Inflation Not That Transitory and Omicron: Will Wall Street Keep On the Rise?

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Pixabay CC0 Public DomainRiesgos en las bolsas. Wall Street

The U.S stock market set a record high in mid-November before a sharp selloff that started when the new COVID-19 variant, Omicron, was identified, and ended the month with a slight loss. Other factors in the backdrop were supply chain disruptions, labour shortages, a higher U.S. dollar and lower oil and UST yields. Rising inflation, previously termed “transitory” by Chair Powell who now says, “It is probably a good time to retire that word,” shortened the bond taper timetable.

From Economist Gary Shilling’s Insight: ‘Historically, global supply shortages haven’t existed outside of wars, so the current episode, the result of temporary supply-chain bottlenecks and economy reopening disruptions, is unusual. But the reaction to it by consumers and businesses isn’t, as they rush to order and buy in anticipation of shortages and price increases in a self-fulfilling cycle.’

Another note, from economist Ed Hyman, on stock market tops vs Fed tightening: ‘The last three major S&P peaks occurred after 6 hikes in fed funds to 6.50% in 2000, after 14 hikes to 5.25% in 2007, and after 9 hikes to 2.50% in 2018.’

M&A activity remained robust in November with newly announced deals to the portfolio including: American Tower’s acquisition of data center operator CoreSite Realty for $10 billion; Novo Nordisk’s acquisition of biopharmaceutical company Dicerna Pharmaceuticals for $3 billion; GIC and CPP’s acquisition of IT security company McAfee for $15 billion; KKR and GIP’s acquisition of adata center operator CyrusOne for $15 billion; and, DuPont’s acquisition of specialty materials company Rogers Corp for $5 billion. Deals that closed in November included Merck’s acquisition of Acceleron Pharma for $11 billion, Pfizer’s acquisition of Trillium Therapeutics for $2 billion, and Paper Excellence’s acquisition of Domtar for $3 billion.

From the WSJ’s Buyout Boom Gains Steam in Record Year for Private Equity: ‘Private-equity firms have announced a record $944.4 billion worth of buyouts in the U.S. so far this year, 2.5 times the volume in the same period last year and more than double that of the previous peak in 2007…The IPO market is also running at a record pace, and merger volume in the U.S. is twice last year’s level.’

Lastly in the convertibles space, similar to the first quarter, the market saw multiples contract, which disproportionally affects growth equities. The convertible market is generally more growth oriented, so there was some weakness as the month came to a close. Despite this, issuance picked up significantly and we expect global issuance for the year to come in just below last year’s level. This expands our investible universe and is a sign of a healthy market.

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To access our proprietary value investment methodology, and dedicated merger arbitrage portfolio we offer the following UCITS Funds in each discipline:

GAMCO MERGER ARBITRAGE

GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.

Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.

Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.

Our objectives are to compound and preserve wealth over time, while remaining non-correlated to the broad global markets. We created our first dedicated merger fund 32 years ago. Since then, our merger performance has grown client assets at an annualized rate of  approximately 10.7% gross and 7.6% net since 1985. Today, we manage assets on behalf of institutional and high net worth clients globally in a variety of fund structures and mandates.

Class I USD – LU0687944552
Class I EUR – LU0687944396
Class A USD – LU0687943745
Class A EUR – LU0687943661
Class R USD – LU1453360825
Class R EUR – LU1453361476

GAMCO ALL CAP VALUE

The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.

GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise.  The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach:  free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.

Class I USD – LU1216601648
Class I EUR – LU1216601564
Class A USD – LU1216600913
Class A EUR – LU1216600673
Class R USD – LU1453359900
Class R EUR – LU1453360155

GAMCO CONVERTIBLE SECURITIES

GAMCO Convertible Securities’ objective is to seek to provide current income as well as long term capital appreciation through a total return strategy by investing in a diversified portfolio of global convertible securities.

The Fund leverages the firm’s history of investing in dedicated convertible security portfolios since 1979.

The fund invests in convertible securities, as well as other instruments that have economic characteristics similar to such securities, across global markets (but the fund will not invest in contingent convertible notes). The fund may invest in securities of any market capitalization or credit quality, including up to 100% in below investment grade or unrated securities, and may from time to time invest a significant amount of its assets in securities of smaller companies. Convertible securities may include any suitable convertible instruments such as convertible bonds, convertible notes or convertible preference shares.

By actively managing the fund and investing in convertible securities, the investment manager seeks the opportunity to participate in the capital appreciation of underlying stocks, while at the same time relying on the fixed income aspect of the convertible securities to provide current income and reduced price volatility, which can limit the risk of loss in a down equity market.

