Martyn Jones

An ocean of opportunity (in fishing nets and carpets)

Martyn Jones

The ‘Blue Planet effect’ has had a profound impact on public attitudes toward plastic waste. First broadcast on the BBC late last year, Sir David Attenborough’s Blue Planet 2 laid bare the damage to our oceans caused by plastic pollution, with the programme revealing the shocking statistic that “we dump eight million tonnes of plastic into the sea every year” and accompanied by images of poisoned marine life.

Plastic pollution has quickly become a mainstream issue and urgent action is needed from consumers, companies and governments. One solution to this problem is to recover and re-use the plastic waste that litters our oceans. ‘Regenerated’ plastics are made from recycled plastic waste, avoiding the creation of new virgin material from oil-based petrochemicals and helping to ‘close the loop’ in the plastic lifecycle.

Regenerated plastics are highlighted in our broader sustainability theme of Increasing waste treatment and recycling. This theme has long-term structural growth drivers including increasingly scarce resources, escalating environmental regulations and the rise of conscious consumerism.

One company benefiting from this theme, and a new holding for the Sustainable Future European Growth Fund, is innovative Italian textile manufacturer Aquafil. The company’s main product is Polyamide 6, better known as nylon, the synthetic polymer first developed in the 1930s by DuPont chemist Wallace Carothers. Nylon has a number of valuable characteristics including toughness and durability, as well as being lightweight, quick-drying, shrink and fire resistant.

As as a crude oil derivative, however, nylon clearly has a number of sustainability challenges. Recognising this around 20 years ago, Aquafil decided to tackle this issue by trying to improve the sustainability of nylon production.

The company set about researching the process of depolymerisation, taking nylon from old fishing nets and carpets, breaking down the long chain polymers and turning this back into the monomer building block Caprolactam. This can then be re-polymerised into new nylon over and over again in a regenerable fashion.

After years of trial and error and investment, CEO Giulio Bonazzi’s vision was realised as Aquafil successfully developed a commercially viable process to recycle used nylon. Aquafil branded this innovative recycled product Econyl, with the tagline: No waste. No new resources. Just endless possibilities.

Demand for this regenerable textile is increasing significantly as consumers care more and more about the impact of the products they buy. A good example of this is the Econyl partnership with Parley and Adidas, helping them to launch a range of recycled products including a range of swimwear, apparel and trainers.

It is still early days for Econyl but the new textile has had some exciting success, with brands such as Gucci, H&M, Stella McCartney, Speedo and car companies BMW and Volvo using its material. We can envisage a point where Econyl is used by brands in the same way as Gore-Tex material – but instead of just promoting durability, the Econyl logo on the garment also highlights the sustainability credentials. We believe this will enable Aquafil to capture more of the end product margin.

From an investment perspective, Aquafil has the quality attributes we look for in a company:

  • Barriers to entry in the form of intellectual property and capital investment;
  • Exciting growth prospects as brands and consumers move towards sustainability; and
  • Strong returns on invested capital and a healthy balance sheet with a net cash position.

We also like the fact this is a family owned and operated company that is managed not for the next quarter, but for the next generation.

Aquafil has the structural sustainability drivers we think will provide reliable growth for the long term and high-quality fundamentals but what about the crucial last piece – its valuation? It currently trades at a 25% premium to the broader MSCI Europe index, but we think the company will grow earnings at twice that of the average European company, making this a potentially attractive investment opportunity.

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Key Risks 

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The majority of the Liontrust Sustainable Future Funds have holdings which are denominated in currencies other than Sterling and may be affected by movements in exchange rates. Some of these funds invest in emerging markets which may involve a higher element of risk due to less well regulated markets and political and economic instability. Consequently the value of an investment may rise or fall in line with the exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest geographically in a narrow range and has a concentrated portfolio of securities, there is an increased risk of volatility which may result in frequent rises and falls in the Fund’s share price. Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed-interest securities - fluctuations in interest rates are likely to affect the value of these financial instruments. If long-term interest rates rise, the value of your shares is likely to fall. If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds. This is because there is low trading activity in the markets for many of the bonds held by these funds. Mentioned above five funds can also invest in derivatives. Derivatives are used to protect against currencies, credit and interests rates move or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions.

Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing. 

Tuesday, September 4, 2018, 3:53 PM