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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.

Ketan Patel, manager of the Amity UK Fund:

As many countries in Europe focus on lifting lockdowns and relaxing restrictions, a lot of people are now turning to the question of whether there will be a second wave of coronavirus to contend with later in the year. Taking a global view however, this seems premature given that we are very clearly still in the midst of grappling with the first wave of the pandemic – India and Brazil remain particular hotspots and in recent days we’ve seen a huge resurgence of the virus in the US, particularly in the southern and western states.

In the US, many states on the verge of re-opening their economies are now backtracking, keeping businesses closed and lockdown restrictions in place. As a result, markets have been jittery of late, showing themselves to be easily spooked on the possibility of bad news. Such a response shows just how fragile the equity rally that we have seen over the last two months really is.

Rightly so, as the macro picture globally continues to look increasingly gloomy and any degree of ‘recovery’ can be considered fragmented, at best. It also seems to be heavily polarised – on the one hand, one in twelve people in the US are now behind on their mortgage payments; on the other, America’s billionaire class has managed to increase their net wealth to the tune of over $400bn since the start of the pandemic.

It’s clear that there are still short-term effects of the pandemic that have yet to make their impact felt, and we should expect markets to react accordingly. However there is also a need to acknowledge and begin to tackle some of the longer-term problems that the virus has exacerbated, such as rising social inequality.

Given that the markets seem to be completely disconnected to this reality, we still think there is a lot to be cautious about. 

The tech cold war

Thomas Fitzgerald, co-manager of the Amity International Fund, looks at how the recent geopolitical developments between the US and China are having a knock on effect for international trade more broadly:

Almost a year on from the initial trade restrictions imposed by the US on the Chinese technology conglomerate Huawei, new measures were recently implemented by the Bureau of Industry and Security (the BIS), which have significant implications, not only for the company’s key suppliers, but for international trade more broadly.

Huawei have continued to use US software and hardware to design semiconductors, in spite of actions taken by the US last year, undermining the national security and foreign policy purposes of the US Entity List by insourcing components to its internal semiconductor division, HiSilicon, as well as commissioning production in overseas foundries using US equipment. Consequently, Huawei was able to continue operating with limited impact to the rollout of its telecom equipment in China or globally.

New measures announced appear to be directly targeted at Huawei and its affiliates, focusing specifically on Huawei’s own chip designs and their manufacture, moving away from the 25% threshold to a new direct product licensing framework. The new rules bring into scope semiconductor equipment and electronic design automation (EDA) tools for the first time. As a result, chip designed for Huawei or its affiliates cannot be shipped without a license if it utilises US software to design it or US equipment to manufacture it. Given the US dominates both sectors, the new measures effectively shut off Huawei’s chip design capability, provided any license application starts with the presumption of denial. The new rules were effective from 15 May, and while there is a grace period of 120 days from the effective date for any chips in production, foundries are prohibited from taking new orders from Huawei.

The key concern ahead is the potential escalation and the response from policymakers in China. The original Huawei restrictions provoked retaliation from China and the threat of an ‘unreliable entities list’ that consisted of major US companies. However, this threat was not realised, and it remains unclear who would be on it and what impact it would have. The new rules have drawn a similar response from China. As a result, the technology industries in the US and China are becoming increasingly localised and major companies such Apple, risk being used as ‘pawns’ in this geopolitical dispute. Furthermore, this technology and national security dispute is becoming increasingly intertwined with the trade war and the blame game surrounding the current health pandemic as we head into the US presidential election later this year. Any potential for a de‑escalation in tensions will likely involve the three elements of technology, COVID-19 and trade. This complicates a resolution, particularly with President Trump keen to focus the narrative on China heading into the election campaign, given a weak economy and mounting criticism of his administration’s handling of the pandemic. Meanwhile, China may benefit from simply waiting to see who is in the White House following the impending election.

Ketan Patel, manager of the Amity UK Fund looks at the recent strong performance of ESG funds during the market turmoil of the last few months:

The pandemic has led to enormous disruption and dislocation in global markets, but it has also created a surge in interest in ESG investing, with investors deploying capital into the sector on an unprecedented level. This increased interest in ESG has coincided with a wider debate over active vs passive investing, and also more importantly on investment performance; both areas on which ESG investing is leading the way.

There are two main factors why active management in ESG will continue to thrive. Firstly, only active managers can engage on the issues that are important for their clients and secondly, active managers play a key role in exercising proxy voting ensuring that the interests of shareholders are represented. Both engagement and voting are platforms from which investors can influence how businesses impact the environment and communities in which they operate. Passive solutions are derived from instruments that are unlikely to allow ESG investors to align their values with investment returns, as they don’t engage with companies or vote proxies.