Class I USD          LU2264533006

Class I EUR          LU2264532966

Class A USD        LU2264532701

Class A EUR        LU2264532610

Class R USD         LU2264533345

Class R EUR         LU2264533261

Class F USD         LU2264533691

Class F EUR         LU2264533428 

Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to find out what those restrictions are and observe them.

Some of the statements in this presentation may contain or be based on forward looking statements, forecasts, estimates, projections, targets, or prognosis (“forward looking statements”), which reflect the manager’s current view of future events, economic developments and financial performance. Such forward looking statements are typically indicated by the use of words which express an estimate, expectation, belief, target or forecast. Such forward looking statements are based on an assessment of historical economic data, on the experience and current plans of the investment manager and/or certain advisors of the manager, and on the indicated sources. These forward looking statements contain no representation or warranty of whatever kind that such future events will occur or that they will occur as described herein, or that such results will be achieved by the fund or the investments of the fund, as the occurrence of these events and the results of the fund are subject to various risks and uncertainties. The actual portfolio, and thus results, of the fund may differ substantially from those assumed in the forward looking statements. The manager and its affiliates will not undertake to update or review the forward looking statements contained in this presentation, whether as result of new information or any future event or otherwise.

 

HSBC Launches a Thermal Coal Phase-out Policy

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Pixabay CC0 Public Domain. HSBC Launches a Thermal Coal Phase-out Policy

HSBC has recently set out a detailed policy to phase out the financing of coal-fired power and thermal coal mining by 2030 in EU and OECD markets, and worldwide by 2040. In recognition of the rapid decline in coal emissions required for any viable pathway to 1.5°C2, the policy will mean HSBC phasing out finance to clients whose transition plans are not compatible with HSBC’s net zero by 2050 target.

In a press release, the firm has pointed out that this measure builds on its current policy that prohibits finance for new coal-fired power plants and new thermal coal mines; “broadening the approach to drive the phase-out of existing thermal coal”.

The new policy, which will be reviewed annually based on evolving science and internationally recognized guidance, is a key part of executing on the bank’s October 2020 ambition to align its financed emissions – the greenhouse gas emissions of its portfolio of clients – to net zero by 2050 or sooner. It includes short term targets to help drive measureable results in advance of the phase-out dates.

Besides, a science-based financed emissions target will be published in 2022 to reduce emissions from coal-fired power in line with a 1.5°C pathway. HSBC also intends to reduce its exposure to thermal coal financing by at least 25% by 2025 and aims to reduce such exposure by 50% by 2030, using its 2020 Task Force on Climate-Related Financial Disclosures (TCFD) reporting as its baseline. 

Client transition plans

“Thermal coal financing remaining after 2030 will only relate to clients with thermal coal assets in non EU/OECD markets, and will be completely phased out by 2040. HSBC will report annually on progress in reducing thermal coal financing in its Annual Report and Accounts”, the bank said. It also revealed that it will work with impacted clients and will expect them to formulate and publish transition plans by the end of 2023 that are compatible with HSBC’s net zero by 2050 target.

“Client transition plans will be assessed annually, based on a range of factors including: level of ambition to reduce greenhouse gas emissions; clarity and credibility of transition strategy including any proposed abatement technologies; adequacy of disclosure and consideration of the principles of ‘just transition’”, HSBC commented. If no transition plans are produced, the bank will need to assess whether to continue to provide financing for that client, as there will be no basis on which to assess alignment with its commitment to phase out coal financing.

In this sense, it will decline to provide new financing (including refinancing) and advisory services to any client that fails to engage sufficiently on its transition plan, or where plans are not compatible with its net zero by 2050 target. In addition, HSBC will seek to withdraw any financing or advisory services with any client that makes a commitment to, or proceeds with, thermal coal expansion after 1 January 2021.

The energy transition in Asia

Given the bank’s substantial footprint across Asia, with the region’s heavy reliance on coal today and its rapidly growing energy demand, HSBC recognized it has “a critical role to play in helping to finance the region’s energy transition from coal to clean”. That’s why it will expect its clients to lay out credible transition plans for the next two decades to diversify away from coal-fired power production to clean energy, and from coal mining to other raw materials, including those vital to clean energy technologies.

”We want to be at the heart of financing the energy transition, particularly in Asia. This is where we can have the biggest impact to help the world achieve its target of limiting global warming to 1.5°C. We have a long history and strong presence in many emerging markets that are heavily reliant on coal for power generation. We are committed to using our deep relationships to partner with clients in those markets to help them transition to cleaner, safer and cheaper energy alternatives in the coming decades”, pointed out Noel Quinn, Group Chief Executive.

