Hub News #48

ISSUE 48 SUMMER 2021

CORPORATE KARMA All stakeholders count

THE WAR ON PLASTIC Finding the winners

The sustainability landscape: Making sense of responsible investing

LIVING AND BREATHING SUSTAINABILITY JUPITER GLOBAL SUSTAINABLE EQUITIES FUND Companies that minimise their impact on our planet and maximise the value they create for society can deliver more sustainable returns for investors. With resourcefulness and enterprise, the opportunity to align with the transition to a more sustainable world is here if you know where to look. With decades of combined experience, our global sustainable equities team have dedicated their careers to identifying resilient businesses which balance the wellbeing of our planet and people, with the generation of profit. It’s their natural habitat – investing in companies that really do live and breathe sustainability. We call this human advantage ‘the value of active minds’.

To find out more visit jupiteram.com As with all investing, your capital is at risk.

For Investment Professionals Only. Not for use by Retail Investors. This advert is for informational purposes only and is not investment advice. The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. Jupiter Unit Trust Managers Limited, registered address: The Zig Zag Building, 70 Victoria Street, London SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. JAM001985-003-0521

CONTENTS & WELCOME

CONTENTS 4

The sustainability landscape

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The war on plastic – finding solutions and winners

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Unique business models – “Only in Japan”

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Retirement should be enjoyed, not endured

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The rebranding of the oil & gas majors: Greenwashing or sound common sense?

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“Do sweat the small stuff ”: How ESG missteps impact future performance

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The ‘Solvers’: Investing in solutions to climate change

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Consistency is key for the Baillie Gifford Managed Fund

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The advantages of flexibility in fixed income

WELCOME This month’s issue of Hub News arrives against a more positive backdrop for the global economy. With the vaccine rollout underway across the globe, the recovery in the world’s major economies has outpaced expectations.

However, this recovery has come with a sting in the tail as inflation numbers from the US hit levels not seen for more than a decade. To date, markets have chosen to believe the Federal Reserve narrative of transitory inflation, but it is finely balanced.

This has changed the mood in markets.

The ‘value’ revival seen since the start of the year continued until relatively recently, but has lost some vigour. More recently, markets have been in a holding pattern, with investors waiting to see how the next few months pan out.

This month’s Hub News has a distinctly ‘green’ theme to it, with Schroders, M&G and Square Mile looking at how investors can navigate sustainable investing today.

M&G tackles climate change, while Schroders look at the concept of ‘corporate karma’ – why companies need to look after all their stakeholders to build success.

Elsewhere, Baillie Gifford discusses the strategy on its Managed fund, fresh from its best-ever year of performance, while Ninety One looks at income options in an income-starved world.

As always, we hope it gives you food for thought in these complex times. Please do share any comments or ideas with us on enquiries@adviser-hub.co.uk.

Cherry Reynard Editor www.adviser-hub.co.uk

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SUSTAINABILITY

THE SUSTAINABILITY LANDSCAPE

Investors increasingly want their capital to have a positive impact on the people and the planet, as well as delivering on their financial goals.

Square Mile Research looks at how advisers can approach Responsible investment with their clients.

The green revolution is underway. It is impossible to ignore the demands for action on climate change from popular pressure groups, and the ever more ambitious targets for achieving net zero carbon emissions being published by governments worldwide. At the same time, companies’ supply chains are being scrutinised for any evidence of malpractice, while movements such as Black Lives Matter underline social injustices and the need for a more equitable world.

These calls for responsible capitalism are echoed across the asset management industry. Until recently, the primary focus for many investors was to ensure that the return on their investments met their financial goals. Today, of equal importance for many is the desire for their money to have a positive impact on both the planet and wider society. It is now clear those two goals are not mutually exclusive, and those businesses which are on the wrong side of the transition to a better world may well struggle as ESG and Responsible investment become increasingly adopted by fund managers across the industry.

Navigating this new landscape of Responsible investment may appear challenging; however, it presents a significant opportunity for advisers. Research conducted by Square Mile earlier this year, found that 41.7% of advisers surveyed indicated that over half of their new clients will seek to invest in responsible or sustainable strategies within the next three years. However, it’s not only investors and asset managers driving this change, but the regulator has also turned its focus to Responsible investment.

Although the UK is no longer obliged to adhere to the EU’s MiFID regulations, which require European advisers to ascertain and account for their clients’ sustainability preferences; the Treasury has opened a review of the EU’s ‘green regulations’. This

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is with a view to preparing recommendations to introduce a comparable regime in the UK. While there are currently no firm timescales as to when any regulatory changes will be implemented or an indication to their extent, the direction of travel remains apparent. Therefore, it would be prudent for advisers to start preparing their business to understand and interpret their clients’ preferences towards Responsible investment. Furthermore, this extends to ensuring they have provisions for these preferences within their Centralised Investment Propositions (CIP).

A fundamental first step is to address any confusion surrounding the terminology used, as this will provide a solid foundation to build upon with clients. Historically, ‘ESG’ and ‘Responsible investment’ have been used interchangeably; however, there is an important distinction between the two. ESG should be viewed as an input into the investment process; a lens that a fund manager can use to determine the level of attraction of a stock and as a means of mitigating risk. It can also provide an indication of how a company’s ESG credentials might act as a tail or headwind to its future success.

Responsible investment, on the other hand, is an umbrella term that captures the spectrum of differing investment approaches which focus on using investment as a force for positive change. Commonly referred to as the Spectrum of Capital, these approaches range from those that exclude certain securities or sectors, to those that focus on delivering positive and measurable impact to both society and the environment.

At Square Mile, we believe there are four broad categories which stem from Responsible investment, outlined below:

•

•

•

•

Ethical exclusions which seek to avoid industries and company practices that cause harm to people or the planet.

For example, avoiding business which produce or distribute fossil fuels.

Responsible practices which consider the operational practices of investee companies, support ‘best practice’ in their respective industries, and encourage them to improve their environmental and social performance. For example, businesses which actively seek to reduce their environmental impact of their operations.

Sustainable solutions which seek to invest in companies that provide solutions to social and environmental challenges and believe in the long-term financial benefits of doing so.

For example, companies that manufacture products which improve energy efficiency.

Impact investing is where money is put to play in making a measurable positive social or environmental impact, with the added requirement of evidencing this impact. For example, those companies addressing healthcare needs and reporting the impact of patients cared for.

The use of a consistent framework of terminology is a useful tool to articulate the various aspects and approaches to Responsible investment, as well as determining where a client’s preferences sit on this spectrum. Furthermore, this Spectrum of Capital is increasingly being used by fund groups to demonstrate where their products sit within the broad range of strategies available, therefore highlighting what clients can expect.

While addressing the language is key in understanding clients’ preferences, there is the additional responsibility for advisers to establish how these are interpreted and applied within their firms, and there are several ways in which this can be

adopted. One option may be to offer a Responsible investment solution as a default, which would require a client to opt out of this stream if it is of no interest to them. However, this shift may be too dramatic, and a more incremental approach may be preferred, and perhaps more practical. It needn’t be complex, and the evolution of the fact-find process could be facilitated by the introduction of a few key questions to open a discussion.

The diagram below demonstrates what this might look like in practice.

By introducing preliminary questions relating to Responsible investment preferences, client segmentation can be implemented along three broad lines. First, those clients with no interest in investing responsibly who can continue to be invested into traditional portfolios. Next, those clients who indicate they would like to see their investment used as a force for positive change when it comes to social and environmental themes will, in most cases, be happy to invest in a diversified portfolio of funds which have a clear mandate to invest across the Responsible investment spectrum. Finally, there are those clients who have specific values or requirements that will require greater consultation to determine the solutions that are best placed to meet their needs and convictions.

