RSMR Invest Magazine - Issue 8 by rsmr

Invest ISSUE NO.8 • SPRING 2021

Investors' thinking this year…

LOOKING FORWARD THE OUTLOOK FOR TO RECOVERY ASIAN EQUITIES WITH 'GREEN Following the pandemic, COLLAR' JOBS Shroders predict more Colombia Threadneedle thoughts on the year

measured progress for the region this year

EXPANSION. THE CONUNDRUM FOR INVESTORS IN 2021 With Brexit resolved and a weaker US dollar, Artemis look at asset allocation

A GREEN DIGITAL FUTURE Janus Henderson's David Eiswert looks to the opportunities ahead for sustainable funds

WHAT MAKES A 'QUALITY COMPANY' AND WHY DO WE INVEST IN THEM Aberdeen standard on quality investing

Contents

Spring 2021

04 J.P. MORGAN ASSET MANAGEMENT: Biden Climate Response 06 COLUMBIA THREADNEEDLE INVESTMENTS: Recovery With ‘Green Collar’ Jobs 08 FIDELITY INTERNATIONAL: TheBrand Year of theWorld Ox 06 ABERDEEN STANDARD: New

We launched the SRI rating in 2012 – the first of its kind in the UK – and we’ve been very active in the socially responsible area of our industry ever since. We track and mirror the changes that are taking place within the industry, and to provide further clarity on the funds we rate, we’ve revamped our SRI rated funds as ‘Responsible’. These changes are also reflected in our portfolios which we construct predominantly from RSMR Responsible rated funds. Adapting our research and aligning ourselves with the evolution of the industry means that we’re able to assist advisers in achieving more mindful client conversations. If you’d like to talk about our framework for approaching responsible investing and how we can help shape your client proposition, please don’t hesitate to get in touch…

Why wouldn’t you? Welcome to this issue of Invest. There is so much noise around ESG & Responsible investing that it made me write the above heading. I love trees but have yet to hug one, and I do wear flip-flops so where am I on the continuum when it comes to investing responsibly? Isn’t it a case of asking yourself why wouldn’t you seek out investments where the fund group and/or fund manager take positive steps to ensure that the companies in which they invest (our money) act responsibly? Across the planet the pandemic continues to impact our lives and livelihoods. And whilst we deal with the challenges immediately surrounding us, we cannot lose sight of the climate change that lies ahead. Governments and regulators across the globe are seeking answers: task forces are being established and new rules and guidelines set. All well intentioned but what’s wrong with just asking ‘Why wouldn’t you?’ The articles in this issue focus on the steps being taken by the asset management sector to embed ESG principles into a coherent policy. Only time will tell if they are principled to deliver on that goal. As Warren Buffet said: ‘…only when the tide goes out do you see who's swimming naked…’ Enjoy the read. Keep safe. Best wishes from the team here at RSMR. n

Geoff Mills, Director, RSMR

10 BMO: Multi-asset investing that doesn’t cost the earth 08 FIDELITY: Revisiting the Case in Quality 12 ROYAL LONDON ASSET MANAGEMENT: Green Bonds Overview THE PRECARIOUS HIGH STREET: SHOPPING BAGS AT DAWN FOR THE GRAND RE-OPENING? 18 SCHRODERS: Outlook for Asian Equities BNY MELLON: 20 BNY MELLON: Investing in sustainability the power of ESG Industry 4.0 – The Robot Revolution 22 AVIVA INVESTORS: ESG: Time for a regulatory revolution 12 INVESCO: Modern Risk Management

14 24

16 BAILLIE GIFFORD: Alexa, How Big Can You Get? M&G INVESTMENTS: Multi Asset 20 T. ROWE PRICE: Japan: Sustainable Three market Drivers forinvesting the Next Three Years

22 AVIVA INVESTORS: A jump in the Right Direction for Milti-Asset Investing 26 ARTEMIS: Investment insight 24 FRANKLIN TEMPLETON: Finding Under-Appreciated Opportunities in UK Small Caps 28 FRANKLIN TEMPLETON: Hydrogen and Battery Innovation 30 SCHRODERS: The Five Practical Issues of adding ESG into Multi-Asset Portfolios 30 JANUS HENDERSON: On The Road To A Green And Digital Future 32 INVESCO: Huawei and the 'Tech War" 32 GOLDMAN SACHS ASSET MANAGEMENT: Investing in Millennial Trends 34 BLACKROCK: How I Learned to To Stop Worrying and love the Bond 34 NINETY ONE: An Alternative Solution A Bleak Outlook For Yield 36 T. ROWE PRICE:: The “In-Between,” The Normal,” And What’s Next… 36 GOLDMAN SACHS: A long Road to“New Progress in India

BAILLIE GIFFORD: How Covid Is Changing The Way We Shop

42 INVESCO: I Thought You Said You Were Contrarian 44 LEGAL & GENERAL INVESTMENT MANAGEMENT: COVID-19 Vaccinations Vs Mutations 46 ABERDEEN STANDARD INVESTMENTS: What makes a ‘quality’ company?

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Invest magazine is published by Rayner Spencer Mills Research Limited (RSMR). The views expressed do not necessarily reflect the views of RSMR or any other party affiliated to RSMR, and no liability can be assumed for the accuracy or completeness of the content, nor should any of the content be used as the basis of any advice offered.

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Vincent Juvyns, Global Market Strategist

WHAT DOES BIDEN'S PRESIDENCY MEAN FOR THE GLOBAL CLIMATE AGENDA?

he election of Joe Biden has fuelled expectations of an increase in global momentum on tackling climate change. However, with compromise still needed to get his proposals through Congress, and with business groups likely to lobby hard against pieces of legislation they find the least acceptable, the economic and market impact of new US president’s climate policy response remains uncertain.

plans, among other policy measures, massive public investments (USD 400 billion) in energyand climate-related research and development (R&D), an area where the US is lagging compared to Europe and China. 3. “Build a stronger, more resilient nation”: Biden’s promise to make significant investments in low-carbon infrastructure is probably the aspect of his climate plan that has generated the most enthusiasm in the US. Infrastructure spending will be part of a broader agenda of easy fiscal policy to promote the post-Covid 19 recovery.