Meanwhile, Group Chief Sustainability Officer, Celine Herweijer, added that they need to tackle “the tough issues head on” to deliver on their net zero commitment, and for a global bank like HSBC with a significant presence across fast growing coal-reliant emerging economies, unabated coal phase out is right up there.

“Asia’s ability to transition to clean energy in time will make or break the world’s ability to avoid dangerous climate change. Whilst our coal phase out dates and interim targets are driven by the science, we need an approach that recognizes the realities on the ground in Asia today. The transition will only be successful if development needs are addressed hand-in hand with decarbonization goals”, she added.

In this sense, she insisted that their clients in Asia are at different starting points to their EU/OECD counterparts, with more infrastructure, resource, and policy obstacles, “but many have declared a strong interest and ambition to invest in the transition and diversify their businesses”. In her view, the good news is that zero-marginal-cost renewables, rising carbon prices and a terminal contraction in coal demand are factors helping them diversify.

Indexing, ESG and Digitization Drive Growth in Customized Investment Solutions

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Pixabay CC0 Public Domain. La indexación, la ESG y la digitalización impulsan el crecimiento de las soluciones de inversión personalizadas

According to new research from quant technologies provider SigTech, 70% of pension funds and other institutional investors believe demand for custom portfolio solutions will increase strongly. The disruptive market forces of ESG, indexing and digitization are driving this increased demand for customization.

Customized portfolio solutions are bespoke investment strategies that are developed to meet the specific needs of investors. Two thirds of those surveyed (67%) believe it will become one of the biggest growth areas in asset management and is one of the industry’s most exciting developments.

“One of the key reasons for growth in this market is that 75% of institutional investors said they are becoming increasingly sophisticated in their individual ESG requirements. In addition, investors are finding it difficult to find off-the-shelf products offered by fund managers that are fully aligned with their needs”, explained the authors of the research.

Another interesting conclusion is that 41% of participants believed fixed income was the asset class with the biggest need for customization, followed by 27% who cited commodities, 18% said equities and 14% mentioned hedge funds.

When it comes to implementing their individual ESG policies, the study found that institutional investors use a combination of solutions. In this sense, 65% use off-the-shelf products (i.e. without any customization), 60% use customized portfolio solutions with external partners, and 52% said they develop these internally.

“Investing does not have to be just about searching for an existing product that offers the best possible fit to the investor’s needs. It is about creating a product that 100% corresponds to the investor’s requirements. Our research shows that 69% of institutional investors agree with this view”, pointed out Daniel Leveau, who heads SigTech’s strategic initiatives for institutional investors.

Schroders Buys 75% of Greencoat Capital, Investment Manager Specializing on Renewable Infrastructures

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Pixabay CC0 Public Domain. Schroders se hace con el 75% de Greencoat Capital, gestora especializada en infraestructuras renovables en Europa

Schroders has announced that it has reached an agreement to acquire a 75% shareholding in Greencoat Capital Holdings Limited (Greencoat) for an initial consideration of 358 million pounds (471 million dollars). Greencoat is one of Europe’s largest renewable infrastructure managers, with 6.7 billion pounds (8.93 billion dollars) of assets under management at 30 November 2021.

In a press release, the asset manager has pointed out that Greencoat “pioneered large-scale renewable energy infrastructure investing in listed and private formats”, delivering compound AUM growth of over 48% per annum over the last four years to 31 March 2021. Over the past 12 months it has achieved net new commitments​ for private funds and equity raises for listed funds of 1.6 billion pounds (2.13 billion dollars).

After this agreement, both firms have an ambition to be a global leader in this “fast-growing and important” investment sector. 

In Schroders’ view, Greencoat operates at the intersection of two significant growth opportunities. The first one is the global transition to net zero: the US and European markets for renewable energy assets are forecast to grow by more than 1 trillion dollars to 2030. The second is the “significant and accelerating” institutional client demand for environmentally positive products in order to meet their own sustainability commitments.

 

As part of Schroders, Greencoat’s growth and its offering to clients will be significantly enhanced, benefitting from Schroders’ distribution reach, sustainability capabilities, management experience and brand. Greencoat will become part of Schroders Capital, Schroders’ private markets division and be known as Schroders Greencoat.