While the green revolution is underway and Responsible investment continues to be plastered over the walls of the investment industry, it is important to note that this is an ongoing journey. As such, advisers can take the more evolutionary path to fine-tuning their approach to Responsible investment and client communication. This new landscape offers an excellent opportunity for advisers to demonstrate the value they can add to their client relationships by listening to their preferences and translating them into appropriate options.

“Although the UK is no longer obliged to adhere to the EU’s MiFID regulations, which requires European advisers to ascertain and account for their clients’ sustainability preferences, the Treasury has opened a review of the EU’s ‘green regulations’. This is with a view to preparing recommendations to introduce a comparable regime in the UK.”

Initial Questions:

Traditional Portfolios

Do you wish to invest sustainably?

Secondary Questions: Do you wish to match your specific values or ethics to your investments?

Sustainable Portfolios

Tertiary Questions: Questionnaire to assess client’s personal sustainability preferences

Exclusion Excluding companies which have a negative impact on society and/or the environment

Responsible

Sustainable

Support firms with better social and/or environmental practice

Rewarding and encouraging positive change and leaders in sustainability

HNW Clients

Transactional Clients

Bespoke Portfolios

Multi Asset Solutions

Impact Inclusion of entities which have a positive impact on society and/or the environment

Source: Square Mile 2021

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ENVIRONMENT

THE WAR ON PLASTIC FINDING SOLUTIONS AND WINNERS Demand for plastic is still growing, says Velislava Dimitrova and Cornelia Furse, Portfolio Managers on the Fidelity Sustainable Water & Waste fund, but solutions are emerging to minimise its environmental impact.

Since the invention of the first synthetic polymer in 1869, plastics have infiltrated our world and become an indispensable part of our lives. Consumption has surged since World War II. In 1950, only around 2 million tonnes per annum of plastic were consumed globally,i increasing 200-fold to 406 million tonnes per annum in 2019. ii In 2018, 45% or 174 million tonnes of all plastic produced was used for packaging. iii Plastics are the ideal material for packaging because they are low-cost, versatile, durable, lightweight, and also bring environmental benefits when compared to the alternatives. To illustrate, plastic reduces food waste by keeping food fresher for longer, and its low weight helps to reduce fuel consumption and emissions when transporting goods. Plastics are therefore increasingly replacing other packaging materials. Between 2000 - 2015, plastics increased their share of global packaging volumes from 17% to 25%. iv Due to these benefits, plastic packaging volumes are on a strong growth trajectory of 4% per annum. By 2030, this should result in c.281 million tonnes of plastic packaging being demanded globally, up today’s c.180 million. v

IMPACT ON ENVIRONMENT Despite its benefits, plastic packaging is problematic because the way we currently use it, in a linear ‘take-make-dispose’ model, is unsustainable. We take oil and gas from the earth to make plastic packaging that is often only used once, and then we dispose of it.

This is in stark contrast to a circular ‘reduce-reuse-recycle’ model; an economic model aimed at eliminating waste, facilitating the continual use of resources and contributing to decarbonisation.

For perspective, only 9% of all plastic waste ever produced has been recycled. vi Plastic packaging disposal poses significant environmental issues. At current levels, only 24% of all global packaging is being recycled. For the remaining waste, only 70% is collected for disposal and managed, however two thirds of this ends up in landfill and releases high levels of methane gas and CO2, contributing to global warming. The remaining 30% of ‘leaked’ waste is degrading natural systems such as forests and oceans.

Without action, it’s expected there will be more plastic in the ocean than fish by 2050. vii With the projected demand expansion, these environmental issues are set to become even more serious. Change is needed and we require new recycling solutions and reduced volumes of plastic packaging used.

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RISING DEMAND FOR RECYCLING AND SUSTAINABLE SOLUTIONS Public awareness around plastic issues has increased considerably.

In 2019, 42% of UK and US consumers said that products that use sustainable materials are important when it comes to their day-to-day purchases. viii Across all continents, governments are responding to public outcry regarding plastic packaging waste, with Europe being the most advanced sustainability region. Globally, aggressive recycling targets are being implemented, significant taxes for non-recyclable packaging will be apparent, and additional legislation is being proposed to only use recycled packaging.

The most significant change to plastic waste regulations since 1997, will be the Extended Producer Responsibility reforms which come into force in the UK in 2023. The proposed changes will shift the full cost of collecting household waste from the taxpayer to businesses that place plastic packaged products into the market.

Due to public pressure and increasing regulation, companies are responding with aggressive plastic recycling targets. Many companies have also made huge efforts to reduce plastic packaging volumes used.

Combining all three driving forces of demand together (consumer, regulation and corporate), it’s predicted that circular packaging solutions will grow at CAGR of 24% between 2019 2050, increasing from eight to 84 million tonnes. v

NEW TECHNOLOGIES As a society, we need to reduce plastic packaging volumes used and invest in new technologies to move plastic packaging to a circular model with high recycle rates and minimal wastage.

Fidelity research has highlighted two possible solutions that need to be adopted to win the war on plastic packaging recycling: post-consumer recycled plastic (PCR), which is itself recyclable, or bio-based plastic packaging, which is compostable.

Firms prefer PCR plastic packaging over bio-based plastic packaging because it’s cheaper. However, not all demand for circular plastic packaging will be able to be fulfilled by PCR plastic packaging because of supply constraints. PCR plastic packaging can be split into two segments: mechanical (where plastic is processed back into resin pellets, but the chemical structure remains unchanged) and chemical (plastic polymers are broken down into building blocks, which can be rebuilt).

For mechanical, there are multiple shortcomings. This method

“At current levels, only 24% of all global packaging is being recycled. For the remaining waste, only 70% is collected for disposal and managed, however two thirds of this ends up in landfill and releases high levels of methane gas and CO2, contributing to global warming.” can only handle specific types of waste (i.e. plastics must be uncontaminated and homogenous), and it ‘downcycles’ plastics (which drastically reduces the quality of the material). The process is inefficient, and 28% of plastic packaging sent for mechanical recycling is lost to the process. ix With chemical recycling, the above issues aren’t as problematic. In theory it’s an infinite recycling process that keeps plastic packaging in a closed packaging loop. However, chemical recycling is still in its infancy and the volumes of plastic packaging waste it can process are currently limited.

These shortcomings limit the supply of PCR plastic packaging that is available, and therefore, the bio-based plastic will be required to make up the shortfall in supply. This creates interesting investment opportunities into both PCR and bio-based plastic packaging markets. For perspective, to meet the surge in demand, by 2030, it is predicted that the PCR market will grow at CAGR of 23% (with a ninefold expansion), whilst bio-based plastic packaging is predicted to grow faster, at CAGR 33% (with a 21-fold expansion). v

FINDING WINNERS It’s important for investors to be able to identify the key technologies and companies that will gain first-mover advantage and be able to profitably scale the technology. The dominant players of plastic recycling will likely be in the chemical recycling PCR markets and bio-based plastic packaging markets, and it’ll be the companies with the leading, lowest-cost technologies, that can operate at scale.

Furthermore, recycled plastic has a 30% lower carbon footprint than virgin plastics. x These recycling efforts are vital to contribute to decarbonisation and to achieve global carbon neutrality by 2050.

DRIVING CHANGE We’re at the very beginning of the ‘boom’ in the plastic solutions market. Through our global research platform and close relationship with companies, we’re able to understand the market opportunity that the plastic packaging crisis represents and can identify the winners of the plastic solutions market’s direction of travel.

As long-term investors, it’s our duty to influence positive environmental change. By using fundamental, bottom-up stock selection, we’ll be able to identify the key leaders that can drive change in the ‘plastic planet’ crisis. Furthermore, by supplying capital to fund innovative technologies, increase scale and reduce the cost of capital, we can facilitate these leaders to save our oceans and planet.