Biden’s climate proposals In his Plan for a Clean Energy Revolution and Environmental Justice, President Biden set out his central ambitions on climate, including: 1. “Rally the rest of the world to meet the threat of climate change”: The president’s aim to re-join the Paris Climate Agreement and re-engage with the global climate policy response could be a game changer. How the president intends to work with the international community should become clearer following the COP 26 United Nations Climate Conference due to take place in Glasgow in November. Investors should look for a possible new Grand Climate Accord, and whether Biden makes climate policy central to ongoing trade tensions with China. 2. “Ensure the US achieves a 100% clean energy economy and reaches net-zero emissions no later than 2050”: To achieve the net-zero goal, Biden

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Implications of climate policy initiatives for the (global) economy The economic impact of the transition to a low carbon economy generally depends on whether it is “sticks-based”, with private businesses bearing the bulk of the cost of the transition, or “carrots-based”, with governments supporting the transition through subsidies and other forms of fiscal stimulus. The carrots-based approach, on which Biden focused in his campaign, is of course the most popular, particularly in the current economic environment. Even though he inherits the highest debt/GDP ratio since the Second World War, Biden aims to maximise the fiscal impulse of his policies by leveraging public-private partnerships. However, a sticks-based approach is also likely to be needed. This could include the implementation

of a carbon tax—or a carbon price that can be set either through taxes or preferably through Emissions Trading Schemes (ETSs) to incentivise carbon producers to reduce their carbon intensity. The US could use its experience with state-level ETSs, such as those in California and Massachusetts, to support the creation of a global level playing field for carbon prices. Contrary to the general belief, moving towards a fairer carbon price globally should not necessarily be negative for the global economy. Sweden, for example, which introduced the world’s highest carbon tax in 1991 and joined the EU ETS in 2005, has seen its GDP per capita grow by only slightly less than the US over the last 30 years, while its carbon intensity has fallen to just a third of U S levels.

Investment implications Biden’s climate policy should generate opportunities for investors in asset classes including real assets and global renewables, all of which have rallied over the last couple of weeks. The biggest economic and market impact may come from Biden’s more multilateral approach to climate policy—particularly if the Biden administration supports carbon border tax adjustments, which could lead to a level playing field globally for carbon prices. While this would not necessarily be negative from an economic perspective, carbon policy will need to be monitored by investors as carbon intensity is going to become an evermore important non-financial parameter of economic and corporate performance. n

For Professional Clients/ Qualified Investors only – not for Retail use or distribution. This is a marketing communication and as such the views contained herein are not to be taken as advice or a recommendation to buy or sell any investment or interest thereto. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and investors may not get back the full amount invested. Past performance and yield are not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. Our EMEA Privacy Policy is available at www.jpmorgan.com/ emea-privacy-policy. This communication is issued in Europe (excluding UK) by JPMorgan Asset Management (Europe) S.à r.l.and in the UK by JPMorgan Asset Management (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. 0903c02a82b02d48

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Simon Bond, Director of Responsible Investment Portfolio Management

LOOKING FORWARD TO A RECOVERY WITH ‘GREEN COLLAR’ JOBS 2021

promises to be a seminal year. Following the Democrat win in November’s US presidential election, in early-January the world’s biggest polluter reversed its decision to leave the Paris Agreement. Further, more countries look likely to commit themselves to zero carbon emissions targets, as well as frameworks for achieving this and new regulations. A competitive tension is building as countries want to make sure they do not get left behind. For instance, the UK looks likely to try to get ahead of Europe in its emerging green agenda. When UK Chancellor, Rishi Sunak, announced in November his plans to issue the UK’s first green gilts in 20211 it was a significant step. The announcement not only signalled the government’s intent, but also set an example that is likely to spur further issuance of green bonds and galvanise the development of green

and social finance in the UK. For Columbia Threadneedle Investments, this is especially welcome as we have been campaigning for a green gilt, notably through our membership of the Impact Investing Institute. The Institute’s October 2020 joint proposal for a Green+ Gilt was supported publicly by 400 asset owners and investors, representing assets under management of more than £10 trillion, showing the substantial support in the market2. We see part of our role as engaging to help improve the green and social bond markets. The UK’s green gilt will bring a promising start to 2021, a year in which the UK hosts the COP-26 UN Climate Change Conference. Even more impactful, though, is the announcement that the government will launch a national infrastructure bank3, which could issue green or social bonds itself.

We see part of our role as engaging to help improve the green and social bond markets.

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Supranationals and government agencies were among the leading issuers of Covid-19 response in 2020. The volume of newly issued

debt based on environmental, social and governance principles reached $520 billion for 2020, up by more than $215 billion from 20194. Notably, $160 billion of this were social bonds, which equates to a 788% increase in issuance versus 2019, which itself was a record year for social issuance, and more than half were specific bonds targeting Covid-19 alleviation5.

Important Information: For use by Professional and/or Qualified Investors only (not to be used with or passed on to retail clients). Past performance is not a guide to future performance. Your capital is at Risk. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested.

We are proud of not just the size of the bond market’s response to the crisis, but also the speed. These Covid-19 response bonds were being issued by the end of March, just a few short weeks after the pandemic reached Europe. Issuers like these could respond quickly because they already had green, sustainability or even social bond frameworks in place, setting out what types of projects they could finance, how to report on use of proceeds and so on. That allowed them to react very fast. In 2021, I would hope to see not just more issuance, but also more agencies, companies and financial institutions putting in place similar frameworks – this would offer greater opportunities for us as we continue to invest in these areas.

This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. This document is a marketing communication. The analysis included in this document have not been prepared in accordance with the legal requirements designed to promote its independence and have been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. The mention of any specific shares or bonds should not be taken as a recommendation to deal.

Both governments and the bond market will channel funds into a green recovery in 2021. Notably, the EU is raising €100 billion to aid countries hit hard by Covid-19, with much of the issuance conducted in 20216. While this money will focus on environmental projects, it should have social co-benefits too in the form of “green collar” jobs created in sectors such as green infrastructure. By working with the Impact Investing Institute and the International Capital Markets Association (ICMA), we are looking to improve the market – in terms of the opportunities for issuance, the quality of the bonds and the rigour of reporting. We have previously contributed to the design of the ICMA’s social bond principles and have committed to work with the association for another year. A final word on new environmental and social legislation expected this year. Such legislation is likely to impose substantial costs on some businesses. In that situation, would you rather be invested in a conventional fund where regulation may introduce headwinds for its holdings or in a responsible investment fund that could benefit? n

1 FTadviser.com, UK to launch first green gilt in 2021, 10 November 2020. 2 https://www.impactinvest.org.uk/wp-content/ uploads/2020/10/Green-Plus-Gilt-Proposal.pdf, October 2020. 3 The Construction Index, National Infrastructure Strategy: UK infrastructure bank, 26 November 2020. 4 Data from Bloomberg and International Bank for Reconstruction & Development, 31 December 2020. 5 Columbia Threadneedle analysis, January 2021. 6 European Parliament, Covid-19: 10 things the EU is doing for economic recovery, 29 October 2020.

Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. columbiathreadneedle.com Issued 12.20 | Valid to 06.21 | J31065 | 3392792

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Invest

Hyomi Jie, Portfolio Manager of the Fidelity China Consumer Fund

WHAT’S AHEAD FOR CHINA’S MARKETS IN THE YEAR OF THE OX?

hina’s modern stock markets are only three decades young, but the Year of the Ox (or Bull) has so far managed to live up to its name for investors.

