Volkswagen said an “unstable supply situation” led to a shortfall of free cash flow.
Mario Tama/Getty Images
Supply chain tangles have agitated companies since the start of the Covid-19 pandemic as higher freight costs, and disruptions in the logistics mangle financial performance. Engine No. 1 sees that as an opportunity for investors.
The activist investor, which also manages $513.90 million in its exchange-traded fund business, launched the Transform Supply Chain (ticker: SUPP) ETF on Wednesday, adding to the teeming universe of thematic funds. The fund invests in companies that are creating shareholder value by minimizing supply chain risks either by reshoring jobs close to point of sale, offsetting labor costs through automation or enhancing sourcing transparency among other transformations.
Engine No. 1 gained prominence in 2021 when it bagged three board seats at oil giant
Exxon Mobil
(XOM) after winning a fierce proxy fight. The surprise element laid both within the investment firm’s size and its stake in
Exxon Mobil
—a mere 0.02% of total shares.
The upstart has since then launched the
Transform 500 ETF
(VOTE), which promised investors to use the shares it owns in companies to “change them” for the better by holding them accountable for sustainability and similar issues. It also created the
Transform Climate ETF
(NETZ) investing in companies that benefit from the energy transition.
Now, the issuer has taken up a new task: selecting equities addressing supply chain instabilities. Holdings include freight railroad company
Canadian Pacific Railway
(CP) and industrial firm
Rockwell Automation,
which works on factory automation.
It’s a timely assignment. Companies still haven’t recovered from the pandemic-induced supply-chain disruption that sent costs soaring across the globe. German auto giant
Volkswagen
(VOW3. XE) fell short of management’s free cash flow estimate for the year “mainly due to the unstable supply situation,” the company said last week.
Boeing
(BA) recently said it is having trouble finding labor.
Of course, Engine No. 1’s ETF isn’t the only product out there targeting supply chain inefficiencies.
ProShares,
in April, started
Supply Chain Logistics ETF
with a ticker (SUPL) not too different from the Transform series’ product, attacking the similar growing problem of logistics.
ProShares ETF also holds Canadian Pacific Railway, and is down 7.6% since its first close. The fund has gained 9.87% this year through Monday’s close, slightly more than the
S&P
‘s 7.7% gain.
Investors need a reason to opt for Engine No. 1’s product instead, specifically because its expense ratio of 0.75% is higher than ProShares 0.58%. Expense ratios are important because they eat into investor returns, particularly over the long run. The average expense ratios charged by thematic funds in 2022 were 0.62%, according to Morningstar.
Engine No. 1 didn’t specifically respond to Barron’s about its competitive positioning, but the firm’s head of ETFs Yasmin Dahya Bilger over a prior call emphasized the firm’s expertise in the space, as well as the “ability to be fluid in our investment approach.” That’s another way of saying the firm actively assesses its holdings.
To be sure, Engine No. 1 does benefit from being just the second product within the Chain Logistics subtheme in the wide pool of thematic ETFs -about 280- and can benefit from the continued investor attention on supply-chain woes.
Write to Karishma Vanjani at karishma.vanjani@dowjones.com
Credit: marketwatch.com