Strategic rationale

Schroders’ believes that the transaction is aligned with its strategy to build a comprehensive private assets platform and enhance its leadership position in sustainability. In its view, providing private capital for the energy transition required to achieve a net zero future will become increasingly important as governments around the world look to accelerate towards this goal: “This is an area where we can support one of the most significant transformations required in economies worldwide to mitigate climate change. In addition, there is strong investor demand for such long-duration assets providing long-term secure income streams”.

Peter Harrison, Group Chief Executive of Schroders, highlighted that Greencoat is “a market-leading, high growth business, with an outstanding management team”, which provides access to a large and fast-growing market in high demand among their clients.

“Its culture is an excellent fit with ours and its focus aligns very closely to our strategy, continuing our approach of adding capabilities in the most attractive growth segments we can provide to our clients. We have demonstrated our ability to integrate acquisitions successfully, to generate growth and create significant value for our shareholders. We are confident that we will be able to leverage the strengths of both firms while preserving Greencoat’s differentiated position in the market”, he added.

Meanwhile, Richard Nourse, who founded Greencoat in 2009, claimed to be “delighted” to have found a partner in Schroders who sees “the potential” of their business and believes deeply in their mission to build a global leader in renewables investing. “We are extremely proud of what the brilliant team at Greencoat has together achieved, creating a market-leading renewables asset management firm in the UK and Ireland, a strong platform in Europe and an important expansion into the US. Combining this team with Schroders’ global distribution network and expertise will enable clients to capitalise on the unequalled opportunity that our sector represents – a trillion dollar investable universe – and the chance to meaningfully support the global transition to net zero”, he concluded.

About Greencoat

Established in 2009, Greencoat is a specialist investment manager focusing on renewable energy infrastructure investing, including wind, solar, bioenergy and heat. Greencoat operates nearly 200 power generation assets across the UK, Europe and the US, with an aggregate net generation capacity of over 3 gigawatts. Its investor mandates typically comprise permanent or 25-year capital, reflecting the longevity of the assets in which it invests. It manages the leading listed renewable infrastructure investment companies in sterling (Greencoat UK Wind PLC) and euros (Greencoat Renewables PLC) and has some of the UK’s leading pension funds amongst its fast growing £2.9 billion private market business. 

The firm has a strong, experienced team who have contributed to its success over many years and which is known for the depth and quality of its operational asset management expertise. It is led by its four founders Laurence Fumagalli, Bertrand Gautier, Stephen Lilley and Richard Nourse. 

Vontobel Acquires UBS’s Financial Advisers Business Serving US Clients

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Pixabay CC0 Public Domain. Pexels

Vontobel has signed an agreement with UBS to buy its subsidiary UBS Swiss Financial Advisers (SFA), based in Zurich. In a press release, the firm has announced that with this acquisition, it expects to further strengthen its platform providing clients with a global investment approach and geographic diversification.

Vontobel will combine SFA and VSWA (Vontobel Swiss Wealth Advisors), its existing business serving North American Wealth Management clients. Preparations for this will start after the closing of the transaction, which is expected for the third quarter of 2022.

“This transaction is reflective of our confidence in the US market and our ongoing strategic growth efforts in the region. This is a major step toward making Vontobel a global name that serves sophisticated clients around the world and builds toward our goal of increasing US client revenue and overall assets under management”, said Georg Schubiger, Global Head Wealth Management Vontobel and Chairman VSWA.

Together with SFA’s CHF 7.2 billion (7.82 billion dollars) in assets under management as of September 30, 2021, Vontobel, through its SEC licensed entities, is expected to become the largest Swiss-domiciled wealth manager for US clients seeking an account in Switzerland for diversification purposes. The combined pro forma assets under management will more than double to over CHF 10 billion (10.8 billion dollars).

Following the transaction, UBS will continue to refer its clients to SFA, an SEC-registered investment advisor and FINMA-licensed securities firm, which offers US clients tailored investment solutions in a Swiss-based environment.

Tom Naratil, Co-President UBS Global Wealth Management and President UBS Americas, claimed to be “pleased” to partner with Vontobel, “a leading global investment firm that’s client focused and committed to excellence”. In his view, this acquisition not only ensures UBS’s US clients continue to have access to a Swiss-based money management firm, but it also simplifies their business structure and enables them to focus on core activities with scale in line with their “strategic priorities.”

Vontobel has long been present in the US as an asset manager, and for over a decade has been growing its wealth management business with teams in New York, Geneva and Zurich. In 2019, Vontobel acquired Lombard Odier’s US-based client portfolio and plans to open a new office in Miami.

The transaction, which is subject to regulatory approvals, will be fully funded with cash from Vontobel’s balance sheet, covered by its robust CET1 and Tier 1 capital ratios. Additional financial details of the transaction were not disclosed.