The last lunar Year of the Ox, in 20092010, brought a 51 per cent surge in the benchmark Shanghai Composite Index. The cycle before that, in 1997-1998, witnessed a 27 per cent rally. Of course, past performance is not a reliable indicator of future results. But as the new ox year kicks off on Feb. 12, several factors will be front of mind for investors eyeing China’s markets. First and foremost is that ample liquidity and China’s “first in, first out” recovery from the economic fallout of the global Covid-19 pandemic look set to help sustain bullish market sentiment into the spring, in both the onshore market and Hong Kong. But any flare up in inflationary pressures or sharp turn to monetary tightening could threaten to put a yoke on hard-charging markets.

The recovery continues Like in 2009, investors today have been emboldened by cheap credit and a strong post-crisis economic rebound. The macro backdrop helps: China’s was the only major economy with positive growth in 2020, and consensus forecasts for this year project GDP rising about 8 per cent. Analysts also expect robust earnings growth for Chinese companies at least in the first two quarters.

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In March, China’s legislature, the National People’s Congress, is expected to unveil details of the country’s 14th five-year plan, which will set the high-level growth and development agenda through 2025. This year is also notable as July will mark the 100th anniversary of the establishment of China’s ruling Communist Party, and maintaining social stability and economic strength are paramount goals. Chinese policymakers’ stated aim of achieving a “moderately prosperous society in all respects” means sparing no effort to support growth while minimising systemic risks.

Diverging performance But investors should also be watchful for high volatility and sharp divergence in performance between sectors. In our view, some valuations already look stretched in sectors like technology, consumer and healthcare, where more crowded trades may result in wider price swings. On the other hand, many large financial stocks remain laggards, trading at single-digit earnings multiples or discounts to book value. Unlike the broad-based bull run in 2009, structural growth themes will likely reign this year, with certain hot sectors and industry leaders dominating the show. Domestic consumption should continue to shine, as Chinese policymakers seek to boost

internal demand in the face of ongoing trade tensions with Washington. Consumers may take the baton from exporters who played a key role in China’s recovery last year. The job market has stabilised with unemployment falling back to pre-pandemic levels, while large savings pots allow the release of more spending power China has one of the highest savings rates among major economies. Last year, facing the uncertainties of the virus threat, China’s consumers saved even more by cutting back on travel and other discretionary spending, but the rollout of vaccines and continued

recovery may allow them to loosen their purse strings once again.

Looking ahead Inflows to Chinese equities have been on a steady rise in recent months, as foreign investors seek exposure to the renminbi’s appreciation as well as China’s economic growth. Investors may also be rotating out of the domestic property market, where the government has imposed tough measures to curb speculation. Recent IPOs of Chinese companies, especially in Hong Kong, have been strong. Still, there is no way to know how far the 2021 bull can run. We see more cause for caution in sectors where valuation multiples have rapidly ballooned. One key risk is faster-than-expected policy tightening. As the recovery continues and inflationary pressure builds up, China may become the first country to need to mop up liquidity. So far this year, the People’s Bank of China has been sending out mixed signals, draining funds at times to test market reaction. Concerns over tightening caused market jitters in late January. There may yet be more small tightening steps to cool inflation or limit asset bubbles. Nevertheless, we expect any further normalisation of monetary policy to be slow and gradual, as the central bank takes care to maintain market stability in what China hopes will be an otherwise auspicious year. n

Unlike the broad-based bull run in 2009, structural growth themes will likely reign this year, with certain hot sectors and industry leaders dominating the show.

Important information This information is for investment professionals only and should not be relied upon by private investor The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Investments in emerging markets may be more volatile than other more developed markets. Changes in currency exchange rates may affect the value of investments in overseas markets. The Fidelity China Consumer Fund has, or is likely to have, high volatility owing to its portfolio composition or portfolio management techniques. It can use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes. Issued by Financial Administration Services Limited and FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International. UKM0221/33198/SSO/NA

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Paul Niven, Managing Director and Head of Multi-Asset Portfolio Management.

MULTI-ASSET INVESTING THAT DOESN’T COST THE EARTH

esponsible investing has gone mainstream, moving front and centre as awareness of Environmental, Social and Governance (ESG) risks and opportunities grow. Several drivers sit behind the shift, none more so than voices like David Attenborough and Greta Thunberg’s on biodiversity loss and climate change. At the same time, we’re living through a global pandemic – the spread of COVID-19 highlighting health and social issues. Governments are taking stronger action both individually and collectively through the likes of the Paris Climate Agreement, and companies are increasingly keen to adopt (and be seen to be adopting) more sustainable business practices.

Sustainability – a new talking point for advisers More and more individuals are keen to do their bit. That often means through decisions as consumers but also the choices made when investing. Yes, achieving financial goals is crucial but there’s greater recognition that a positive difference can be made along the way. For financial advisers this is likely to mean more clients are keen to explore sustainable options and the direction of regulatory change means that such discussions will become increasingly hard-wired into the planning process. Sustainable options will become fundamental components of any centralised investment proposition.

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A boom for ESG funds It should come as no surprise that the asset management industry has responded to these trends. According to figures from Morningstar, €233bn flowed into sustainable funds across Europe in 2020 – a 52% rise from the previous year. Over the same period, Europe saw 505 new ESG-orientated funds launched and 253 existing offerings repurposed.

Mind the greenwash More choice is great news but there are challenges. Not least is a host of new jargon to get to grips with, a plethora of issues to assess and a wide range of associated approaches to consider. It can soon become confusing. Another challenge is differentiating between the ESG credentials of product providers. Many asset managers are vocal about their expertise, but concerns have been raised around ‘greenwashing’. Have they only recently started looking at or talking about ESG? Do they have the right experience, skillset or resource to effectively apply ESG analysis in investment processes or drive positive change in companies through stewardship activities like engagement, for example?

Getting to grips with ESG The Investment Association provides a useful framework to help advisers, providing a guide through fund and firm level

components of ‘Responsible Investment’. It can help with understanding and comparison with regards to exclusion, sustainability-focused and changeorientated labels and understand product provider approaches to stewardship and integration within investment processes.

A pioneer in responsible investment At BMO GAM, our heritage in responsible investment is a long one. We launched our first ethically-screened fund in 1984 – it was Europe’s first – and we have continued to develop a suite of related solutions ever since. Our 20+-strong Responsible Investment team is one of the biggest in the industry and they sit central to all our activities. Alongside working with investment managers, they help us maintain a leading voice through our thought leadership and exert influence on broader policies and regulation. Their sector knowledge meanwhile enables us to engage deeply with companies to drive change and integrate ESG factors into our decision-making processes. In 2020 for example, we engaged with 760 companies across 53 countries and achieved 343 milestones (instances of positive change). For a comprehensive lowdown on our activities look at our Responsible Investment Annual Review at bmogam.com/responsibleinvesting.