Sources: i Geyer et al ii Plastics Europe iii Conversio Market & Strategy GmbH iv Euromonitor v Fidelity analysis vi UN Environment Programme, 2020 vii Ellen MacArthur Foundation viii GlobalWebIndex ix Ellen MacArthur Foundation x C Balance, Recycle Guru: Carbon Savings Achieved by Recycling, 2013

Important information This information is for investment professionals only. The value of investments can go down as well as up and you may not get back the amount invested. Views expressed may no longer be current and already acted upon. Changes in currency exchange rates may affect the value of overseas investments. Emerging markets investments can be more volatile than developed markets. Reference to specific securities shouldn’t be interpreted as a recommendation to buy or sell these securities but is included for the purposes of illustration only. A focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by Financial Administration Services Limited and FIL Pensions Management Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0621/34553/SSO/NA 7

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JAPAN

UNIQUE BUSINESS MODELS – “ONLY IN JAPAN” Although Japan is perceived as a low-growth economy, there are plenty of attractive companies, says FSSA Investment Managers.

Despite the perception that there is little or no growth in Japan, the core portfolio holdings in the FSSA Japan Equity Fund have been able to adapt and grow despite economic headwinds, and have delivered sustainable earnings growth and attractive shareholder returns.

Tourists who have visited Japan would most likely agree that it is a country like no other. Those who have yet to be introduced to this unique country may find aspects of its inimitable culture and customs unfamiliar, perhaps even inscrutable. From an investment perspective, this same unfamiliarity with the Japan market – with dissimilar investment opportunities compared to other equity markets – could present investors with considerable challenges.

At FSSA Investment Managers we believe that a deep knowledge of the local market and an understanding of the cultural and societal aspects of Japan are critical in the research and analysis of Japanese companies – especially if there are no direct Western parallels to draw a comparison. As a team, we spend most of our time visiting companies and carrying out research trips to the countries where we have made investments (though we have temporarily moved to “virtual meetings” due to Covid-19).

We have found that the Japan market contains businesses that are uniquely Japanese. For example, M3 is a global leader in online medical-related services.

We explore some of the other myths and misconceptions of investing in Japan on our website: firstsentierinvestors.com.

Important information This document is not a financial promotion and has been prepared for general information purposes only and the views expressed are those of the writer and may change over time. Unless otherwise stated, the source of information contained in this document is First Sentier Investors and is believed to be reliable and accurate.

References to “we” or “us” are references to First Sentier Investors.

First Sentier Investors recommends that investors seek independent financial and professional advice prior to making investment decisions.

In the United Kingdom, this document is issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 143359). Registered office: Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number 2294743. In the EEA, issued by First Sentier Investors (Ireland) Limited which is authorised and regulated in Ireland by the Central Bank of Ireland (registered number C182306) in connection with the activity of receiving and transmitting orders. Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland number 629188. Outside the UK and EEA, issued by First Sentier Investors International IM Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 122512). Registered office 23 St. Andrew Square, Edinburgh, EH2 1BB number SC079063.

RETIREMENT

RETIREMENT SHOULD BE ENJOYED, NOT ENDURED Retirees need income solutions that can provide spending confidence through retirement, says Jason Borbora-Sheen, co-Portfolio Manager, Ninety One Diversified Income Fund.

With the average UK life expectancy now 82, one of the greatest challenges facing people living in the UK is the ability to fund a 30+ year retirement, while ensuring that their pension pot can support their expected standard of living.

Future retirees need income solutions that can provide spending confidence through retirement. It is important to avoid not only drawing down assets at an unsustainable rate, but also underspending out of fear of outliving the pension pot.

Decumulation strategies are steadily attracting attention; they delay the need to fully annuitise savings, but still provide an income stream while remaining invested, allowing the best chance of retaining some capital to eventually purchase an annuity or leave a legacy to loved ones.

Understanding the relationship between assets, income and retirement goals is key. As we are living longer, in what is a historically low interest rate environment, flexibility is also required in the decumulation stage.

To ensure a successful decumulation strategy in retirement, we encourage investors to consider three core elements.

1. WITHDRAWING A SUFFICIENT AND SUSTAINABLE INCOME During the decumulation phase of retirement, investors effectively convert a portion of their assets into income based on a ‘withdrawal rate’. It is important to determine a sustainable withdrawal rate (SWR) that prevents any income taken from fully exhausting the pension pot, thereby retaining the ability to purchase an annuity during a later stage of retirement.

While there is no uniform solution to finding the correct withdrawal rate for an individual investor, we would argue that a sufficient income can be best achieved by investing across a diverse range of asset classes. In order to achieve a sustainable income, we believe investors should avoid aggressively chasing yields which can put capital at risk, and instead focus on resilient and natural yields that are backed by robust business models.

“Decumulation strategies are steadily attracting attention; they delay the need to fully annuitise savings, but still provide an income stream whilst remaining invested”

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2. IT’S IMPRUDENT TO BE TOO PRUDENT: DECUMULATION STRATEGIES REQUIRE A GROWTH ENGINE Contrary to conventional wisdom, if an investor wants to take income withdrawals, we believe decumulation strategies require a strong growth engine to avoid the pension pot running dry. To us, growth assets include all those with a positive correlation to equities, such as high yield corporate bonds, emerging market debt and listed property.

Traditional fixed income assets, such as developed market sovereign bonds, can no longer be relied upon to provide the decent levels of sustainable income achieved historically. The policy response to the coronavirus pandemic has seen absolute yields on government bonds plummet, dragging down yields on other defensive assets. Even though yields have recently increased on the prospect of a post-pandemic economic recovery and the perceived threat of rising inflation, they remain at historically low levels.

Nevertheless, compelling returns can still be earned across a range of asset markets and securities, and most notably from those assets classified as growth. While we think it is important to always have a balance, by having a growth engine and accessing the relatively higher income and capital growth potential available from growth assets, a retiree could expect to receive a higher level of income over ten years than if they relied on defensive assets alone. It is however paramount to acknowledge that growth assets are not without risk and investors may wish to consider a strategy which strikes a balance between achieving compelling total returns and portfolio volatility.

3. FOCUS ON LOWER VOLATILITY TO AVOID THE WORST OF MARKET DRAWDOWNS Sequencing risk refers to the danger associated with the ‘sequence’ in which returns are generated and withdrawals are made from a portfolio. The risk is highest in early years of decumulation when the portfolio value and time horizon are at their greatest. Unsurprisingly, withdrawals in bear markets are worse than in bull markets given the retiree takes a proportionally bigger bite out of a shrinking balance.

Thus, sequencing risk is to a certain extent a matter of luck, but it threatens the preservation of capital and its ability to underpin a sustainable income drawdown. Sharp drawdowns can be particularly harmful to investors with nearer-term horizons such as retirees.

Inherently lower portfolio volatility is key for decumulation strategies. We believe it effectively acts as ‘hidden alpha’ as it can help generate greater levels of income because it allows sequencing risk to be managed more effectively.

We view active management as a crucial factor in dynamically adapting risk within an investment portfolio to account for changing market conditions, but without sacrificing income – a necessity for those in retirement. Such versatility is important given that retirees need to withdraw income irrespective of the market environment.

CHECKLIST While investors approaching retirement have significant freedom and choice, coupled with a plethora of potential headwinds to consider – this can be overwhelming. By considering this three-point checklist – determine and source a sustainable withdrawal rate; use ‘growth’ assets to avoid the pot running dry; focus on lower volatility to avoid the worst of market drawdowns - we believe investors will be better placed to enjoy, rather than endure, their retirement.

How is this achieved in practice?

To find out how we apply a defensive approach, with growth, read more about our three-point checklist that an investor should consider in order to source a sustainable level of income while reducing the need to withdraw from their underlying pot of capital: https://ninetyone.com/RetirementChecklist The value of an investment can fall as well as rise and isn’t guaranteed. Your client could get back less than they invest.