Citi Sells its Broker-Dealer and Investment Advisory Firms to Insigneo

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. Pexels

Citi announced that it has entered into a definitive agreement to sell its broker-dealer and its investment advisory business to Insigneo.

“The sale of CIFS (Citi International Financial Services), a Puerto Rico-based broker-dealer, and Citi Asesores, an investment advisory firm in Uruguay’s free-trade zone, is subject to regulatory approvals. Citi will maintain all existing bank deposit relationships with wealth clients moving to Insigneo”, said the press release.

In addition, both firms have agreed to explore for Citi to offer banking services to Insigneo’s existing clients. “Citi’s strong presence in Puerto Rico and Uruguay, serving institutional clients, remains unchanged”, they added.

Negotiations, which took over 15 months, were finally completed, and regulatory approvals could be confirmed by the second quarter of 2022. According to industry sources, the sale involves 4.5 billion dollars of AUM. 

“This sale allows us to simplify our wealth business. At the same time, we saw an opportunity to continue to provide our clients with best-in-class retail banking while they seamlessly continue to work locally with their investment professionals, who upon close will move to Insigneo, which offers a broad spectrum of investment products and wealth management capabilities”, said Scott Schroeder, Head of U.S. International Personal Bank at Citi.

Raúl Henríquez, Chairman and CEO of Insigneo, commented that they are “extremely happy” to incorporate CIFS and Citi Asesores into Insigneo Financial Group’s growing platform. “And we are pleased to continue our relationship with Citi as a banking services provider for our new clients”, he added.

UBS AM Appoints Lucy Thomas as New Head of Sustainable Investing

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Foto cedidaLucy Thomas, nueva responsable de Inversión Sostenible de UBS AM.. UBS AM ficha a Lucy Thomas como nueva responsable de Inversión Sostenible

UBS Asset Management (UBS AM) has announced the appointment of Lucy Thomas as Head of Sustainable Investing. Based in Zurich, she will be responsible for leading the delivery of the sustainability and impact strategy; and will report to Barry Gill, Head of Investments. 

“As a leading global asset manager, we have a critical role to play, both in providing our clients with the investing solutions they need to meet their sustainability goals and helping to shape the future of the industry. During her 20-year career, Lucy has worked as an asset owner, asset manager, and asset advisor and brings extensive experience working with clients and leading the integration of sustainability factors into the investment process globally”, said Gill.

Thomas has 20 years of experience in the industry and joins UBS AM from TCorp, the financial markets partner of the New South Wales government in Australia, where she was Head of Investment Stewardship. Prior to that, she was Global Head of Sustainable Investment at Willis Towers Watson (2014-2018). She started her career as an analyst on the graduate program at Morgan Stanley.

Meanwhile, the new Head of Sustainability Investing claimed to be “delighted” to be joining UBS AM, a team with “a leading combination” of culture, capabilities and commitment to sustainability. “We are at an inflection point in our industry where creating value for clients, society and the planet has never been more crucial”, she concluded.

John William Olsen: “There Is a Long-Term Tailwind for Environmental and Social Solutions”

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Foto cedidaJohn William Olsen, gestor del fondo M&G (Lux) Positive Impact.. John William Olsen: “Hay un viento de cola a largo plazo para las soluciones medioambientales y sociales”

John William Olsen, manager of the M&G (Lux) Positive Impact fund, believes that all investments have an impact on people and the environment. Now that investors are aware of this, he thinks that fund managers have a great opportunity to boost SRI. In this interview, we discuss with him how they are tackling this challenge and how it is reflected in the strategy he manages.

1. Why do you think impact investing has become an easy way for investors to invest sustainably? 

All investments have an impact on people and the environment, whether positive or negative, intentional or unintended. Impact investing involves setting impact objectives alongside financial return objectives and quantifying and measuring these over the period of investment. Defining the impact that is (or is not) wanted and constructing a portfolio to meet the objectives enables investors to seek both financial return at the same time as aligning capital with broader objectives. With this, clients can put their money to work with a purpose.

2. Normally when we think of impact funds we relate it to equity funds. Why does it seem to be a type of strategy that fits better in this asset class? Is there room for a greater presence of fixed income in impact funds?

    All parts of the investment chain have a role to play when it comes to impact investing – from catalytic capital such as blended finance, through to private assets and then listed equity and credit. Some asset managers, such as M&G, can play across that whole sphere, with an end-to-end impact financing approach.