“We’ve been really pleased with our BMO Sustainable Universal MAP Range since their launch in 2019 – they’ve demonstrated that investing with a sustainable mindset can make sense from a performance perspective too.” Mark Parry, Director, Head of Distribution Partners

within them. The funds have clear exclusion criteria and avoid investing companies involved in fossil fuels, tobacco or weapons, or those with unsustainable business practices.

“Our impact reports give your clients real insight into the results of their investment choice, the positive difference investing sustainably can make and the impetus their money can provide in helping us encourage companies to operate more sustainably.” Nina Roth, Director, Responsible Investment

Understanding our impact Each year we publish impact reports for our responsible and sustainably orientated strategies. They’re designed to offer you and your and clients’ insights into the impact of our investment decisions and stewardship activities. Within the reports we analyse the portfolios across key impact metrics such as carbon intensity or diversity. We also assess how the products and services provided by the companies we invest in align with the 17 Sustainable Development Goals (SDGs), which are designed to provide the world with a roadmap to a more sustainable future. n For more detail on our Responsible Investment and Multi-Asset capabilities, related insights or BMO Sustainable Universal MAP Range visit redefiningvalue.com

BMO Sustainable Universal MAP – redefining value The BMO Sustainable Universal MAP range was launched in 2019 – a suite of risk-targeted, low-cost active multi-asset funds deigned to provide advisers with a practical tool for deployment within the advice process. At launch, the range covered Cautious, Balanced and Growth options with Defensive and Adventurous added to the line-up in March 2021. With an OCF capped at 0.39%, the funds may be priced at a point comparable with passive strategies, but each offers investors access to layers of active expertise and management. That includes active asset allocation – both tactical and strategic – by our Multi-Asset team and stock selection by underlying asset class specialists. The range’s sustainable remit means investments are typically focused within areas like energy transition, resource efficiency and health & wellbeing – all longterm structural themes that provide tailwinds for quality and attractively valued businesses operating

KEY RISKS Past performance should not be seen as an indication of future performance. The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. Screening out sectors or companies may result in less diversification and hence more volatility in investment values.

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For professional clients only, not suitable for retail investors somewhere on the article. INVESTMENT RISKS: The value of investments and the income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. CREDIT RISK: Should the issuer of a fixed income security become unable to make income or capital payments, or their rating is downgraded, the value of that investment will fall. Fixed income securities that have a lower credit rating can pay a higher level of income and have an increased risk of default. SUSTAINABLE INVESTING: The investment strategy will result in certain industries being excluded as a result of our ethical and sustainable investment policy. As a consequence, there may be increased risk due to reduced diversification opportunities.

GETTING TO GRIPS WITH GREEN BONDS

reen bonds are one of the more visible sides of the increasing interest in environmental, social and governance (ESG) impacts on investing. The events of 2020 appear to have only accelerated this trend.

It is something of a truism that where there is investor demand, supply will follow. As investors have focused more on ESG issues, so bond markets have responded. Ratings agencies now include ESG analysis in their ratings, while there are a host of ESG-

credentials than company B. And given the fungible nature of cash, there are often no guarantees that funds raised will be used solely for green purposes, nor that cashflows back to bond holders will come exclusively from green operations. An illustrative example is shown in figure 3.

Figure 1: Cumulative green bond issuance Cumulative issuance ($ billion)

Giving the green light to invest Our investment approach has always been to focus on the specifics of any bond we buy, rather than someone else’s assessment or labelling of it. In this way, a bond labelled as green is not intrinsically good or bad, any more than a BBB rating means that we should or shouldn’t invest.

This isn’t necessarily a criticism of all green bonds – more that in our view, applying a single rating or label to any bond is problematic. In our view, it is extremely difficult to outsource the analysis of credit ESG risks to third parties. As well as the limited scope of equity-based platforms – only c. 40% of the bonds in the sterling credit index have a public equity profile – the apparent convenience of a single ‘ESG score’ often fails to capture the idiosyncrasies of credit. We know this inefficiency from credit ratings: while broadly helpful, the over-distillation of information into one rating creates distortions that active investors can exploit.

The grass isn’t always greener

Source: Bloomberg NEF, Bloomberg L.P., based on quarterly issuance from 2007 to Q3 2020

Green is Good?

exponential growth in issuance.

At face value, there can be little argument about the positive impact of the green bond concept. As a bridgehead to get investors and issuers considering and elevating critical societal issues, this has undoubtedly been a success and the market has delivered

However, green bonds also have limitations – the main ones being that a bond does not have to clear certain hurdles or external validation to be labelled as green – meaning that a green bond issued by company A may have very different ‘green’

Figure 4: Digging beneath the surface: the bespoke route to adding value

Figure 2: Typical structure of a green bond – arrows indicate cashflows

related bond labels including social bonds, sustainability-linked bonds and green bonds. Issuance of these bonds has been increasing, with green bonds dominating this area. In 2016, green bond issuance was around $100 billion. Last year it was just under $300 billion¹, and HSBC is expecting this to increase to between $310 and $360 billion in 2021, partly due to ongoing demand, but also given expectations that a Biden-led US will rejoin the Paris Climate Accord and create a backdrop more open to ESG considerations.

Figure 3: The market isn’t always efficient

While the convenience of attaching a label or a rating is broadly helpful, the desire to distil a lot of information into a single badge creates distortions. As active managers, we welcome this. We know that at times, the market will flock to buy green bonds, attracted by the label. This additional demand can compress the spread available on those bonds. In theory, markets should not allow such an obvious distortion, but a glance at figure 3 shows two bonds from UK utility Anglian Water, of similar maturity, both backed by the exact same assets, trading at different spreads simply because one is ‘green’.

We prefer to focus on the overall ESG performance of our bonds beyond any spoonfed prescription. Indeed, the credit market provides real opportunities for end investors to access critical and socially strategic sectors and issuers that are not accessible to equity investors. We think it is much more compelling, for instance, to focus on our ability to directly fund affordable housing and environmental infrastructure, and earn appropriate economic returns for our clients. Positively, the market’s preference for convenience generates opportunities for active managers who are prepared to put in the hard work to understand a company’s overarching sustainability, or search for bonds secured on specific green assets, to embed these bonds into portfolios without compromising achievable yields. An example of one such bond is First Hydro Finance 9% 2021, which is an unrated, off-benchmark bond issued by a subsidiary of French company, Engie (see figure 4). As an electricity generator with some nonrenewable capacity, the parent company may have a poor ESG rating. However, its subsidiary, First Hydro, generates hydroelectric power in Snowdonia and has a far better sustainability assessment. In addition, the bonds are secured, with strong covenants and ring-fenced assets and cash flows. The attractions of a bond that may fail a traditional ESG credit screen only become apparent under our more bespoke and integrated credit and ESG approach.

