The EdenTree Blog
Our blog aims to bring you the latest insights and reactive commentary from our fund managers, analysts and responsible investment team as we navigate unprecedented times in financial markets and for responsible and sustainable investors.
As we approach the tenth week of lockdown here in the UK, Thomas Fitzgerald, co-manager of the Amity International Fund shares some of his experiences in working from home:
To discover and monitor long-term responsible and sustainable investment opportunities, we staff our investment process with a hard-working, naturally inquisitive team that operate under the mantra that as a collective we can reach better decisions than we can as individuals. Collaboration is therefore a core element of our investment process, and one of the reasons that our office in London is open-plan, with fund managers and investment analysts sat together and numerous breakout areas.
So how has this changed during a period of lockdown? The short answer is that it has not. For most, week one involved the obligatory technology reconfiguration. Sourcing a Bloomberg keyboard, an extra monitor and finding the best spot in the house for broadband speed were the key requirements. As the days progressed, the use of Skype and Google Meets accelerated. And on that note, a huge thank you to our I.T. and Operations Teams for their incredibly hard work and endless patience in getting us up and running at break-neck speed! The team’s daily desk meeting became virtual almost instantly and weekly updates with other teams around the business were soon established.
Since the lockdown began, the global equity team has continued its regular morning meeting and held a number stock reviews in conjunction with our proprietary research on subjects as varied as the digital payments, medical technology and enterprise software. We have held business update calls with existing holdings and attended both investor days and industry conferences in a virtual capacity. In recent days, we have even held a virtual team “off-site”, to discuss long-term, pervasive global themes. Clearly, the formal part of the investment process works well from home. The greater challenge has been replicating informal conversation, such as the spontaneous discussion that follows a meeting, however, that is beginning to build through Skype chats as we get more used to the new environment and the new way of working.
So, will the way in which we work change indefinitely? In some ways I believe that it will. Thanks to the ever-evolving improvements in technology and the relentless work of our colleagues, the current global health pandemic has taught us that the investment process works, it is flexible and scalable. The current social distancing measures have also enabled us to explore new ideas and challenge existing positions with great detail. However, in our view, sharing these ideas and debating insights ultimately achieves a better result. This is, for the moment at least, still best achieved in a face to face format. Our work and travel patterns will certainly evolve as a result of this enforced experience, however, our investment process will endure.
Jon Mowll, responsible investment analyst, on how COVID-19 is laying bare the shortcomings of globalised capitalism:
Some deep injustices – and indeed absurdities – of globalised capitalism have been laid bare by the pandemic. How can it be that Bangladeshis in the apparel sector are reliant on unsustainable consumption levels in the Global North to earn what amounts to a poverty wage? That when such consumption grinds to a halt (a necessity from an ecological perspective), millions in the Global South face unimaginable destitution? That people go without food whilst crops wilt in the fields? That airlines burn jet fuel to fly empty planes around the world so they don’t lose their slots at airports? Ultimately, these are the results of a system which in which financial profit, reaped by so few, is sometimes placed before the lives and livelihoods of so many – as well as before the integrity of our collective life support system, the Ecosphere.
In the longer term, we need to recognise that the economic systems and dynamics which have predominated since the 1970s (and, in some senses, date back to the 1500s) may not be fit for the 21st century. We have seen, in recent years, shifts towards the ideas of “stakeholder societies”, “inclusive capitalism”, and so forth. Change is afoot.
We are already seeing some of the seeds of a new economy emerging, though their success is by no means guaranteed. At a company level, for instance, Medtronic have made their low-grade ventilator specifications (used in less severe cases of Covid-19) open source, making these ventilators available globally to be manufactured by anyone. Such collaborative, knowledge-sharing initiatives (or “knowledge commons”) will be central to tackling global challenges at a local scale.
At the level of the city, economist Kate Raworth’s ‘Doughnut’ model has just recently been adopted by Amsterdam, as it seeks to recover better from the dislocation caused by Covid-19. The aim is to create a city that meets the needs of all without putting undue pressure on the ecosystems which support it. EU Finance Ministers, alongside many other stakeholders, are pushing for a continent-wide “green recovery”. 170 Dutch academics have put together a 5-point plan for a post-Covid-19 economy, building on many ‘degrowth’ principles. We will watch these and similar developments with great interest.
David Katimbo-Mugwanya, Fixed Income Fund Manager at EdenTree, comments in light of the DMO's decision to issue the first ever negative yielding gilt:
For the very first time, the UK’s Debt Management Office issued a 3-year gilt at a negative yield on the 20th May 2020. Were an investor to buy that government bond at the premium that it was issued and hold the investment to maturity, they stand to lose more to amortisation than they would gain from the fixed coupon payments received in nominal terms. Put simply, they would lose money. As such, gilt investors opted to pay for the opportunity to lend rather than be compensated for availing funds that the UK government borrowed.
With the short end of the gilt yield curve historically more sensitive to the benchmark interest rate set by the Bank of England, it should come as no surprise that this feat occurred at a time when the possibility of a sub-zero base rate is being contemplated more seriously. Recent commentary affirming these BoE considerations has served to anchor this part of the sovereign yield curve to the environs of zero, if not just beneath this level.