Performance and volatility targets are subject to change and may not necessarily be achieved, losses may be made. Past performance is not a reliable indicator of future results. The amount of income may rise or fall. The Fund may invest more than 35% of its assets in securities issued or guaranteed by a permitted sovereign entity, as defined in the definitions section of the Fund’s prospectus.

Important information This is an advertising communication for institutional investors and financial advisors only, and not for public distribution.

Ninety One has prepared this communication based on internally developed data, public and third party sources. Although we believe the information obtained from public and third party sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness.

Ninety One’s internal data may not be audited. Ninety One does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions.

This communication is not an invitation to make an investment nor does it constitute an offer for sale. Any decision to invest in the Fund should be made after reviewing the full offering documentation, including the Prospectus, which sets out the fund specific risks. Fund prices and copies of the Prospectus, annual and semi-annual Report & Accounts, Instruments of Incorporation and the Key Investor Information Documents may be obtained from www. ninetyone.com. Except as otherwise authorised, this information may not be shown, copied, transmitted, or otherwise given to any third party without Ninety One’s prior written consent. © 2021 Ninety One. 11

Forward-thinking investing that taps into tomorrow’s opportunities Discover new investment opportunities in the key themes that are shaping our world.

At Sanlam, we craft better financial futures for our clients by understanding and identifying opportunities within the fundamental themes that influence our lives – and the world around us – today and tomorrow.

Over time, the performance of the major asset classes has become increasingly correlated. Our thematic investment funds view the investible universe from a different angle – focusing instead on emerging and expanding global megatrends: from artificial intelligence to healthcare, and from education to renewable energy.

It’s a shift of perspective that leads to wider long-term opportunity, and a clearer path towards your clients achieving their investment goals.

Shift your perspective. Explore thematic investing with Sanlam today. Visit sanlam.co.uk/thematic

Past performance is no guide to the future. The value of investments and any income from them can fall and investors may get back less than invested. Sanlam is a trading name of Sanlam Private Investments (UK) Ltd, which is authorised and regulated by the Financial Conduct Authority.

RENEWABLES

THE REBRANDING OF THE OIL & GAS MAJORS: GREENWASHING OR SOUND COMMON SENSE? Interest in renewable energy sources has intensified as countries seek to move away from fossil fuels to meet the climate change targets set out in the Paris Agreement, says Sanlam.

In order to balance global demand for energy with society’s calls for lower emissions, companies within the energy sector are starting to transition towards a more sustainable business model – and this is creating long-term investment opportunities.

While the shift towards renewable energy sources has gained momentum, the oil and gas (O&G) industry – for so long a stalwart in investment portfolios - has faced additional challenges, including price volatility, a coronavirus-driven drop in demand, and the rising cost of oil exploration and extraction. In response to this disruption, O&G companies are seeking to diversify their business models to focus on sources of long-term growth.

LOOKING BEYOND THE OIL MAJORS Activists and investors are urging the oil majors to step up and deliver the solutions that will bring the world closer to its net-zero objective. Unsurprisingly, the seven largest integrated O&G companies – BP, Chevron, Exxon Mobil, Royal Dutch Shell, TotalEnergies, ConocoPhillips, and ENI – have garnered most of the attention and criticism.

However, according to the International Energy Agency (IEA), the majors account for only 12% of O&G reserves, 15% of global production, and 10% of estimated emissions from industry operations. In comparison, national oil companies (NOCs) – which are fully or predominantly owned by

governments – account for more than half of all global production and an even greater proportion of reserves, and most are not well positioned to adapt to the changing landscape.

COMPANIES IN THE SPOTLIGHT “No energy company will be unaffected by clean energy transitions. Every part of the industry needs to consider how to respond. Doing nothing is simply not an option.”

Dr Fatih Birol, IEA Executive Director O&G companies are coming under increasing pressure to play an active and tangible role in achieving the stated aims of the Paris Agreement, and to declare specific targets that can then be used to hold them to account. However, bodies such as The Climate Accountability Institute have questioned whether the oil majors can be trusted to deliver on their promises.

COURT-ORDERED CHANGE In a move that may have far-reaching consequences for the sector, a Dutch court ordered Royal Dutch Shell to reduce its carbon emissions more quickly than previously intended, to 45% from its 2019 levels by 2030. A lawyer for Friends of the Earth, which brought the case against Royal Dutch Shell in the Netherlands, commented: “This is a turning point in history ... it is the first time a judge has ordered a large polluting corporation to comply with the Paris Climate Agreement”.

ACTIVISTS ON THE BOARD During May, Exxon Mobil’s shareholders voted two activists from hedge fund Engine No. 1 to Exxon Mobil’s board, with a third likely to join. Robert Eccles, a professor at Saïd Business School at the University of Oxford, described the move as “a good example of activist stewardship to help the company get the board it needs for the energy transition”. Despite this, Exxon CEO Darren Woods has reiterated the importance of oil and gas in meeting the world’s transitory energy needs, particularly in sectors that are harder to decarbonise – a view evidenced in Exxon’s recent 5-year spending plan.

“GREENWASHING” Greenpeace USA, Earthworks, and Global Witness launched legal action against US oil giant Chevron for “greenwashing”, alleging: “Chevron is attempting to completely reshape its public presence to keep pace with the public’s perception of the climate crisis”. They alleged that the company invested only 0.2% of its capital expenditure in low-carbon energy sources between 2010 and 2018, while increasing its overall carbon emissions from 2017 to 2019.

clearly demonstrated the need for the principal exporters to diversify their economies.

A substantial drop in demand for O&G production is likely to have a dramatic effect on countries whose economies depend on fossil fuels, and who represent almost one-third of the global population.

The chart below illustrates different countries’ exposure and resilience to the low-carbon transition.

RENEWABLE ENERGY AND REAL ASSETS MAKING CHANGES In August 2020, BP set out its environmental strategy and redefined itself as an “integrated energy company”. By 2030, it intends to achieve a ten-fold increase in low-carbon investment and to reduce emissions from its extraction operations by 30-35%. The company will not initiate new exploration for oil reserves in countries in which it does not already have operations.

BP’s foray into renewables includes a joint venture in solar power developer Lightsource, and investments in battery technology and electric vehicle charging.

A GLOBAL DISCONNECT The Covid-19 pandemic caused major disruption to the industry, driving down both demand and prices. While major O&G companies can pivot, the impact has been particularly severe for economies that rely on revenues from O&G production and has

The issue of climate change continues to guide and shape political policy. Governments have underwritten the advancement and expansion of renewable energy solutions; in turn, this financial and legislative support has spurred the development of new technology, driving down costs, generating economies of scale, and creating attractive long-term investment opportunities. In many cases, these opportunities are accompanied by durable contractual revenue streams with built-in inflation protection – valuable characteristics for investors seeking stable returns amid volatile events like the global pandemic.

Renewable energy is a long-term theme that is set to play out over decades, and it makes up around 30% of the Sanlam Real Assets Fund. Real assets span a wide range of different sectors, from housing and transport to logistics, data warehousing, and renewable energy, and the investment universe continues to evolve.

Looking ahead, energy will continue to generate long-term investment opportunities: demand for energy has not diminished, but demand for more sustainable energy has surged and the rate of change is gaining momentum.