In our view, the need to focus on what is behind the label applies to all bonds, not just green. Figure 5 shows two very different companies whose bonds offer very different spreads. Both have an attractive label – but in Burberry’s case, the bonds are paid from general company revenues, not from specific ‘sustainable’ assets. MORhomes is a social housing provider – so all monies raised go to funding this activity, and revenues paying coupons come from this source. In addition, the MORhomes bonds have a claim over the properties, providing additional protection for bondholders compared to the unsecured nature of the lending to Burberry. Yet Burberry bonds, with their greater name recognition and more conventional unsecured issuance, pay investors less.

Figure 5: Market favours familiarity and convenience

It pays to dig deeper Our approach to ESG in credit is built on the longstanding investment philosophy that credit markets do not accurately price idiosyncratic risk. We use ESG analysis in the same way as any other form of credit research – to uncover information that rating agencies and other market participants might be missing, helping us to make better investment decisions and deliver excess returns. The green bond label offers the attraction of convenience – a fund buying the bond can point to an allocation to ESG-friendly assets. But is that really the case, and is it worth paying for? We may buy labelled bonds, but if we are paying for ESG ‘additionality’ it has to be tangible and demonstrable.

¹ https://www.ft.com/content/021329aa-b0bd-4183-8559-0f3260b73d62

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THE PRECARIOUS HIGH STREET: SHOPPING BAGS AT DAWN FOR THE GRAND RE-OPENING?

he pandemic has hit us all hard but high street retailers are really suffering. The combination of the rise of internet providers, lockdown closures and people working from home has been potent and lethal in the demise of so many outlets. Non-essential retailers were forced to close their doors to the public for a total of 18 weeks in 2020 and we’re now six weeks into the third national lockdown with no clear indication from the government as to when restrictions will be lifted.

A return to trend growth Even before the pandemic hit, many retailers were already struggling with online competition and crippling business rates and over the last year there seems to have been a never-ending stream of announcements about retailers going out of business. Debenhams and Arcadia group (owner of brands like Top Shop and Burton) are some of the latest high-profile businesses to hit rock bottom. Ted Baker recently announced a fall in revenue of 47% in the 13 weeks prior to 30th January this year, mainly due to the forced

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closure of its UK stores and international outlets. The company has a significant online presence, but people are spending less, particularly on higher-end party wear. With no prospect of heading out for a big night anytime soon, there doesn’t seem much point in investing in a show-stopping outfit! Saving is also a theme, economic uncertainty is making people cautious and curbing spending, people feel they need reserves right now and aren’t committing to unnecessary spending. Springboard collects data to measure footfall in retail stores, shopping malls, and high streets using sensors, artificial intelligence, and computer vision. Recent research found that retail footfall dropped to the lowest level on record last year as the pandemic hit the high street. Footfall was 39.1% lower in 2020 than it was the previous year and fell by 75% in the week after the first lockdown in March, a level never previously recorded. From March 23rd to mid-June 2020, during the first lockdown, footfall declined across all UK retail destinations by a staggering -71.4%. The impact on bricks-and-mortar businesses is clear and the rise in the vacancy rates in towns and cities across the UK is a symbol of the sad decline of our high street. How are retailers staying afloat? By reorganising their operations, assessing the balance sheet, focussing on profitable and non-profitable stores and revamping product ranges. Retailers with a strong online presence and a successful and agile brand are managing to balance the books and are swallowing up some of their weaker rivals. Despite the economic uncertainty, online spending in 2020

increased by 20% compared to a decline of 3% in 2019. How will the public respond to the reopening of the high street? Will it be shopping bags at dawn to get the best bargains? Or will people be cautious about returning to populated areas? Footfall rose by 40.3% in week one after the first and second lockdowns with consumers making a dash for the shops to scratch that deep-rooted itch. Let’s be honest, shopping isn’t just about shopping, it’s a social experience where we meet up with friends and treat ourselves. We’ve been denied this experience for long periods, multiple times over the last year and a surge in demand for shopping once we start unlocking the country seems highly likely. More and more people have immunity, either from having had the virus itself or from the vaccine, and the protective blanket over the population will gradually cover us all to a point where even the most cautious will feel comfortable being in a busy space. The retailers left standing will benefit from the unfortunate closure of their rivals and the recovery of the retail sector could follow a gradual curve after the initial bounce back. The suspension of property funds is nothing new, uncertainty following the Brexit vote sent investors running for the hills and the big liquidity issue reared its head. Insufficient funds meant that redemptions couldn’t be met, and they had no choice but to close their doors. Property funds are struggling now for different reasons, it’s more an issue of valuation as its unclear what these assets are worth in today’s economic climate. So, some

property funds with significant exposure to retail outlets and office space, another sector badly hit due to the change in working patterns, remain suspended as a price tag can’t be placed on the assets that they hold. What’s the future looking like for these funds? There’s a lot of negativity and pessimism right now in the retail sector so investors will be cautious about putting their money into funds that have a high weighting to retail. A lot of bad news has potentially been factored in though and some companies within the retail sector that have been priced to fail won’t, and could be set for a recovery once the economy reopens, but this doesn’t help raise the appeal for an investor. It’s not all doom and gloom though, there are areas in commercial property such as warehousing where there’s been significant growth over the last year as companies go all out to meet the extensive demand for home deliveries. With the vaccine now being successfully rolled out across the UK, there is hope for retailers who have survived the devastation caused by the pandemic. We all have a need for human interaction and sensory satisfaction, and we crave fun experiences. Visits and spend in stores and destinations will be driven by these needs and hopefully we’ll see a return to the good times for retailers and consumers.. n This information is for professional use only and should not be given to retail clients.

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Matthew Dobbs, Head of Global Small Caps

Richard Sennitt, Fund Manager

THE OUTLOOK FOR ASIAN EQUITIES

t seems ancient history now, but 2020 opened with a high degree of optimism for Asian markets. True, valuations were no more than reasonable given the share price gains of the previous twelve months, but conditions appeared favourable and there was a widespread consensus on a global economic recovery and a strong year ahead for corporate earnings. Well, it is obvious in hindsight that Mr Market was wrong – or was he? The fact is that for those who held their nerve in the spring, it turned out to be a vintage year. All in all, 2020 was an extreme example of cutting through the noise and focusing on the long term.