    Impact investing is growing rapidly. The Global Impact Investing Network’s latest surveys estimated the size of the market at $715 billion, with 36% of impact capital invested in private debt and 16% in private equity. While the majority of impact assets are in these two asset classes, impact investing across public equity, real assets and public debt is on the rise. But whether we are talking about early stage private asset investments or public listed investments, there are some crucial principles to impact investing that all investors should adhere to: intentionality, additionality, materiality and measurability.

    3. In this regard, what is most relevant?

    Every impact investment should be made with purpose to deliver positive outcomes that will support the United Nations’ Sustainable Development Goals. The investment must make a positive contribution to solving a challenge – investing in businesses that are bringing something new, innovative and additional to addressing that challenge. It’s also key to look at how the investment materially impacts the outcome that you’re looking to generate. And last, but not least, measurement is crucial.

    4. In the current context, and looking ahead to 2022, what role can and will impact strategies play in investors’ portfolios? Why?

      There is a long way to go in orienting towards a more sustainable and equitable society, but while there are obstacles and uncertainties, there is a palpable sense of hope as we continue to emerge from the COVID-19 crisis. The next nine years hinge on whether political leaders, companies and investors can help drive the shift to bouncing back in a resilient and equitable way – redesigning the future and pulling out all the stops to reach the UN’s 2030 deadline. An increasingly engaged population of concerned citizens also has a critical role to play in embracing behavioural change and holding these other actors to account. The world has pledged to ‘build back better’ – and we must keep that promise. We think investment strategies that are addressing these challenges will only gain in importance.

      5. Taking the M&G – M&G (Lux) Positive Impact fund as a reference, we see that it invests in six areas. Why have you chosen them?

      The fund embraces the United Nations Sustainable Development Goals framework and invests in companies focused on six key areas, mapped against the SDGs. These are: climate action; environmental solutions; circular economy; better health, saving lives; better work & education; and social inclusion. The SDGs provide a solid, excepted framework for determining material impact areas, and help frame the measurement of how those positive impacts are being achieved. It is estimated that by 2030 delivering capital to the SDGs could be a $12 trillion investment opportunity.

      6. What’s your portfolio construction process?

      Selection begins with a global universe of over 4,000 stocks, which is then initially screened for minimum liquidity and market-cap criteria, as well as screening out companies that are not capable of delivering demonstrable positive impacts to society. From this remaining pool of stocks the team ‘screens in’ a watch-list of some 150 impactful companies that can be purchased if the timing and price are right. These companies are analysed under the team’s ‘III approach’, examining the Investment case, Intentionality and Impact of a company to assess its suitability for the fund. As part of this analysis, it scores companies on these III credentials, and requires above-average results for consideration within the watch-list, as well as consensus agreement of a company’s merits from the entire Positive Impact team.

      7. I understand that the areas in which the fund invests have in common that they are megatrends or, at least, part of the secular growth. What is your outlook for them?

      We believe there is a long-term tailwind for environmental and social solutions. On the social side, the pandemic has shone a harsh spotlight on a range of development challenges and highlighted the need to step up efforts to achieve the UN Sustainable Development Goals. On the environmental side, we have seen an increased focus on reaching net-zero and a surge of ‘green deals’ worldwide. We believe that companies that offer solutions that help address the world’s biggest societal challenges are well positioned for the future decades of growth.

      8. Taking this fund as an example, how do you measure the impact and does the investor show interest in this information?

      We focus on each company’s given impact, assessing how its business activities are aligned to specific societal impact challenges that we have identified as both needing investment and being investable by public equity investors. We test the company’s stated purpose or mission statement, asking: “is positive impact genuinely a part of the business’s DNA and a demonstrable part of its corporate strategy? Or is it just good PR?” We assess whether the company’s actions demonstrate clear alignment with that purpose, and weigh up positive impacts versus negative impacts, in particular excluding any company whose activities represent an overwhelmingly negative impact that counterbalances any positive impacts it may deliver.

      We start with a qualitative assessment of a company’s business: what is it doing to address a particular impact challenge, and how much of its business is aligned to that challenge? While this assessment is qualitative, the UN Sustainable Development Goals (SDGs) have provided a more quantitative framework for investors, and we map every company’s business activity to these goals. Importantly, we use the 169 underlying targets to give this analysis greater focus.

      9. What are the main changes you have made to the fund in the last year and how are you preparing for next year?

      We have further shifted the portfolio towards the ‘under-served’ and ‘under-addressed’, to help ensure that the impacts being delivered are truly additional and material, while also steering the portfolio towards ‘C’ companies, as represented by the IMP+ACT ‘ABC’ classification system: ‘A’ investments act to avoid harm; ‘B’ benefit stakeholders; and ‘C’ contribute to solutions. We expect this shift will continue into next year and beyond.