FIGURE 1: COUNTRIES’ PREPAREDNESS FOR A LOW-CARBON TRANSITION

Iraq

1.0 High exposure

Libya

Qatar

Brunei Darussalam Kuwait

Kazakhstan

Saudi Arabia Oman

Vietnam

Azerbaijan

Russian Federation

Nigeria Iran, Islamic Rep. Guyana

Botswana South Africa

0.5 United Arab Emirates Norway

China Malaysia

Ukraine Indonesia India Bolivia

Venezuela, RB

Equatorial Guinea Algeria

Congo, Rep. Cambodia Ghana Egypt, Arab Rep. Angola

Low exposure

Colombia Côte d’lvoire Bangladesh Australia Thailand Mozambique Canada Poland Turkey Namibia Argentina Malawi Korea, Rep Mexico US Chile Pakistan Brazil Germany Japan Philippines Mongolia Italy France UK Sweden Uganda Tanzania Kenya

“The oil majors account for only 12% of O&G reserves, 15% of global production, and 10% of estimated emissions from industry operations. In comparison, national oil companies – which are fully or predominantly owned by governments – account for more than half of all global production and an even greater proportion of reserves”

0

0.5 High resilience

1.0 Low resilience

Source: World Bank, 2 July 2020 Sanlam is a trading name of Sanlam Private Investments (UK) Limited (registered in England and Wales 2041819; registered office: 24 Monument Street London EC3R 8AJ). Authorised and regulated by the Financial Conduct Authority. The value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

15

ESG

“DO SWEAT THE SMALL STUFF”: HOW ESG MISSTEPS IMPACT FUTURE PERFORMANCE New research supports the view that companies that neglect stakeholders pose greater risks to investors, says Katherine Davidson, Portfolio Manager, Global & International Equities, Schroders.

Schroders has written extensively on our concept of “corporate karma” – the idea that what goes around, comes around with regard to how companies treat their stakeholders.

Since the start of the pandemic, we’ve written about our belief that a new social contract is emerging, particularly in relation to how employers treat their employees, and we’ve shown how it’s possible for companies to balance the needs of all stakeholders.

We’ve also looked at how well companies are supporting their stakeholders. Above all, we’ve tried to emphasise why corporate karma is crucial for your investment returns.

Companies that look after their stakeholders are less likely to experience controversies such as customer boycotts, strikes and walkouts, litigation, regulation, environmental or occupational accidents. This implies a lower risk profile for your portfolio.

“Companies that look after their stakeholders are less likely to experience controversies such as customer boycotts, strikes and walkouts, litigation, regulation, environmental or occupational accidents.”

WHAT DOES THE RESEARCH SAY? Controversies are a hard thing to study empirically because headline-grabbing episodes like VW’s “Dieselgate” or Boohoo’s 2020 modern slavery scandal are, thankfully, pretty rare.

But a new paper from the University of Virginiai expands the data set by examining more minor ESG incidents such as environmental damage, discrimination, occupational health and safety issues, fractious relations with local communities, and anti-competitive practices. There were as many as 80,000 such incidents among listed US companies over the decade 2007-17.

The paper’s author finds a clear relationship between the number of past incidents and future financial and stock performance.

A portfolio of stocks with high environmental, social and governance (ESG) incident rates had lower profits and underperformed the wider market by about 3.5% per year, even when taking into account sector exposure and other risk factors.

The model also held for out-of-sample data in European markets, where a similar portfolio would have underperformed by 2.5% per year.

WHY DO CONTROVERSIES RESULT IN UNDERPERFORMANCE? Even relatively minor incidents can be indicative of weak internal controls or issues with corporate culture. So the same companies are likely to experience more of these types of events in the future.

No one ever forecasts a controversy, so analysts tend to overestimate the sustainable earnings power of “incidentprone” companies. This leads to negative earnings revisions and resulting underperformance in the future.

Furthermore, analysts tend to look through minor incidents so are more likely to be blindsided by big ones.

Consider the example of BP which, before the Deepwater Horizon spill in 2010 wiped 50% off the company’s value between April and end-June, had a long history of environmental and safety incidents. Until Deepwater Horizon, these had not had a material impact on the share price.

Even if the incidents remain small, over time they can undermine a company’s reputation and the trust of its customers, workers and investors.

MARKETS AREN’T EFFICIENT AT PRICING ESG FACTORS Despite the surge of interest in sustainable investing, financial markets are still poor at pricing environmental, social or governance information (ESG), particularly when there is no clear implication for short-term earnings. This can be understood through the “limited attention theory”, whereby investors find it easier to absorb salient, readily processable information.

Furthermore, we see a much stronger relationship between the incident data and performance than third-party ESG ratings, which aggregate hundreds of data points into a single score or grade.

This shows the value of doing our own homework. We need to tease out what historic data and incidents can tell us about a company’s culture or controls, rather than just putting numbers into an algorithm.

Stocks with a higher share of short-term-focused investors saw the biggest negative reaction to incidents, presumably because these investors were less focused on the implications of a firm’s ESG track record on its long-term earnings power.

Long-term investors seemed to be better at anticipating future controversies and selling high-risk stocks.

HOW CAN INVESTORS USE THIS INFORMATION? This tells us that, when assessing minor or major controversies, we should be focusing on the root cause rather than the proximate cause.

For example, the specifics of a product recall matter less than whether it indicates a culture of chasing growth at the expense of quality control.

Following a controversy, we should challenge companies to demonstrate what has changed to prevent further incidents, and hold them to account.

We believe when constructing a portfolio, companies classed as “improvers” should, all else being equal, be held at lower weights to reflect their higher risk profile and greater uncertainty of long-term earnings power.

This article was published in June 2021. Any company references are for illustrative purposes only and are not a recommendation to buy and/or sell, or an opinion as to the value of that company’s shares.

The article is not intended to provide, and should not be relied on, for investment advice or research. The views and opinions contained herein are those of the authors, or the individual to whom they are attributed, and may not necessarily represent views expressed or reflected in other communications, strategies or funds.

Source: i ESG Incidents and Shareholder Value, Simon Glossner, University of Virginia – Darden School of Business, February 17, 2021

17

18

For investment professionals only

ANSWERING YOUR BIG BOND QUESTIONS LET’S CREATE At M&G we have one of the biggest and most-respected fixed income teams in Europe. They’re not afraid to tackle the big questions head-on.

Finding answers and providing a variety of fixed income solutions.

Find out more: www.mandg.com/ investments/professional-investor/ en-gb/fixed-income-outlook Capital at risk

For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides investment products. The company’s registered office is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776. JUN 21 / 572601

CLIMATE CHANGE

THE ‘SOLVERS’: INVESTING IN SOLUTIONS TO CLIMATE CHANGE The urgent need for action on climate change could prove a defining theme for global investors in the 2020s – propelling sustainability leaders into the limelight, says Randeep Somel, fund manager at M&G Investments.

“The simple truth is that transformational action on climate change can no longer be postponed.”

20

When investors reflect on the 2010s, one trend will probably shine bright in the memory: the ascending dominance of ‘Big Tech’.

The last decade has seen US technology companies flourish.

They have taken commanding positions in their respective areas, including social media and online search, and disrupted other markets.

Their rise has been epitomised by the so-called ‘FAANG’ stocks: Facebook, Amazon, Apple, Netflix and Alphabet (Google’s parent). As confidence in their long-term prospects rose, their share prices – and those of peers – soared during the 2010s.

The trend was catalysed further during the lockdowns of 2020, when global society became more dependent on technology for work and play, propelling the US stockmarket to new highs.

Irrespective of whether Big Tech continues its ascendence, there is an emerging theme that I believe will define global markets over the coming decade: the emergence of sustainability as an immediate and overarching priority for investors.

temperature to 1.5°C – a level at which the risks and impacts of climate change are lower. To meet this goal, agreed in the 2015 Paris Agreement, we must achieve net zero greenhouse gas emissions worldwide by 2050.

Rising to the challenge demands deep and far-reaching reductions in emissions across all aspects of the economy this decade. I see three key areas where companies can meaningfully help combat climate change.

