“Howay the Ladds Monthly Spotlight” – November 2021

As world leaders gather in Glasgow for COP26 (Conference of Parties), we thought it would be interesting to shine the spotlight on responsible investing and what it means. Is it hype, is it the dotcom boom all over again, and are there opportunities?

November Spotlight

The earth is what we all have in common

Wendell Berry

In a nutshell COP26 is where the leaders of almost 200 nations come together to discuss climate objectives and, more importantly, revisit the commitments made at the 2015 Paris Agreement.

We can be very cynical about all things “green”, but the reality is that this is the direction of travel. Not only are we seeing more investor offerings, but over half of the investments made in the UK this year have gone to sustainable strategies.

We have written before on how confusing it can be with lots of terminology. I believe there are two simple ways to look at this; ESG (Environmental, Social and Governance) and Responsible Investing.

ESG

There are three parts to ESG:

  • Environmental criteria – this will cover areas such as energy use, waste, and pollution
  • Social criteria – this will cover areas like whether suppliers hold the same values as the company, whether the company donates money to the community around them, working conditions and whether other stakeholders’ interest are considered
  • Governance criteria – this will cover accounting, voting rights, conflicts of interest, and political contributions

Although ESG seems to be the latest buzzword, many fund managers we work with would already have considered these factors before investing, it is just that they might not have articulated it in this way.

There is growing evidence that investing for good means better outcomes for shareholders.

Take an example of Loungers Plc which was founded in Bristol. This company is growing, treats staff well and the customer experience is good. During the pandemic they responded well to staff and have come out of this a stronger business. In fact, this company is still growing.

On the flip side you have J D Wetherspoon Plc ,which appears to treat staff poorly, reacted badly during the pandemic and complains it cannot attract and retain staff!

If we look at how their share prices have performed, Loungers Plc share price is up over 100% over 12 months, and J D Wetherspoon Plc is flat. Over 2 years J D Wetherspoon Plc is down over -35% and Loungers Plc up over 40%.

In this example we have considered what the corporate governance is like, and working conditions. This all seems very logical and this is where ESG plays a big part in understanding businesses. If you speak to any quality fund manager these are things they will already have been looking at.

Responsible Investing

The second area goes into the realms of responsible investing; this might be some form of exclusionary policy (i.e., for example, not investing in oil), right through to impact (i.e., does the product or service have a direct impact to create something that is better?).

If we consider impact investing, we are looking to companies that are doing something positive for the planet and for society. Some seem obvious; Siemens Gamesa Renewable Energy are manufacturers of wind turbines and Orsted are a pioneer in green energy operating across wind and solar and are seen as the most sustainable energy company in the world.

Then you have companies like Energy Recovery Inc who address the global problem of water scarcity through their invention, which is an energy recovery device which delivers 60% energy savings and up to 98% efficiency for seawater reverse osmosis desalination plants!

Responsible and impact investing offers a diversified opportunity set and these companies are just an example. We could provide lots of different names across many sectors and all doing many positive things.

Conclusion

In summary, COP26 is focusing on climate change, but the opportunities are much wider and really focus on making the world a better place.

When we consider ESG, this is something we expect the managers we select to have already adopted. The names in their funds are likely to be those that we recognise. They have selected a particular company because they see quality and value, and that is the game of fund management! The process of finding those excellent fund managers and hidden gems has been something we have adopted in our mainstream portfolios for over ten years.

Going down the responsible side, we will still be able to identify companies that we all know, but once we enter the realms of impact investing then we are likely to see something different. Many of the companies are not ones we easily recognise, but unlike the dotcom era, these often have proven business models and are at the forefront of technological change and are extremely profitable. When the world is so focused on tackling climate change, and COVID has forced governments to concentrate on levelling up society, these companies will be beneficiaries. In ten years’ time many of the names will be household names but for now this is not always the case.

We do not believe this is hype and is certainly not dotcom all over again. We have experience across mainstream and responsible investing. The mainstream portfolios are predominately focused on ESG, with some exposure to impact investing (because we believe this is an alternative means of long-term returns).