      Healthy Cities

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      Jonathan Roger Blue City
      Pixabay CC0 Public DomainJonathan Roger. Jonathan Roger

      Smart cities aren’t just about robotics and futuristic design. To be truly smart, they also need to protect and promote the health of their inhabitants – a task that’s all the more pertinent in the wake of the Covid-19 pandemic, which saw busy, crowded metropolises reporting some of the highest rates of infection.

      In all, a smart city can reduce the disease burden by up to 15 per cent and reduce greenhouse gas emissions by around 10 per cent, research from consultants McKinsey shows (1).

      According to the Pictet-Smart City Advisory Board, it’s not just about healthcare but also about taking care of the population’s health even before they get sick. The aim is to create an environment that promotes healthy living. It’s a priority for planners and regulators, and an opportunity for businesses and investors, according to the Advisory Board members, who dialled in from cities across the globe.

      Pollution is a major challenge. More than 80 per cent of city dwellers are exposed to air quality that breaches WHO’s limits, with the problem particularly acute in low- and middle-income countries (2). Air pollution, in turn, is a major cause of illnesses and diseases, accounting for some 4.2 million deaths a year (3).

      Pictet AM

      A holistic approach is needed. That includes more parks and greener buildings – both figuratively, in terms of reduced emissions and improved efficiency, but also literally, using plants within construction projects.

      Businesses are increasingly embracing the innovation challenge. The 51-storey Jian Mu Tower in Shenzhen, China, for example, will provide 10,000 square meters of space for aeroponic farming, growing everything from salad greens to fruit and providing enough sustainably-produced food for some 40,000 people. These plants will absorb 200,000 kg of CO2 a year, as well as helping to shade the building, thus improving its energy efficiency and reducing the need for air conditioning.

      Another way to reduce pollution is to encourage people to use alternatives to petrol-guzzling cars. That could mean making better use of existing public transport infrastructure, including sensors and apps to encourage people to travel at quieter periods – something that may be increasingly possible thanks to the advent of flexible working. (Conventional trains in Europe, for example, run on average at 35 per cent of capacity (4). They may be full during rush hours, but there is plenty of room at other times.)

      Micromobily – from bikes to scooters – not only reduces the need for cars but can also have health benefits for users.  By 2030, the micromobility market could be worth up to USD500 billion, according to consultants McKinsey (5). The trend can be further accelerated with more infrastructure – like secure parking and charging points – as well as with better city design.

      Waste management, clean water and sanitation are also key. As an island with limited freshwater resources and limited land, Singapore is one of the leading innovators, with initiatives such as a new deep tunnel sewage system and high-grade reclaimed water. NEWater, the name Singapore’s Public Utilities Board gives to its highly treated reclaimed wastewater, is purified through a multi-stage process – including microfiltration, reverse osmosis and ultraviolet disinfection – and used in industry and for air conditioning. During dry periods it is also added to reservoirs, where it is mixed with raw water, treated again and supplied to consumers’ taps.

      Accommodating ageing

      Covid-19 highlighted the need for healthcare infrastructure. This is a growing area of the economy – Singapore, for example, has doubled its healthcare spending over the past decade.

      Cities need to provide easy access to everything from basic diagnostic centres and strengthened early-stage outpatient treatment capacity to acute hospitals and assisted living. Technology can help, bringing access to diagnostics via apps, enabling doctors to consult colleagues remotely or speeding up diagnosis and drug discovery with the help of machine learning. The growing telehealth universe includes companies such as Teladoc Health Inc, which diagnoses, recommends treatment, and prescribes medication for routine medical issues through phone and video consultations (6).

      Care for the elderly is becoming increasingly important as populations age. Of the 238 million people aged 65 and over in OECD countries, some 43 per cent live in cities (7). A key focus is on assisting people to stay in their homes even when they can no longer be fully independent. Swiss non-profit Spitex, for example, provides millions of hours of home care and assistance each year, offering services which range from changing bandages and administering medicine to meal delivery and wheelchair hire.

      Technology also helps the elderly stay healthy and independent for longer – something that Lucerne’s iHomeLab has focused on. Its CleverGuard, for example, uses non-intrusive appliance load monitoring (NIALM) technology to analyse current and voltage. It detects any unusual patterns in the use of electrical appliances, including any unexpected inactivity which could be a sign of help needed. The iSens light sensor, meanwhile, can be installed next to the bed and used to alert carers of any abnormality in movement.