The first is where their activities or products directly cut emissions, either by replacing carbon-intensive inputs with renewable alternatives or by designing components and systems that improve energy efficiency. The second is where companies help make industry and transportation – which account for 35% of global emissions combined – less polluting. The third is where companies contribute to a more circular economy by designing out waste and keeping materials in use.

THE SUSTAINABILITY IMPERATIVE

THE ‘SOLVERS’

The simple truth is that transformational action on climate change can no longer be postponed.

The United Nations estimated in 2019 that global emissions must fall by 7% a year on average from 2020 to 2030 to get on track to limit the increase in the world’s average surface

When it comes to making the transition to a resource-efficient, low-carbon economy, it is European companies that are at the vanguard.

This should come as little surprise: Europe has arguably taken more action than other major economies to address the

causes of climate change, creating a supportive environment for green innovations to spawn.

European companies have gone on to become global leaders in their fields. I believe this trend is epitomised by a pioneering group that has developed solutions to the world’s most important challenges, and that we might dub the ‘SOLVERS’.

DS Smith – DS Smith is a leader in sustainable packaging, demonstrating the potential of closed-loop recycling – a process whereby waste is collected, recycled, then re-used to make the same product. By using recycled materials in its corrugated boxes, M&G estimates that the UK company saves 55 million trees a year from being cut down.

Schneider Electric – Schneider is a leader in energy-efficient electrical systems, from low-voltage devices to digital solutions that optimise processes across buildings, data centres, industry and the grid. The French group – rated “the world’s most sustainable company” in 2021 by Corporate Knights – enabled its customers to avoid 89 million tonnes of CO2 equivalent emissions in 2019, according to the company’s estimates.

Much as the ‘FAANG’ acronym is more symbolic than complete – there are other global technology stocks, like Microsoft, that are omitted – this list is by no means exhaustive. There are many other companies spearheading sustainable solutions, including several based in North America.

European companies – and the solutions they are developing – appear pivotal to setting emissions on a downward trajectory, even though their names do not form a world-famous acronym just yet.

Orsted – Ørsted is a leader in offshore wind power, having built more offshore wind farms than any company worldwide.

By replacing fossil fuels with electricity harnessed from the wind, the Danish company – which aims to be carbon neutral by 2025 – estimates that it avoided 13 million tonnes of CO2 equivalent emissions in 2020.

Linde – Linde is a leader in the production of industrial gases, from life-saving oxygen in hospitals to hydrogen for clean fuels.

The US-German group also provides gas processing solutions that enable companies to improve efficiency and cut emissions.

Linde’s applications enabled approximately 100 million tonnes of CO2 equivalent emissions to be avoided in 2019, according to the company’s estimates.

Vestas – Vestas is a leader in the manufacture of wind turbines, being the largest provider and service operator of onshore turbines in the world. By enabling its customers to efficiently generate electricity from the wind, not fossil fuels, the Danish company states that its turbines avoided 186 million tonnes of CO2 equivalent emissions in 2020.

EDP Renováveis – EDP Renováveis is a leader in green energy, generating 100% of its electricity from renewable sources, mostly wind turbines. By enabling fossil fuels to be substituted, the Portuguese company said it helped global society avoid 19 million tonnes of CO2 equivalent emissions in 2019.

Rockwool – Rockwool is a leader in the manufacture of fire-resistant stone wool insulation, which significantly reduces the need for heating in homes and offices, and so energy consumption. Over the lifetime of building insulation it sold in 2019, the Danish company estimates that 200 million tonnes of CO2 equivalent emissions could be avoided.

THE LONG-TERM POTENTIAL Climate change poses a real and present danger to the well-being of people and the planet. With growing recognition of the urgency of the challenge, I believe companies like the ‘SOLVERS’ are well-placed for sustainable, long-term growth.

The next decade presents a critical window in which we can still change the course of climate change. Success not only demands that we change our behaviour, but that we also invest heavily – and urgently – in the transition to a low-carbon economy.

The multi-decade global transition to reduce the impact of human activity is already underway, galvanised by efforts to shape a more sustainable recovery from the Covid-19 global downturn.

In Europe, sustainability is central to the €750 billion “Next Generation EU” recovery plan, which promotes investments that cut emissions and advance renewable energy and energy efficiency.

Government support should provide a tailwind to businesses that can accelerate the transition. Even without it, wider society is increasingly pressing for more sustainable products and services.

There does not need to be a trade-off between profits and the planet. I believe that where companies can provide solutions to the climate challenge, they can present compelling opportunities for long-term investors. In turn, investors can play a part in addressing the climate emergency.

The views expressed in this document should not be taken as a recommendation, advice or forecast.

When you’re deciding how to invest, it’s important to remember that the value of investments goes up and down.

So how much your investments are worth will fluctuate over time, and you may get back less than the original amount you invested.

About the author Randeep Somel has managed the M&G Climate Solutions Fund since its launch in November 2020. Randeep joined M&G Investments in 2005 and managed the M&G Global Themes and Managed Growth funds between 2013 and 2017. He was appointed Associate Portfolio Manager of the M&G Positive Impact Fund in 2019 and is part of the Equity Impact Committee.

For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776.

21

MULTI-ASSET

CONSISTENCY IS KEY FOR THE BAILLIE GIFFORD MANAGED FUND The Baillie Gifford Managed Fund, a distillation of the group’s strongest ideas across equity and fixed income, had its best year ever in 2020.

Can it continue to thrive in 2021 and beyond?

AS WITH ANY INVESTMENT, YOUR CLIENTS’ CAPITAL IS AT RISK. The year 2020 played to Baillie Gifford’s strengths. At a time of uncertainty, investors gravitated to those companies with a lengthy and predictable growth trajectory. The Baillie Gifford Managed Fund, which serves as a distillation of the group’s strongest ideas across equity and fixed income, had its best year ever, outperforming the wider sector by 20%. The question today is whether it can continue to thrive in a climate of recovery.

The Managed Fund was launched in 1987, so has weathered plenty of crises before. The process has been largely unchanged over its history. It draws on the regional equity and fixed income teams, who all contribute their best ideas to the fund. “They all provide the building blocks for the Managed Fund,” says Lucy Haddow, client service director at the group.

It has a 75/25 strategic weighting to equities versus bonds and cash, with equities considered the long-term growth engine and fixed income there for balance, growth and diversification.

The allocation to the different regions is decided by the relative enthusiasm of different regional managers and whether they are seeing lots of new ideas. This takes some nuanced judgement – all fund managers have inherent enthusiasm about their asset class.

Haddow says that it helps that they know each other well: “We’ve worked together for a long time and we get a sense of whether they are mildly enthusiastic or really enthusiastic. To my mind, this best demonstrates our process on the fund and managers will be honest if they’re not finding many ideas, would prefer to remain underweight or add incrementally. We see it with fixed income at the moment, where the managers are still finding ideas but are cautious, and we saw it with UK equities last year.”

The policy setting group is charged with making these decisions. This is Andrew Stobart, emerging market equities manager, and the two lead managers on the fund, Iain McCombie and Steven Hay. There are also representatives from the multi-asset and client service teams. Haddow is the chair.

They rarely make significant moves, each will be incremental.

“We try not to tinker. There is always a temptation to tinker, but we always bring it back to where the ideas are coming from.” For example, more recently, the group has been finding ideas in Asia and emerging markets. “Our increased allocation is a reflection of the widening opportunity set available,” says Haddow. This is

22

part of a broader trend – the economic centre of power is shifting from west to east. The approach has served the fund well through almost all market conditions. It has had a tougher time since the start of the year, given the pause in growth but has still delivered a positive return.

Certainly, Baillie Gifford won’t be changing the style that has worked so well for it over the longer term. Haddow: “We are long-term bottom-up growth investors. What you get is consistency.” Nevertheless, the process naturally steers the fund to attractive areas of the market, so it can participate in some recovery areas. Its largest position currently is in UK equities, with companies such as St James’s Place among its top ten holdings.