The impact portfolios are purely focused on responsible investing, with exclusions and impact strategies at the heart of what we do. With over seven years’ experience running our Balanced Positive Impact Portfolio, we know that investors do not need to sacrifice returns to gain exposure to this opportunity set.

Sources include but not limited to Financial Times, and the BBC

Tracking the market

My maths went a little astray last month when calculating the returns for Bitcoin! However, even with a return of over 100% you can see why this is such a “hot” investment. But the returns over the last month show how volatile it can be. There is talk of this being an alternative to gold, but we would err on the side of caution. The last month saw positive returns after a negative September, with Crude Oil up 11.38% and up over 70% this year!

1 January 2021 31 October 2021 Increase
Bitcoin USD 29,374.15 61,318.96 108.75%
Crude Oil 47.62 83.57 75.50%
S&P 500 3,700.65 4,605.38 24.45%
Stoxx Index 401.69 475.51 18.38%
FTSE 100 6,571.90 7,237.60 10.13%
Gold 1,944.70 1,795.50 -7.67%
Hang Seng 27,472.81 25,377.24 -7.63%
  30 September 2021 31 October 2021 Increase
Bitcoin USD 47,734.34 61,318.96 28.46%
S&P 500 4,307.54 4,605.38 6.91%
Stoxx Index 454.81 475.51 4.55%
FTSE 100 7,086.40 7,237.60 2.13%
Gold 1,755.30 1,795.50 2.29%
Hang Seng 24,575.64 25,377.24 3.26%
Crude Oil 75.03 83.57 11.38%

Sources of data: CNBC, Yahoo Finance & Reuters

What is in, and what is out?

Looking at the 12-month performance to the 31 October, there is little charge. Seven of the top performers are energy funds. The top three performers are iShares Oil & Gas Exploration & Production UCITS ETF CHF +129.8%, TB Guinness Global Energy I Acc +99.1% and iShares S&P 500 Energy Sector UCITS ETF CHF +98.5%.

There is a mix in the bottom ten but there are four gold funds within this group. The three biggest fallers in the last 12 months were VT Garraway Absolute Equity I Acc GBP -35.7%, LF Equity Income C Acc GBP -35.2% and Aviva Inv European Property I Inc GBP -24.3%. The largest fall of the gold funds was Ninety-One Global Gold I Acc GBP -19.3%.

Looking at Data from the Investment Association, the main sectors seeing outflows in August were UK All Companies -£354 million, UK Equity Income -£177 million and £ Corporate Bond -£105 million. In fact, the UK seems to be the most unloved region now! Global markets have seen positive inflows of +£838 million and interestingly Short-Term Money Market has taken +£625 million and Emerging Markets +£155 million.

In summary, there is little surprise in terms of performance, with energy doing the best so far this year. The fund movements are interesting as it clearly shows that the UK remains unloved, and the question is what will make this change!

Sources of data: TrustNet, Investment Association

Talking shop with fund managers

In October we had 13 fund manager meetings and more are arranged over the coming weeks.

We thought we would share thoughts from two managers; one on China, and one on what Central Bankers should do!

With China taking such a share of negative sentiment it was interesting to talk to Xavier Hovasse of Carmignac. I cannot do justice to what he said but his observation was that whether you look at the UK, French, or US press, there is a massive negative Western bias against China. The reason for this is unclear. It could be because the West believes democracy is the only way, or it could be they feel threatened by the growth of China. This creates a gap between Western perception and reality, and therefore to invest in China you need to look through the narrative.

David Coombes who is head of Multi Asset at Rathbone expressed his concern that everyone is focused on the risks of inflation when the real risk is the action of Central Banks. He feels raising rates too quickly to stem inflation would kill any potential recovery. The bravest decision of the Central Bankers would be to do nothing and see how the cards fall in the next six to nine months.

General disclaimer: The data has been sourced from external sources and although we have looked to ensure this is as accurate as possible, we are not responsible for data they supply. The view on responsible investing is written in a personal capacity and reflects the view of the author. Equally the views under talking shop are those of individual fund managers. Individuals wishing to buy any product or service because of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made because of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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