Asia rises to the challenge Of course, it is never that simple. The Spring months seemed to present an existential threat perhaps even to humanity itself, a “Day of the Triffids” moment. As it turned out, Asia has proved well up to the challenge. Many of the more advanced Asian economies have dealt with the pandemic efficiently and effectively. Those who cite different culture and a more conformist mindset might want to reflect on the full stadia at sporting events in much of Australia as we write. If the US had emulated Taiwan in the minimisation of fatalities, only some 100 US citizens would have died against the over 400,000 that have. Of course, not every Asian country

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has the resource and institutional depth to respond, but in the case of India and much of the ASEAN region, young populations are proving resilient (ASEAN is the association of Southeast Asian Nations)

As ever we are prepared to be patient, think differently from the crowd, and focus on long-term sustainability

Going virtual Asia was also remarkably adept at reinvigorating and adjusting supply chains. While economies exposed to services (fluff rather than stuff) suffered as travel, tourism, bricks and mortar retail collapsed, hard exports (i.e. goods) have been surprisingly strong. With inventories lean, corporate earnings have proved at the least resilient, and in some cases remarkably robust. This has been particularly true in the information technology complex as the world has gone virtual: virtual work, virtual play, virtual shopping, virtual everything. Adding to the mix has been a very benign global liquidity backdrop, led by the US Federal Reserve whose asset purchases and low interest rates have helped support the financial system. This has been accompanied by extraordinary levels of fiscal activism with governments supporting people’s incomes. A weak dollar has added to the fuel, as has a rise in thematic investing, driven in part by the fact that the pandemic has only served to further accelerate digitalisation trends already firmly in train. Asian stock markets have ample representation of companies that benefit: computer gaming, e-payments, e-commerce, electric vehicles, as well as the enablers of the new trends such as

specialists in robotics, artificial intelligence, and semiconductor testing and production.

A long-term case for Asia The above perhaps is history. But to understand where we are going, it helps to understand where we have been. We remain convinced of the long-term case for Asia, and that is in the knowledge of the less good things that have intervened including continued tension between the US and China (a fact of life) and the many political fissures (Hong Kong, North Korea, Myanmar). The shorter-term outlook looks less enticing. Valuations are overall somewhat stretched, so the expected recovery in corporate earnings appears to be already well recognised by the consensus. And as we know, earnings very frequently disappoint. Furthermore, the very fact that Asia has had a “good war” over COVID means there is not the same degree of recovery potential as is possibly present elsewhere. We would also expect most regional monetary and fiscal authorities to continue a relatively conservative stance, led by China which

has recently signalled some concern over exuberant markets. In our view, they are right given distinctly bubble like” valuations in areas such as bio-technology and electric vehicle manufacturers. In summary, we are working on the assumption of more measured progress for the region in 2021. Investors may have to work harder for positive returns as some of the long-term growth companies need to grow into their valuations. There are also pockets of value and we see opportunities in areas that have not captured the imagination of the Robinhood brigade. As ever we are prepared to be patient, think differently from the crowd, and focus on long-term sustainability. n l The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

l For more information on the RSMR rated Schroders Asian Alpha Plus Fund and to download the Fund Profile click here.

IMPORTANT INFORMATION The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance and may not be repeated. Exchange rate changes may cause the value of investments to fall as well as rise. The views and opinions contained herein are those of the individuals to whom they are attributed and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds .Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

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Andrew Parry, Head of sustainable investment at Newton Investment Management

INVESTING IN SUSTAINABILITY: THE POWER OF ESG The world has arguably changed more in the past year than it has throughout the last half-century – from economies around the world hitting new lows to some of the world’s biggest companies losing serious amounts of money and having to make mass redundancies.

learly, very few companies have benefited from this global crisis. But the way in which companies react to it and their outlook for the future could enhance or detract from previously positive reputations.

Although ESG has been a hot topic in investing for some time, we are now seeing that how companies deal with ESG factors through a pandemic can help us to gauge which ones might sink or swim in the future. Transparency is a crucial part of this. During uncertain times like these, how openly companies deal with their projections for the future, the treatment of their employees and the actions they take to sustain their businesses could have an important bearing on how consumers view their ethics and brands. “The crisis has highlighted that ESG is not a convenient label to sell financial products, but a set of real issues that must be considered when assessing the merits of an investment decision. How a

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company responds in a crisis tells you a lot about its motivation and whether it has a moral compass that guides its purpose,” says Andrew Parry, head of sustainable investment at Newton Investment Management. “What the Covid-19 crisis has done is place attention firmly on the social dimension of ESG, as, first and foremost, this is a human crisis. Thus far, the majority of companies have behaved well and responded with a high level of empathy and compassion. Those that haven’t have been quickly on the receiving end of public opprobrium through the press and social media, potentially permanently impairing their reputations.”

change their normal working regimes, encouraging staff to work from home for the foreseeable future. Like any new experiment made without extensive preparation, alternative working arrangements bring pros and cons. On the positive side, remote technology and teleconference applications can be a godsend for companies that are heavily involved in group communication efforts and collaborations. The downside is that companies must find a way to work with any unexpected technological issues. Also, for many companies, work can be done more efficiently when dealing directly with individuals in the office instead of waiting to hear back from them via technology.

Some companies will have no choice but to cut costs and therefore lay off employees during this time, but those who have a benefits or payout programme for their employees are not likely to face such harsh criticism as those who look at their former employees as a burden or liability.

“Businesses are social enterprises, and we thrive on social interaction,” says Parry. “What this ongoing experiment has shown is that flexible working arrangements can work for many businesses and can play an important part in providing a good work-life balance for many.

Beyond this, Covid-19 has also made hundreds of thousands of global companies

“Yet it has also illustrated that permanent, physical absence from the

workplace has its limitations and leaves an important social gap in life. Reflecting on the lessons learned, companies will recognise that more flexible working patterns that are considerate of the home life needs of many of their staff will be a great way to retain and motivate people.” For many global investors, the integration of ESG factors has often been looked at as a ‘nice to have but not a ‘need to have’. But although ESG has generated a lot of interest in recent years, this crisis has shown how responsible investing should now be considered an essential approach to serving clients in the 21st century. Change was and still is a challenge for companies – through technology, demographics, global trade and the climate – and Covid-19 is a dramatic new manifestation of the uncertainties of today’s world.

Important information For professional clients only. Any views and opinions are those of the investment manager, unless otherwise noted and is not investment advice. This is not investment research or a research recommendation for regulatory purposes. For further information visit the BNY Mellon Investment Management website. www.bnymellonim.com

“If you don’t integrate ESG into your analysis of a company, you’ll have an incomplete picture of the opportunities and risks for the enterprise. That is why ESG is not a flag of convenience: it is finance 101,” concludes Parry. n

www.rsmr.co.uk Spring 2021

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ESG: TIME FOR A REGULATORY REVOLUTION

IMPORTANT INFORMATION

New EU regulation promoting responsible investment is coming to our shores and not before time, says Thomas Stokes, Investment Director at Aviva Investors.

ere’s our prediction: within five years your clients’ pension and investments will be invested “sustainably”.

We believe the fund managers of tomorrow will be increasingly judged not just by their investment performance, but also on how they approach environmental, social and governance (ESG) issues, such as climate change, inequality and social diversity. Fortunately, these two aspects aren’t necessarily mutually exclusive. In fact, there’s empirical research that shows the opposite. For instance, a Morningstar study analysed 4,900 funds and they found that 59 per cent of sustainable funds had beaten their traditional peers over a 10-year period through to 2019¹.