Haddow says it would also be wrong to think of the fund as solely focused on technology, even though it has significant weightings in Shopify and Amazon. “Technology is only around 11% of the fund; we have more in industrials.” Growth can be found across a broad range of sectors. One of the fund’s latest holdings is Japan-based Unicharm, which makes baby diapers, but also adult incontinence pads. The latter is a fast-growing market as the Japanese population ages.

The managers have moved away from some of the companies with which Baillie Gifford is most associated. For example, it reduced Tesla on the fund from 1.5% to 0.8% and it sold out of Alphabet completely. It had already sold Facebook and hasn’t held Apple for many years. Haddow admits that the portfolio will always look expensive on standard short-term metrics, but they are not valuation agnostic and will sell out or reduce if companies get too expensive versus the long-term opportunity.

Haddow says the team is tapped into a rich seam of new opportunities: “We are pushing to find the next generation of growth businesses. We get good access to companies. We have participated in quite a few initial public offering (IPOs) this year, including a consumer finance business and a biotechnology group. These both came from relationships Baillie Gifford had with them as private companies. This existing relationship gives us greater confidence when buying an IPO.” The fixed income portion is trickier. There is relatively little value in conventional fixed income. The fund has an overall underweight in the fund – 17% versus a 20% starting point.

Haddow says that being active and long term is

“We are pushing to find the next generation of growth businesses. We get good access to companies. We have participated in quite a few initial public offering (IPOs) this year, including a consumer finance business and a biotechnology group. These both came from relationships Baillie Gifford had with them as private companies”

helpful, as is having a global opportunity set. The fixed income portion of the portfolio now has several inflation-linked emerging market and high yield issues: “These are more attractive in an environment where there is higher inflation”.

In terms of governance and sustainability, the fund has no specific exclusions, but the process naturally pushes towards companies that can grow sustainably over time. That naturally steers the managers away from less sustainable areas such as tobacco or oil. The fund currently has no tobacco, and only

around 0.2% in gambling. Equity exposure to the energy sector is just over 1%. “We have long thought about social and governance considerations,” says Haddow.

Inflation is a concern in today’s environment, but the fund is focused on companies with pricing power. Haddow says: “We have to recognise that companies don’t grow overnight. We need to put trust in the management teams we’re working with to address the issues. For us, it’s about consistency of approach.”

FIGURE 1: BAILLIE GIFFORD MANAGED FUND ANNUAL PAST PERFORMANCE (%) TO 31 MARCH EACH YEAR 2017

2018

2019

2020

2021

Managed Fund

22.0

6.3

8.4

0.2

46.4

Sector Median*

17.7

1.4

4.5

-7.8

26.3

Source: Statpro, FE. Class B accumulation shares, total return in sterling. Returns reflect the annual charges but exclude any initial charge paid. *The manager believes an appropriate comparison for this Fund is the Investment Association Mixed Investment 40-85% Shares Sector median given the investment policy of the Fund and the approach taken by the manager.

Past performance is not a guide to future returns.

For financial advisors only, not retail investors. This article does not constitute, and is not subject to the protections afforded to, independent research.

Baillie Gifford and its staff may have dealt in the investments concerned. The views expressed are not statements of fact and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The Fund’s share price can be volatile due to movements in the prices of the underlying holdings and the basis on which the Fund is priced. Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates. The Fund invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment. Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority. Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs. All data is sourced from Baillie Gifford & Co unless otherwise stated.

23

BAILLIE GIFFORD MANAGED FUND

Want a fund full of our best ideas in equities and bonds?

We can manage that.

We have more than 70 investors in Baillie Gifford bringing decades of experience and original thinking to investment ideas across a whole range of sectors. So, our Managed Fund makes full use of their skills. We take the best ideas in equity and bond investing and build a balanced portfolio with low fees. Beautifully straightforward, it’s been outperforming others since 1989.

Performance (p.a.%) to 31 March 2021* MANAGED FUND IA MIXED INVESTMENT 40%–85% SHARES SECTOR MEDIAN

5 Years

10 Years

15.6%

11.4%

7.7%

6.3%

As with any investment, your clients’ capital is at risk. Past performance is not a guide to future returns. For financial advisers only, not retail investors. The manager believes the above comparison is appropriate given the investment policy of the Fund and the approach taken by the manager when investing.

Find out more by watching our film at bailliegifford.com

Actual Investors

All data is at 31 March 2021. *Source: FE, B Acc shares, single pricing basis, total return. Baillie Gifford & Co Limited is the Authorised Corporate Director of the Baillie Gifford ICVCs. Baillie Gifford & Co Limited is wholly owned by Baillie Gifford & Co. Both companies are authorised and regulated by the Financial Conduct Authority.

B.E.A.C.H sectors: A rising tide Though Covid-19 cases are still rising in certain regions...

DAILY NEW CONFIRMED COVID-19 CASES PER MILLION PEOPLE.

...there could be light at the end of tunnel…

400

13.2

300

200

Covid-19 vaccine doses delivered per 100 people worldwide.

Europe World

100

Asia

0 1 Mar-20

North America

30 Apr-20

8 Aug-20

16 Nov-20

24 Feb-21

1.03bn

total number of Covid-19 vaccine doses delivered to date.

24 May-21

Source: Our World in Data and COVID-19 Data Repository by the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University as at 25 May 2021.

Source: BBC: ‘Covid vaccines: How fast is progress around the world?’, 26 April 2021.

...prompting fresh investor optimism.

500%

S&P 500: RELATIVE PERFORMANCE 140

week-on-week increase bookings for holidays in Greece, Spain and Turkey from July onwards by one of Europe’s largest tour operators in the week the UK announced an easing of lockdown restrictions.1

S&P 500 Travel, Leisure, Resorts, Restaurants, Hospitality* 130

Index rebased to 100 on 12/31/2019

120

69%

110

100

jump in bookings made via a leading UK-based metasearch engine and travel agency the day after the announcement.2

90

80

x4

flight increase: a major UK-based low-cost airline group said bookings for flights from the UK had more than quadrupled week-on-week in the same period.3

70

60

50

40 Dec 2019

Jan 2020

Feb 2020

Mar 2020

Apr 2020

May 2020

Jun 2020

Jul 2020

Aug 2020

Sep 2020

Oct 2020

Nov 2020

Dec 2020

*Equal weighted index of S&P 500 sub-industries (Casinos & Gaming, Airlines, Hotels, Resorts, and Cruise Lines, Restaurants) and stocks (Live Nation Entertainment , Six Flags).

Source: Bloomberg as at 20 April 2021.

Jan 2021

Feb 2021

Mar 2021

B.E.A.C.H. sectors that could benefit Bookings companies Entertainment providers Airlines Casinos and cruise ships Hospitality and hotels 1 Financial Times. Holiday bookings surge after UK unveils plans for lockdown easing, 23 February 2021.

2 Ibid.

3 Ibid.

As the US economic recovery from the Covid-19 pandemic gathers pace, we expect the travel and leisure sectors there to continue to benefit from economic re-openings and a pick-up in vaccinations. These sectors bore the brunt of the sell-off in 2020 and while they have partially recovered, we expect further momentum. Pent-up demand, growing consumer confidence, healthy consumer balance sheets, historically elevated savings, and the boost from fiscal stimulus should collectively see consumers make up for lost spending during lockdowns.

As such, we expect a substantial increase in discretionary spending, and one of the biggest beneficiaries to be travel and leisure. Given the delayed economic recovery in Europe and uneven vaccine rollout globally, we expect rotation into ex-US travel and leisure investments to increase but at varying rates in the second half of the year.

Bryan Besecker, vice president, investment strategist in the Global Investment Strategy team, BNY Mellon Investment Management.