      Last but not least, city infrastructure needs to be able to cope with the next pandemic – including plans and facilities for quarantine accommodation, for the isolation for the mildly ill (to reduce pressure on hospital beds), for the rapid conversion to ICU beds and for centres to distribute masks and vaccines.

      Sustainable cities are one of the UN’s Sustainable Development Goals, and health is a key part of that – from reducing the adverse environmental impact of cities to ensuring access to green spaces and sustainable transport systems. The Covid-19 pandemic has made these targets all the more urgent. Investors can help drive the change, embracing a growing number of opportunities and innovations.

       

      Tribune written by Thematic Advisory Board.

       

      Discover more about Pictet Asset Management’s expertise in thematic investing.

       

       

      Notes:

      (1) Theoretical improvements in key KPIs if a “smart city” concept is being applied. Source: McKinsey Global Institute analysis, 2018

      (2) WHO, “Global Urban Ambient Air Report”, 2016

      (3) “Global, regional, and national comparative risk assessment of 79 behavioural, environmental and occupational, and metabolic risks or clusters of risks, 1990-2015: a systematic analysis for the Global Burden of Disease Study”, Forouzanfar et al.

      (4) European Environment Agency, 2005

      (5) McKnisey,  “Micromobility’s 15,000-mile checkup”, 2019

      (6) Teladoc Inc is part of the Pictet-Smart City portfolio

      (7) OECD, “Ageing in cities”

       

      Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

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      Brazil: Patria Investments Boosts its Alternatives Offering with a Growth Equity Strategy

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      Patria Investments, leading alternative asset manager in Latin America, has recently announced the launch of a new growth equity strategy through a partnership with Kamaroopin, a private markets investment group previously affiliated with Tarpon Investments and led by Pedro Faria.

      As reported by the Brazilian firm in a press release, the partnership is structured in two stages. First, establishing a minority stake during a joint fundraising campaign, and then a full business combination contingent on fundraising success and certain other requirements.

      “Growth Equity is highly complementary to our flagship private equity business, and expands our product offering to meet a key area of investor demand. We are excited to partner with Pedro and the Kamaroopin team on this new initiative that will broaden Patria’s presence across the private markets value chain. Our investment philosophies are highly aligned with a sector-based focus, and a commitment to being not just investors, but company builders”, ” said Alexandre Saigh, Patria’s CEO.

      With market size of more than 15 billion dollars in Latin America, Venture Capital and Growth Equity strategies are in high demand. Venture Capital transaction volume in Brazil has grown at a CAGR of more than 40% over the last decade, with transaction value reaching 6.6 billion dollars in 2021.

      A new partner

      Kamaroopin was created in 2018, and currently has three invested portfolio companies where they partner with great entrepreneurs as investor operators to drive growth through single minded consumer focus and tech-enabled business models. Their portfolio has generated a 2.7x gross multiple based on June 2021 valuations, led by their signature first investment in Petlove, the #1 digital Petcare platform in Brazil. Kamaroopin’s current portfolio amounts to nearly BRL 1 billion (or more than 175 million dollars) in assets under management, and they are profitable on a Fee Related Earnings basis at current size.

      Faria, its founding partner, highlighted that Kamaroopin was founded within the SK Tarpon ecosystem, with the mission to be company builders, operating as true partners of entrepreneurs and teams. “We are taking a step further with the association with Patria, the leading alternative investment firm focused on Latin America. We are inspired by their team leadership and successful investment model. We will strengthen our ability to back many more companies and build consistent and lasting business legacies”, he added.

      The details of the transaction

      While detailed financial terms of the transaction have not been disclosed, the structure will comprise two stages. The first one includes an agreement to acquire a 40% minority stake in Kamaroopin’s existing business for cash consideration, which upon closing will launch a joint fundraising campaign for a new Growth Equity fund.

      The second stage would trigger the acquisition of the remaining 60% stake for equity consideration, contingent on achieving pre-defined fundraising objectives, and fulfilling certain other requirements. Should the requirements for the second stage not be satisfied, both firms would have optionality to unwind the transaction.

      Patria Investment believes that the agreement will have minimal impact on its near term Distributable Earnings, with the exception of an attractive performance fee opportunity on Petlove. As part of the partnership, it will be entitled to participate in the crystallization of Petlove´s eventual performance fee, in a structure that was designed to provide the best alignment of incentives among all parties.

      Upon the closing of stage two of the transaction, Kamaroopin’s earnings would be fully consolidated, and including revenue from the new fund, the strategy is expected to be profitable on both a Fee Related Earnings and Distributable Earnings basis with significant room to scale moving forward.