializing AI for public benefit, but it has recently come under assault from short sellers after supposedly competing translation products were unveiled by OpenAI and others. We think the threats are overblown: the company’s learning system is extremely difficult to replicate, has significant growth opportunities ahead of it, and has been consistently growing revenues at more than 40% a year.
Lemonade
Vertical: Innovation
Lemonade is a public benefit corporation organized “to harness novel business models, technologies, and private-nonprofiit partnerships to deliver insurance products where charitable giving is a core feature.”
That alone is profoundly innovative. But the company’s management team has been incredibly creative in the way that they fund their growth plans, which adds another layer of wonderfulness to an already-exciting proposition.
The company’s insurance products have industry-leading net promoter scores around 70, and operate closer to breakeven than most insurance industry analysts tend to recognize. As their core demographic ages, we expect they will come back to Lemonade again and again.
The Investment Case: Lemonade is well capitalized with narrowing operating losses and annual revenue growth in excess of 40%. The next two years of growth should have remarkable implications for its bottom line as the company expands past breakeven, and we were able to buy in at a fifth of their IPO price.
Crocs
Vertical: Innovation
This manufacturer of comfy clogs has been dismissed as a fad every year since they IPO’d back in 2006. But a look past the surface reveals an immensely innovative company that has consistently iterated on their core design to create something that is somehow both trendy and timeless.
The company is also well on the way towards replacing the plastic in its shoes with renewable materials, and aims to reach 50% bio-based materials by 2030. They have also rolled out a recycling program that offers discounts on new shoes to those who participate.
On its own, that’s not so impressive. But the company has made huge strides towards enshrining comfort and utility in our popular culture, which is a significant form of impact on its own.
The Investment Case: The company took on a significant debt load after acquiring Heydude, a complementary footwear brand, in 2022. Though concerning, this hasn’t hurt the company’s solid global growth trajectory, with both brands exceeding estimates as of the most recent report. As they pay down debt and continue on their growth trajectory, we expect free cash flow to continue growing by 25% or more over the coming years.
Next Steps
We welcome any questions or thoughts you may have on our approach to investing in general, or this report specifically. Please click here to pass on whatever feedback you may have confidentially.
We’d also love to welcome you to our community of clients. Just click here to get our work together started.
Writing deepens our dialogues, helps us understand the world better, and holds us intellectually accountable.
If you're intrigued by what you've seen so far, consider signing up for our newsletter and exploring the archive of past essays. And remember: we treasure feedback.
What We Own Right Now and Why
Author:
Sloane Ortel
We work hard to identify and invest in companies that generate positive real-world impact in the same way they generate revenue.
This isn’t just about feeling good. For one thing, we consider companies with a positive, well-established role in a broader system to be more resilient than their competitors. They tend to be good stewards of their corporate assets, with well-established governance procedures and clear processes to mitigate conflicts with shareholders.
With that said, companies are social organisms with living, breathing components. Which makes it difficult to capture what makes them special with mere statistics. Fortunately, concentration is one of the hallmarks of our investment style. Which means it’s possible for us to pull together brief narratives about our holdings which you can read through at your leisure.
This approach differs significantly from the way investment firms typically talk about impact.
The tendency is to produce reports which focus on a handful of issues like climate, waste, and water usage. But unfortunately, this can prevent clients and other stakeholders from developing a holistic view of how the portfolio’s holdings interact with the world around them. This conventional approach can also focus your attention on data that is easily comparable and readily available, which overlooks much of the nuance of a deeper analysis.
Our approach has downsides too. It’s more unwieldy than a slick infographic, short on portfolio-level statistics, and long on my own exposition. We are always looking to refine and improve our approach to this, so I hope you’ll share your thoughts with us on how we can do better.
What’s In This Strategy?
We think of the holdings in our flagship Global Opportunity strategy as belonging to one of four verticals: Infrastructure, Innovation, Lending, and Real Estate.
The criteria for each is relatively straightforward:
Relative to our benchmark (The MSCI ACWI), we remain significantly underweight non-us companies at the moment, with roughly 78% of our overall holdings domiciled in the United States.
We are also significantly overweight Real Estate, Industrials, and Financial Services stocks, and have no current positions in the Basic Materials, Energy, Healthcare or Utilities Sectors, which are roughly 22% of our index.
The strategy’s historical performance is shown below.
Inside the Verticals
Breaking our portfolio down by industry verticals is helpful when analyzing our strategy. The table below shows some summary statistics for each of these four components, as well as their weight within the strategy overall.
Our focus on companies with solid business models that generate free cash flow is immediately evident from this comparison. Our strategy has more than three times the ratio of free cash flow to market capitalization of its benchmark, which indicates that our holdings are extremely well-placed to make strategic investments or return capital to shareholders over the coming years.
Trading at roughly 60 times earnings, our Real Estate vertical might seem richly valued at first glance. We believe that current accounting earnings are not the best indicator of value for these asset-based businesses, especially in the midst of structural headwinds for the real estate industry. Our holdings are extremely well-positioned with high occupancy rates, deeply integrated into their local communities, and have been weathering the industry’s recent stresses with aplomb.
We continue to see opportunity in each of our verticals, and our due diligence pipeline is full of high-impact lenders, innovative companies with misunderstood opportunity sets, and infrastructure investments that should benefit from significant secular tailwinds.