Next, the age old accusation that investing in ESG funds resulted in investors having to give up performance for values has well and truly been dismissed. A review of the most competitive sector, the UK All companies, reveals that 1 in 4 of the top quartile funds are screened over the past 12 months to April 2020.[1] However, what is impressive is that the outperformance of the screened funds goes beyond 12 months. On average 1 in 5 funds in the UK All companies sector that are screened are 1st quartile over 3, 5 and 10 years.

These long-term tailwinds gathering strength augur well for ESG investing, with a greater focus on the role that companies will play in mitigating climate change and delivering social justice.

Thomas Fitzgerald, co-manager of the Amity International Fund, shares some of his key findings from the recent Baird Global Technology, Consumer & Services Conference 2020:

During the current COVID-19 pandemic, remote work, online collaboration tools and digital business processes more broadly have transitioned from “office perks” to essential workplace infrastructure, providing a catalyst for organisations to reconsider their investment priorities.

e-Commerce growth has been trending at triple-digit rates on a year-over-year basis since April for many of the retail names presenting at the conference. The roll out of “curb-side pickup” solutions to complement traditional “Click & Collect” capabilities has been a common capability enhancement across the industry, and consumer adoption has been significant, a dynamic that may help mitigate the pressure from last mile delivery costs. Most companies appeared to agree that the new normal environment post pandemic is likely to reflect an acceleration of most trends already in motion.

Product development remains the lifeblood of innovative businesses and a key driver of future revenue generation. Consequently, those companies enabling the design process do not appear to be experiencing a material slowdown in demand. Technology companies continue to invest in new advanced computing and future innovations around 5G, autonomous driving, artificial intelligence, etc.

Testing, measurement and infrastructure companies demand for communication services have increased significantly during this crisis. Many of the participating companies suggested that the current COVID-19 pandemic has accelerated the time-line and scope of 5G infrastructure, while customer emphasis has shifted to the following topics: 1.) network security, network scalability, stimulating new business opportunity and preparing for the ‘new-normal’ (new way of consuming services) in a post-COVID-19 world.

Digital payment giant Visa noted that the company saw digital payment channels capture a share of total payment volume in April that was equivalent to the last three years combined. Furthermore, management explained that consumers are “building muscle memory” in digital transactions that should help sustain this secular trend in a post-COVID world. The pandemic is also a catalyst to increase contactless usage in the US (penetration has been lagging in the US versus the rest of the world) driven by hygiene implications of using a physical card and ease of use.

Fixed Income Fund Manager David Katimbo-Mugwanya on the surge in social bond issuance seen in 2020 so far:

Like the green bond category that preceded them, we consider social bonds as a practical tool for investors to provide direct funding to projects that align with their responsible and sustainable objectives. They also possess an explicit stated use of proceeds and or framework by which company projects qualify for such funding. By definition, social bonds are those whose proceeds fund projects focussing on specific societal issues or target populations whilst sustainable bonds combine aspects of both green and social bonds in the nature of how funds raised are earmarked, disbursed and audited for impact.

In our opinion, the COVID-19 pandemic has precipitated the issuance of social bonds, after having brought to light the pressing need for funding towards projects addressing societal needs beyond climate change – notably healthcare. With supra-national entities such as the World Bank and other Government-backed agencies leading the way vis-à-vis bond launches, the nominal issuance of social bonds has been greater thus far and could even exceed the volume of green bond issuance for 2020. We therefore anticipate strong issuance going forward.

Our Amity Funds actively invest in green, social and sustainable bonds whose proceeds are deployed towards; projects with clear and verifiable positive environmental impacts (green), funding initiatives that target specific societal issues or segments of the population (social) and or sustainability-led undertakings combining both green and social elements along with other themes such as education.

However, in a market place showing an ever-increasing demand for responsible investment, social bonds are arguably just as susceptible to ‘impact-washing’ as green bonds are to ‘green-washing’. It remains important therefore to conduct thorough due diligence into the issuing entities’ corporate practises, cultures as well as their strategic vision from a responsible perspective, instead of relying solely on bond ESG labels. It can also be argued that green bonds often have clear, quantifiable and almost universal target metrics such as reduction in C02 emissions. The sheer breadth of societal issues or varying target populations that proceeds of social bonds could be deployed towards however, introduces an added layer of complexity – particularly for those lacking a robust responsible & sustainable investment framework.

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