For Professional Clients only. Any views and opinions are those of the author, interviewee unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and its subsidiaries. Issued in the UK by BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. Document ID: 585901.

Expiry: 6 December 2021. T9763/0621.

FIXED INCOME

THE ADVANTAGES OF FLEXIBILITY IN FIXED INCOME The right ideas count for little if they can’t be implemented effectively, says Nick Hayes, Portfolio Manager, Head of Total Return and Fixed Income Asset Allocation at AXA Investment Managers.

The past year has certainly shown the advantages of flexibility in fixed income. Investors have had to deal with the Covid-19 pandemic, a market rotation following positive vaccine results, and, so far this year, the global reflation narrative. While it is vital for investors to understand the importance of events and their implications, it counts for little if you do not have the flexibility to implement a view.

Of course, there are different ways we can think about flexibility in fixed income. Perhaps the most obvious is what you can invest in. Within the global strategic bond space, we have full access to the global bond universe, from safe haven assets such as US Treasuries to higher risk markets such as Asian high yield bonds.

We also need to consider how quickly we can get in and out of positions. Part of this is about the nature of your exposure – do you want cash bonds to implement a view, or is it better to use futures? It is also about having the infrastructure to get in and out of positions swiftly though, with a dedicated trading team helping us to do this.

While we believe a global fixed income portfolio should be structurally diversified across fixed income markets, we can also add value by making tactical asset allocation decisions. As an example, in theory we could allocate completely to government bonds, though the kind of circumstances in which that would happen are extreme. The following three examples show the kind of tactical decisions we have made in the recent past, using our flexibility to take advantage of market opportunities.

1. GOVERNMENT BONDS COMING INTO 2020 Governments bond yields were low at the beginning of 2020, with ten-year US Treasuries yielding 1.5%, around half their end-2018 level. We believed they could go lower with the end of the cycle approaching, however, with the Fed likely to cut rates to support the economy.

We did not anticipate a global pandemic providing the economic shock for rate cuts but were well positioned when it happened. We were at our most defensive in some time by March 2020, with a very positive view on US Treasuries. The flexibility we have to reflect our views means we can adjust positioning quickly, however, and brought down our defensive exposure significantly as policymakers acted to protect the global economy.

2. TAKING SPREAD RISK FOLLOWING THE FIRST STAGE OF THE COVID CRISIS The flipside of reducing our defensive exposure after March 2020 was an increase to credit risk. We had been cautious on spread risk for much of 2019 and the early part of 2020, preferring to own smaller pockets of value. Following the Covid-sell-off, however, we turned more opportunistic on cheaper valuations in developed market credit, high yield and emerging markets.

We achieved this by selling futures to short US duration, particularly at the long end of the Treasury curve. By using futures, we can select the currency and part of the curve we want to hedge out and accurately implement our investment views in portfolios.

The short US duration has since contributed materially to performance in our strategies, helping us to further offset the negative impact of rising bond yields over the first quarter of 2021.

As hinted on above, however, our ability to react quickly has been vital to all of this. The upwards move in US yields over the first quarter of 2021 was notable for its rapidity. If you cannot change your positioning quickly enough, you risk either losing money or not being able to take advantage of changing market conditions.

CONCLUSION We believe that investors can continue to benefit from an allocation to fixed income, especially given the recent rise in bond yields and degree of optimism priced into markets. Flexibility is a critical consideration when investing in fixed income, however, with investors likely to reap the biggest benefits from considering a diversified universe where they have the potential to add to returns through tactical portfolio adjustments as the economic and market cycle evolves.

3. USING FUTURES TO ADJUST DURATION In recent months, we have seen a new stage in terms of the market recovery from Covid-19, with investors getting excited about the prospects of global reflation and bond yields breaking through the second half of 2020’s tight trading levels. We reduced duration in the middle of February 2021 and again towards the end of the month, with yields looking like they had upwards momentum in strength. This subsequently proved correct, protecting against the worst of the move upwards in Treasury yields.

“It is also about having the infrastructure to get in and out of positions swiftly though, with a dedicated trading team helping us to do this.”

Not for Retail distribution: This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.

This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

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Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

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Investment involves risks, including the loss of capital.

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This promotional communication does not constitute an offer to buy or sell any investments, products or services and should not be considered as a solicitation, or as investment, legal or tax advice.

This material does not contain sufficient information to support an investment decision. Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate, London, EC2N 4BQ. In other jurisdictions, issued by AXA Investment Managers SA’s affiliates in those countries. © AXA Investment Managers 2021. All rights reserved.

For investment professionals only and should not be relied upon by private investors.

Intergenerational Planning Synopsis Donald Manning Retirement & Savings Development Manager

Intergenerational wealth transfers according to research carried out by Brooks Macdonald, will see around £327 billion of assets passed to the next generation over the next 10 years. Families will need to obtain the correct advice regarding wealth transfers, to make sure that the transition of wealth is done as tax efficiently as possible. Over the next 15 years, research has shown that the financially mature and stress-free retirees, will be overtaken by ‘complex families, complex finances’ retirees, as the largest group of retirees by 2035. It may require a different advice process model to be able to deal with their retirement journeys.* There are annual exemptions and Potential Exempt Transfer rules which can help to reduce or mitigate IHT on intergenerational transfers. Advisers can help clients construct their income stream tax efficiently and help document their expenditure, to make the most of this exemption.

Passing down wealth When it comes to passing wealth down to the next generation, using pension and ISA allowances can provide a tax-efficient vehicle for the gifted assets. Third-party payments can be made by the donor utilising both the annual allowance and carry forward rules. With the use of Junior ISA, the donor knows that access cannot be achieved before the child becomes 18. Investment control is available at age 16, which gives a good opportunity for advisers to engage with the child to discuss investments and plans for the ISA funds.

Partner privileges For married couples and civil partners, on death, the survivor can take advantage of Additional Permitted Subscription, (APS).

Original ISA assets do not automatically pass to a spouse or civil partner on death, as they may have been passed to another via the Will. The adviser can assist in making sure that the allowance in these circumstances is utilised as tax efficiently as possible.

Where APS is not available for ISA investors and they want to pass those assets on as tax efficiently as possible, it will require the use of AIM investments. Where qualifying investments are held for at least 2 years at the date of death, they are exempt from IHT. Clearly AIM investments by there very nature, bring a further level of risk and therefore it is important to make sure clients understand the risks associated with such investments.

Intergenerational planning can be complex and take into account multiple allowances and rules. Advisers are best placed to steer clients and their beneficiaries through these to make sure that assets are transferred as tax efficiently as possible.

Reporting to help you and your clients At FundsNetwork we have a wide range of reporting tools to help in your planning with clients. Our ‘Pension Summary’ report can identify current pension withdrawals to see if there is scope to make the most of gifts out of normal income rules. It will also identify if a nomination has been made and identify who current beneficiaries are with percentages.

The ‘ISA Contribution’ report can help identify those clients who have not used their full annual ISA allowance in the current year, as well as identify if their OIEC investments could benefit from Bed & ISA. It will also identify those clients who do not have an ISA with FundsNetwork.

FundsNetwork weekly breakfast briefing Join Donald Manning each week at our weekly breakfast briefings, where he uncovers what’s behind the headlines to help you understand the implications to you, your business and your clients.

If you would like to find out more email us at

adviser@emails-fundsnetwork.co.uk

*Source: Money Marketing, 19 November 2020. This research was conducted by Canada Life in partnership with Trajectory.

Important information: This is for investment professionals only and should not be relied upon by private investors. Please note that with pension products your client will not be able to withdraw their money until they reach age 55. Tax treatment depends on individual circumstances and all tax rules may change in the future. The value of investments and the income from them can go down as well as up so your client may get back less than they invest. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, FundsNetwork™, their logos and F symbol are trademarks of FIL Limited.

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