Top 5 Holdings
The following five companies were the largest positions. These five positions comprised 42% of our overall holdings in this strategy as of June 3rd, 2024.
Agricultural Mortgage Corporation
Vertical: Lending
Known as Farmer Mac, this Washington D.C. based lender is a remarkable example of impact in action. Its core purpose is to increase the availability of long-term credit at stable interest rates for America’s rural communities.
The company estimates that farmers and ranchers invest $2 locally for every dollar they save on interest expenses, which means the company’s impact reaches deep into areas of the country that are just plain difficult to access.
In addition to that, the company is focused on growing its portfolio of loans to rural electricity cooperatives, which is a profound opportunity to compound their impact over time.
The Investment Case: Farmer Mac’s core financial equation is a thing of beauty. They have delivered consistent returns on equity in the high teens, and more than 90% of their revenue is recurring. On top of that, the company is well placed to serve growth markets in renewable energy, fund investments that will be necessary to increase agricultural sustainability and productivity, and deepen the resilience of our agricultural system.
Alexandria Real Estate
Vertical: Real Estate
This Real Estate Investment Trust (REIT) is focused on creating and maintaining the mission-critical lab space that innovative biotechnology companies require to develop life-changing therapies.
It was the first REIT to adopt this focus, and roughly three-quarters of its annual revenue comes from “clusters” of market-leading lab space in key centers of pharmaceutical R&D like Boston, San Diego, San Francisco, and North Carolina’s Research Triangle.
The company’s tenants were responsible for 50% of novel FDA-approved therapies in the ten years ending 2023, which is nothing if not profound impact. And to our nerdy delight, the company has won numerous awards for the quality of its disclosures and financial reports in that period as well.
The Investment Case: Office real estate is in the doldrums at the moment, but lab space is uniquely insulated from the industry’s high-level challenges because the work that happens inside of them can’t generally be done from home. The company’s revenues and cash flows are growing at healthy double-digit margins, but we have been able to purchase stock at valuations unseen since the financial crisis while other investors have been fleeing the industry.
Duolingo
Vertical: Innovation
Duolingo’s mission is to provide a private tutor experience to everyone on the planet through technology. Initially focused on just language learning, they have expanded their focus to include math and music in recent years.
Each of these areas unlocks significant economic opportunity for the learners that participate in them. Learning a new language is arguably the single most effective way to enable an individual to improve their economic situation since communication is necessary for most forms of high value work.
Beyond this, the company has used its power in the language learning market to introduce a new, lower cost, and more accessible language assessment test which is displacing the legacy Test of English as a Foreign Language, or TOEFL, which is a profound additional benefit.
The Investment Case: Duolingo is a longstanding market leader in commercializing AI for public benefit, but it has recently come under assault from short sellers after supposedly competing translation products were unveiled by OpenAI and others. We think the threats are overblown: the company’s learning system is extremely difficult to replicate, has significant growth opportunities ahead of it, and has been consistently growing revenues at more than 40% a year.
Lemonade
Vertical: Innovation
Lemonade is a public benefit corporation organized “to harness novel business models, technologies, and private-nonprofiit partnerships to deliver insurance products where charitable giving is a core feature.”
That alone is profoundly innovative. But the company’s management team has been incredibly creative in the way that they fund their growth plans, which adds another layer of wonderfulness to an already-exciting proposition.
The company’s insurance products have industry-leading net promoter scores around 70, and operate closer to breakeven than most insurance industry analysts tend to recognize. As their core demographic ages, we expect they will come back to Lemonade again and again.
The Investment Case: Lemonade is well capitalized with narrowing operating losses and annual revenue growth in excess of 40%. The next two years of growth should have remarkable implications for its bottom line as the company expands past breakeven, and we were able to buy in at a fifth of their IPO price.
Crocs
Vertical: Innovation
This manufacturer of comfy clogs has been dismissed as a fad every year since they IPO’d back in 2006. But a look past the surface reveals an immensely innovative company that has consistently iterated on their core design to create something that is somehow both trendy and timeless.
The company is also well on the way towards replacing the plastic in its shoes with renewable materials, and aims to reach 50% bio-based materials by 2030. They have also rolled out a recycling program that offers discounts on new shoes to those who participate.
On its own, that’s not so impressive. But the company has made huge strides towards enshrining comfort and utility in our popular culture, which is a significant form of impact on its own.
The Investment Case: The company took on a significant debt load after acquiring Heydude, a complementary footwear brand, in 2022. Though concerning, this hasn’t hurt the company’s solid global growth trajectory, with both brands exceeding estimates as of the most recent report. As they pay down debt and continue on their growth trajectory, we expect free cash flow to continue growing by 25% or more over the coming years.
Next Steps
We welcome any questions or thoughts you may have on our approach to investing in general, or this report specifically. Please click here to pass on whatever feedback you may have confidentially.
We’d also love to welcome you to our community of clients. Just click here to get our work together started.
The world changes all the time
So There's Always More to Say
Writing deepens our dialogues, helps us understand the world better, and holds us intellectually accountable.
If you're intrigued by what you've seen so far, consider signing up for our newsletter and exploring the archive of past essays. And remember: we treasure feedback.