In August, we addressed four key questions raised by financial advisors and their clients: What are the alternatives to cash? How much should you invest offshore? Is it too late to invest in South African equities? Are we seeing a change in investment style leadership?1 The article raised several additional questions from advisors, which we discuss briefly below. Please note that we have addressed each question independently, and not with a subsequent answer building on the prior question.
1. Can you do both good (make an impact) and well (generate investment returns)?
In short, yes. But why, and how?
There is growing consensus that the world needs to urgently address climate change, and that accelerated investment is needed to ensure global temperature increases stay within two degrees Celsius. Unfortunately, even a two-degree increase will have a massive impact on our planet. For example, coral reefs will be almost entirely wiped out; people will be exposed to more extreme weather (heat waves, droughts, floods, and tropical cyclones); mountains will lose their glaciers and be more susceptible to landslides; more than 70% of the earth’s coastlines will see sea levels rise greater than 0.2 metres; and certain islands will become uninhabitable.
There is an approximate 90% correlation between carbonisation and economic growth, and therefore we need to change the way the economy works. As a result, the world will need to invest between $2.4 trillion and $4 trillion per annum in areas such as wind and solar capacity, electric vehicles, and battery production over the coming decades to meet this objective. And yet we are currently only investing in the region of $700 billion per annum. This transition has barely begun.
It is fair to say that we all know what the problem is, but what are the catalysts for change? We have identified three key drivers:
- Regulation: Countries around the globe are signing up to the net zero carbon pledge.2 The year 2020 saw new policy announcements across Asia and the US, and stronger commitments from Europe. In fact, 64% of global emissions are now covered by “net zero” announcements.
- Technology: Costs have fallen materially as technologies have improved in areas such as wind and solar energy generation, and battery pack production which has, for example, resulted in an exponential increase in electric vehicle sales over the past decade.
- Consumer behaviour: Surveys suggest consumers are concerned about climate change and, as a result, are increasingly comfortable that their investment solutions include a portion that is environmentally focused.
The Ninety One Global Environment Fund seeks to benefit from the new structural growth themes of renewable energy (solar, wind, clean power utilities, etc.), electrification (electric vehicles, hydrogen economy, heating and cooling, etc.) and resource efficiency (waste management, agriculture, factories, etc.). Our specialist knowledge and proprietary research help us identify the most attractive opportunities within the complex environmental sector. This approach has been rewarding for our investors, with the fund outperforming the traditional global equity benchmark, the MSCI All Country World Index (ACWI), by more than 16% per annum since launch in February 2019.3
The fund’s differentiated strategy means that it serves as a great diversifier to traditional global equity portfolios, including the Ninety One Global Franchise Fund, which has attractive ESG credentials given the types of companies in which it invests.
2. If SA cash is trash, what can be said of offshore cash?
Well, offshore cash is even trashier. For several years now, offshore dollar, sterling and euro cash investments or money market funds have delivered zero (or marginally negative after fees) returns. While offshore money market returns might improve at the margin should the US Federal Reserve and other central banks start to raise rates, they are unlikely to do so materially in the short to medium term. Investors need to look beyond the perceived safety of these offshore cash funds to earn attractive hard currency real returns.
Conservative investors should therefore take a slightly longer-term view and consider funds such as the Ninety One Global Multi-Asset Income Fund. The fund targets an attractive, resilient yield of around 4% per annum, as a significant part of the overall return. This higher yield reduces the dependency of returns on generating large capital gains, and the associated volatility. The defensive income anchor has also meant that since inception in July 2013, the fund has not delivered a negative calendar year return.
In an article,4 co-portfolio managers John Stopford and Jason Borbora-Sheen said: “Given the importance of income [as a dominant driver of most asset class returns over the long run], the decline in yields, [as evidenced in Figure 1], on most asset classes since the Global Financial Crisis, and the further fall during the COVID-19 crisis, appears to bode ill for conservative investors.” The good news, however, is that the managers are still finding attractive opportunities across a range of asset markets and securities.