Why are we so confident ESG investing is going to become more prominent? Firstly, we believe there are powerful driving forces behind the demand for ESG investing; this isn’t just a fad. Let’s look at the situation today. Most people have relatively little knowledge of how their pension and investments are invested. Some people may

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know the name of their pension provider for example, but few will have an awareness of the specific companies and securities they have indirectly handed their money to. In their defence, as an industry we haven’t made it easy for investors to truly connect with their money. On a positive note, just as people have become avid recyclers in recent years, they are now becoming more conscientious about where they’re investing. To give you some numbers, a recent Aviva survey showed that 92 per cent of advisers believe that ESG will be a larger proportion of their business in the next couple of years, and this is primarily due to increased demand from their clients. This surge of interest also seems set to continue, especially with events such as the COVID-19 crisis and the Black Lives Matter movement serving as a powerful reminder of the issues we face today. Ultimately, this push from clients will help to force the hand of the finance industry to do better. Other than client demand, an imminent revolution in regulation will also have a huge influence on the industry.

How influential can regulation really be?

individuals on responsible investment, and, for those who are interested, to ensure they are provided with a suitable ESG solution.

The answer is ‘very’. Can you remember smoking in restaurants and being able to take your shopping home in a free plastic bag? These unhealthy and unsustainable behaviours changed very quickly thanks to regulation.

These moves are just the first ripples in a coming wave of legislation. As ESG investing matures, regulation will strengthen and the definition of what an ESG investment is will become more defined.

In a similar fashion, we will also see a shift in the investment world as ESG investing becomes the norm. And, just like the restrictions on smoking and plastics, this change is in everyone’s best interests.

A force for good

What is the regulation?

In essence, investment returns are not the only thing clients are going to be interested in the years to come. They will also want to ensure their money is being used responsibly to build a better world for themselves and for future generations.

There’s new regulation currently being finalised by the European Commission, which is due to hit UK shores next year. For a financial adviser in the UK, it will mean that they will need to ask their client if they want them to recommend funds that take ESG into account.

The reason we’re so positive is because we believe these two goals are aligned. Moreover, these changes highlight a powerful truth: a more responsible financial industry can bring about a lot of positive change to build a fairer and more sustainable world.

At the same time, further regulations will require fund managers to be far more transparent about the ESG credentials of the funds they manage, and advisers will have to explain how they use that information in making their recommendations. The main objective of the new rules is to educate

1. Source: https://www.morningstar.co.uk/uk/ news/203214/do-sustainable-funds-beat-their-rivals.aspx

l Key Risks: The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency exchange rates. Investors may not get back the original amount invested.

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment. In the UK this document is issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: St Helens, 1 Undershaft, London EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. 136164 - 06/10/2021

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Maria Municchi, fund manager, Sustainable Multi Asset Fund Range

DRIVERS AND DEVELOPMENTS IN SUSTAINABLE MULTI-ASSET INVESTING

ustainable investment approaches look to the future, by investing responsibly and supporting the environment and society. So sustainable investment strategies should aim to achieve objectives that include meeting financial goals, as well as preserving our planet’s resources, recovering its climate and making life better, more equal and inclusive. A multi-asset approach to sustainable investing allows investors to make use of a diverse range of asset types to achieve their objectives. Diversification offers investors the opportunity to spread their risk, with the intention of avoiding concentration in one or a few themes or assets classes that might introduce unwanted volatility in their returns. These are likely to include traditional asset classes of equities, bonds and cash, but also may now incorporate such things as infrastructure, green bonds, social bonds and speciality funds. Equities within a sustainable strategy provide an ownership stake in businesses that are following a sustainable business model or are transitioning towards one. Bonds, or fixed income securities, represent a way of lending to companies that take a responsible approach, or even directly to fund specific projects or

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initiatives that aim to make a positive difference, often from supranational entities. We also include buying bonds issued by governments in our sustainable strategies, as governments around the world will typically use the bulk of their income, be they tax revenues or bond proceeds, for the good of their society. This may be in the form of providing education, welfare payments, healthcare or public pensions. Of course any government may undertake practices that some find unpalatable, and we will refrain from holding their bonds where we believe the negatives sufficiently outweigh the positives. The pressing challenges facing environments and society know few borders and investors have extended their scope worldwide, so taking a global approach is a necessity in our view. In our sustainable strategies, we aim to find value opportunities that we believe are attractive, wherever they may arise. The techniques and tools applied in investing sustainably continue to evolve. What may have previously amounted to simply excluding investments in certain sectors has developed into more sophisticated approaches. These approaches may require greater and more detailed analysis on the work companies are doing to meet their sustainability objectives, as well as identifying and measuring their

Sustainable multi asset investing at M&G

Source: M&G, January 2021

achievements. This may involve extensive resources, which may only be available to the larger organisations. As the spectrum of sustainable investing has developed, we have incorporated additional features to existing first stage exclusions on such factors as adherence with United Nations Global Compact Principles, as well as sector and industry exclusions. Considerations of how a potential investment may be judged on its environmental, social and governance (ESG) behaviours and contributions have now been integrated into our investment process. We believe that adopting a positive ESG-tilt approach, by looking to focus on investing in entities that have more positive ESG characteristics compared to their peers, should form a core element of how we build portfolios of sustainable assets. To achieve this, we believe it is appropriate to use the access we typically have, as largescale investors, to the management and ownership of companies, to engage with them to gain clearer insights into the sustainability of their business plans and processes. Engagement can help clarify investor understanding, encourage greater transparency and identify tools to measure progress towards sustainable objectives. Beyond that, we also seek to incorporate investments that actively aim and

intend to make a positive impact on some of the world’s pressing environmental and social challenges. Across the investment world demand for sustainable or responsible investment products is growing and even gaining momentum. Individual savers and institutional investors alike have recognised that investing to sustain the planet’s resources, improve its social wellbeing and look to the world’s future, can go hand in hand with seeking to achieve financial security and M&G feels equally strongly about that and have been developing processes and products to help meet those goals. We understand that while investors may have objectives relating to a sustainable future that are similar, their expectations for financial returns and their tolerance for risk may differ. To meet that demand, M&G has launched a new range of sustainable multi asset funds, which we believe can satisfy these alternative appetites. Spread across cautious, balanced and growth profiles, these actively-managed, risk-targeted solutions combine strategic and dynamic asset allocation decisions originating from our longstanding Multi Asset team, invested in assets that incorporate positive ESG-tilt and positive impact characteristics. All those decisions are encompassed with an overarching climate focus, which concentrates on carbon intensity and climate adaptability, which we believe is crucial to achieving a more sustainable global economy. n

The value of a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. The views expressed in this document should not be taken as a recommendation, advice or forecast. 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.