It is arguably worth highlighting the Bank’s previous reluctance to deploying this policy toolkit option on account of perceived adverse consequences to the UK’s banking system. The newly-installed Governor and his colleagues are not alone in pondering over the merits of such interest rate settings in recent weeks however, as global central banks attempt to forge a path out of the ongoing economic contraction. We view a further expansion of quantitative easing as more likely for the period ahead. As we await the outcome of the Bank of England’s policy deliberations nevertheless, teetering on the precipice of zero, the market participants willing to pay to invest in a ‘safe haven’ asset have already made up their minds.
Ketan Patel, manager of the Amity UK Fund, gives an update on his outlook for the UK economy, how the fund has been performing and where his focus is now as a bottom-up stock picker:
April was the second best month for the US equity market’s performance for over four decades, with the vast majority of this bounce driven by technology and healthcare stocks. However, the UK missed the rise, as our equity market is far more heavily weighted towards the Financials, Mining and Oil & Gas sectors, all of which continue to struggle significantly during the pandemic. But what we’ve consistently seen across wider geographies and sectors is that market optimism does not seem to be reflecting the negative economic reality; asset prices are being distorted by unprecedented intervention by central banks and governments.
A healthy degree of pessimism is needed considering we still do not know how long lockdown will last for and what the economy will look like once it’s lifted. The extent of the damage is likely to be severe, leading us to believe the idea of a v-shaped recovery is slim, and we also see it as unlikely that there will be a widely available vaccine for COVID-19 before 2021 at the earliest. That also then raises the possibility of a second wave of coronavirus occurring over the winter months of this year, and therefore a further knock-on effect to the economy.
The key data point to analyse will be the jobless numbers, which have been rising dramatically in the US and also in most developed economies, as the benchmark to assess the extent of the economic damage. If the working populations aren’t back to work by the summer, the economic damage is likely to be not only deeper, but also long lasting and will push the prospects of any recovery further out into 2021/22.
On that basis we remain cautious. Our primary job as bottom-up stock pickers is to look past the macro noise, but when conditions are this negative and widespread, that often isn’t possible. However, the Amity UK Fund has held up relatively well amid the turmoil of the last few months mainly due to our defensive positioning, which includes a large exposure to large cap companies which are in a better position to cope with the pandemic. This includes well known names in sectors including Healthcare, Utilities and Food Retail, all of which are well represented in the fund. General retailers that have a strong online presence or that were early adopters of digital, such as Hotel Chocolat, Dunelm or Next have also held up well, as consumers have shifted their consumption habits online.Moving forward, our focus continues to be the hunt for quality business models that are flexible and robust enough to ride out near term uncertainty and capable of adapting to any long-term structural changes in the economy and consumer behaviour. We want to own companies that are efficiently managing their leverage, making sure they are generating strong cash flows and well positioned to take advantage of any economic recovery that will emerge post the pandemic. However given the current heightened levels of uncertainty and our relative defensive positioning of the portfolio, we are not looking to make any significant changes or dive into anything new soon – in times like these, often doing nothing can prove to be the pragmatic approach.
Jon Mowll, responsible investment analyst, on some of the social implications raised by the pandemic:
The global spread of Covid-19 has created a more extensive awareness of systemic issues which pre-date and have been exacerbated by the pandemic. It has led to questions of who and what we (or rather, our economic systems) value, the nature of work and of our collective humanity, and the role of business in society.
Here in the UK, and elsewhere, we see that the narrative of such public health crises being “great levellers” is patently false. As ShareAction’s Simon Rawson has remarked, “Covid-19 has shone a spotlight on the social (“S”) component of ESG in a way that we have never seen before.” We see that those people who form the very bedrock of our societies are often poorly paid, working long hours in precarious, sometimes menial jobs. Nurses and carers, shelf-stackers and cashiers, delivery drivers and fruit pickers. They are at greater risk of contracting Covid-19, because they cannot work from home. Without them, society would slow to a halt. And yet many are paid scarcely enough to make ends meet.
Pre-existing inequalities are also reflected in other ways. Air pollution – a problem felt most acutely by poor communities living in inner cities – has left many people with heart and lung conditions, making them more susceptible to the virus. Unhealthy diets among lower earners similarly contributes to underlying health conditions such as obesity and weakened immune systems. We reflected, in last year’s EdenTree Insight ‘Mind the Gap: Economic Inequality in the 21st Century’, on the fact that a person’s socio-economic status has a profound impact on their physical health, quality of diet, life expectancy, and so on. Covid-19 shows it all too clearly.
If we broaden our scope to the Global South, it becomes clear that a strategy of “physical distancing” is really a luxury of wealthy nations. For people living in refugee camps, slums, or shanty towns, with very high population densities, social distancing is impossible. Disease burdens are already high, and access to medical care beyond the reach of millions. It is therefore both the inequality within countries, and the inequality between countries that Covid-19 throws into sharp relief.
The role that investors and businesses can play in the immediate term is clear. Short-term profitability must be disregarded, and the safety and wellbeing of everyone in a company’s sphere of influence, including in supply chains, prioritised. If and once that happens at scale, it may be difficult for us, looking back, to understand how anything else was considered acceptable.You can read the full article from Jon here.