Figure 1: Where do we find income today?
Source: Bloomberg, BofAML, yields as at 31 August 2011 and 31 August 2021. 1 month deposit rates for cash; 10yr Government bonds – generic sovereign yields; investment grade bonds: BofAML Sterling Corporate & Collateralised All Stocks Index; BofAML US Corporate Index; BofAML Euro Corporate & Pfandbrief Index; BofAML Japan Corporate Index; High yield bonds: BofAML Asian Dollar High Yield Corporate Index; BofAML US High Yield Index; BofAML Sterling High Yield Index; BofAML Euro High Yield Index; Emerging market bonds: JP Morgan GBI-EM Global Diversified Index; JP Morgan EMBI Global Diversified Blended Index; JP Morgan CEMBI Diversified Broad Composite Index; equity indices as stated. For further information on indices, please see the Important Information section.
It is these attractive opportunities that make their way into the fund. The managers are, however, selective in what to own and what to avoid, as the highest-yielding assets are often compromised and can deliver disappointing returns with significant risks. Better returns for less risk can generally be found in moderately high-yielding securities, where the yields are properly underpinned by resilient excess cash flows.
3. Global equity markets have run hard, now what?
While global equity markets appear expensive when looking at broad market indices, we believe that there are still unique opportunities for active stock pickers, as captured in the Ninety One Global Franchise Fund.
We believe that our Quality capability’s purist approach to quality investing is well suited to current conditions and for the uncertain times ahead. The team is solely focused on identifying attractively valued best-of-breed “franchise” companies with the following key attributes:
- Hard-to-replicate enduring competitive advantages,
for example, ASML (EUV lithography, DUV lithography) - Dominant market positions in stable growing industries,
for example, Estée Lauder (brands include Estée Lauder, Bobbi Brown, Clinique and MAC) - Low sensitivity to the economic and market cycles,
for example, Nestlé (brands include Gerber, Nescafé, Maggi, Nespresso, Purina) - Healthy balance sheets and low capital intensity,
for example, Verisign (.com, .net) - Sustainable cash generation and effective capital allocation,
for example, Visa
The result is a high conviction, concentrated portfolio of currently only 27 stocks. There is also very little overlap with the Top 50 MSCI ACWI stocks - only eight are included in Global Franchise and only two of these are in in the top ten holdings (Microsoft and Johnson & Johnson). In fact, the fund’s active share5 is 93%, meaning that the fund is highly differentiated from the MSCI ACWI and so is likely to also be very different from many other global funds, especially passive index funds.
Importantly, the companies in the Ninety One Global Franchise Fund are still generating far superior returns on capital but are valued at a discount to the broader market.
Source: FactSet, Ninety One, 31 August 2021. *Index: MSCI AC World NDR (pre Oct-11, MSCI World NDR). The portfolio may change significantly over a short period of time. The above reflects the portfolio characteristics reweighted excluding cash and cash equivalents. Inception date: 30 April 2007. For further information on indices, please see the Important Information section.
Conclusion
Investors faced with one or more of the issues raised above may best be served by seeking professional financial advice, tailored to their individual circumstances.
1 What’s on investors’ minds?
2 Net zero refers to the balance between the amount of greenhouse gas the world produces and the amount removed from the atmosphere. Net zero is achieved when the amount produced is no more than the amount taken away. Reaching net zero is vital to avert the extremes of harmful global warming.
3 Source: Morningstar, 30 June 2021. Performance is net of fees (NAV based, including ongoing charges, excluding initial charges), gross income reinvested, in US dollars. Highest annualised return since its launch: 88.1% (31.03.21), A Acc USD. Lowest annualised return since launch: -7.3% (31.03.20), A Acc USD.
4 Thriving in an income desert, July 2020.
5 Active share is a measure of the percentage of stock holdings in a manager’s portfolio that differs from the benchmark index.