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Matthew Beesley, CIO at Artemis

EXPANSION IS THE BIG THEME OF 2021

Artemis’ CIO Matthew Beesley on ballooning earnings multiples, debt and how these create opportunities for active investors.

wo areas of expansion from 2020 are likely to dominate investors’ thinking this year – earnings multiples and debt. What will they mean for market valuations and the threat of inflation?

The first one is perhaps easier to deal with. Markets are supposed to price with some efficiency. Rising P/E multiples either mean higher prices or lower earnings – or potentially both. Earnings collapsed in many sectors last year. Using the S&P 500 as an example, returns were driven by multiple expansions in most cases – healthcare being a notable exception. Today, most sectors are trading at ten-year highs. So the logic follows that we need very meaningful earnings growth for equity markets to make headway. More than that – and assuming markets have priced earnings growth efficiently – we need to see positive earnings surprises. That might be a tough hurdle for markets.

were aggressive in their restructuring gave plenty of scope for earnings surprises in the years that followed. The reason was simple – investors continually underestimated operating leverage in business models where costs have been cut aggressively. This opportunity will be one of the characteristics our managers seek for their funds in 2021.

With Brexit resolved and a weaker US dollar, asset allocation to the UK is likely to increase

Hunting for inefficiencies Luckily, inefficiencies in markets throw up opportunities for the active investor. A key learning of the Global Financial Crisis, for example, was that companies which

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The UK looks cheap

There are also idiosyncrasies in markets, the UK equity market being the most extreme example. UK equities lagged behind the recovery in other markets from 23 March last year. And they remain undervalued. Many discrete sectors in UK equities look very cheap compared to both their history and, for example, their equivalent US sectors. With Brexit resolved and a weaker US dollar, asset allocation to the UK is likely to increase. Not to mention the burst of activity from private equity and corporates from overseas already seen in 2021.

difficult to see is how technology stocks will fare. It could be that we are still early in the technology bull market. Looking back at the dotcom era, large cap tech stocks grew to a much larger proportion of the S&P 500 and Nasdaq before peaking.

What about the macro? All of the above is clear from an ‘investment fundamentalist’ perspective. But what’s the elephant in the room for these arguments? Rationalising discounted cashflow models can go some way to explaining the types of stocks favoured in 2020. And the glut of fiat money augurs a benign environment for equities in particular. But is this too simplistic? This question forms part of the second ‘expansionary’ conundrum. Monetary and fiscal stimulus. As the former was ramped up in response to the pandemic, assets prices responded accordingly. The latter has had to be extended to directly feed into economies. And everyone is waiting to find out how, when or if it will be recouped.

Cyclicals or more tech?

Inflation concerns on the rise

Emerging markets could also be a good way to play the cyclical recovery and even protect – to some extent – against inflation. More

This feeds into concerns on inflation. After a decade in which inflation expectations declined, we now seem to be entering into

a period in which they are increasing. How soon and how persistently this becomes an issue for bond and equity markets is up for debate. One view among our fund managers is that there will be spikes in 2021 as yearon-year comparisons roll into focus. Others point to the expansion that government and central bank balance sheets have undergone and posit inflation as an inevitable consequence. Timing seems the key variable here. Given the lagging nature of inflation as a measure, it’s likely to be a debate that plays out over at least the next year if not longer. Expectation of inflation is likely to be a big issue not only because it could cause a significant shift in investment sentiment. It is also because if we don’t see inflationary pressures building, then the next question investors will start to ask is just how are governments going to deal with their current and growing mountains of debt.

Responding to the inflation challenge If we are likely entering into a world of higher inflation, it heralds sector rotations and an opportune environment for active managers. It would be suggestive of cyclical companies performing better, both in equities and in corporate bonds. And it signals a potential return to value. n

Capital at risk. This content has been prepared for professional investors only. All financial investments involve taking risk which means investors may not get back the amount initially invested. FOR PROFESSIONAL INVESTORS ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS. Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice. Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority.

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Dimitry Dayen, CFA, Director, Senior Research Analyst for Energy (ClearBridge Investments)

HYDROGEN AND BATTERY INNOVATION DECARBONIZING HEAVY TRANSPORT

use, it could help decarbonize major industries such as steel. In transportation, it could power a variety of trucks, buses, marine, rail and aircraft. Volvo, for example, envisions fuel cell electric vehicles (FCEVs) as ideal for demanding long-haul trucking. Ballard Power Systems and Plug Power appear to be the technology leaders globally on hydrogen fuel cells with a focus on the bus and truck market. Plug Power has already seen success in some use cases, such as forklifts.

he race is on to decarbonize heavy transport-a major opportunity for lowering global carbon emissions. For a meaningful impact in lowering greenhouse gas (GHG) emissions, non-fossil fuel penetration is needed into heavy transport: trucks, buses, marine and trains, together with passenger cars, account for 14% of GHG emissions worldwide.

Batteries Are Not Standing Still: Lithium Metal Offers Exciting Potential

Hydrogen functions as an energy carrier, which means it can store and deliver energy produced by a primary energy source, such as natural gas, coal, nuclear power, solar, wind

or hydro. Green hydrogen uses renewable energy sources, such as wind, solar or hydro to liberate hydrogen through electrolysis of water and does not emit any carbon in the production of hydrogen or in its consumption in a fuel cell. There are many projects underway classified as low-carbon hydrogen technology, commissioned to produce hydrogen for energy or climate-change related purposes, according to the International Energy Agency (Exhibit 1). The potential for hydrogen and fuel cells in industrial, transportation and stationary power applications is promising. In industrial

Time for a comeback? Rolling 10 year value vs. growth performance

Cummins, which makes diesel and alternative fuel engines, believes that trains will be early adapters as they are less reliant on external infrastructure and use a return-to-base system for fueling - a central charging infrastructure would suffice to serve many engines. The company estimates the cost of hydrogen trains to be comparable to that of electrifying train lines today. For marine use, Bloom Energy is partnering with Samsung Heavy Industries to power ships with fuel cells powered by natural gas. As nations and ports develop their hydrogen infrastructure, ships powered by fuel cells could transition from natural gas fuel to hydrogen fuel and become zero-carbon and zero-smog emitters.

Lithium metal, or solid state, batteries are in the early stages but could offer significant improvements on lithium-ion batteries in terms of range, charging time, lower cost, and smaller size. These benefits could jumpstart electric vehicle adoption in heavy transport. The main difference between a lithium metal and lithium-ion battery is that the former is not built with an anode, the positively charged electrode by which the electrons leave the cathode to charge. Lithium metal batteries help solve several problems posed by lithiumion batteries. For one, lithium metal batteries weigh less. This is crucial to long-haul trucking. Also, eliminating the anode material means lithium metal batteries are less expensive to produce both in terms of materials and manufacturing costs. The high energy density of lithium metal batteries, allowing them to deliver more energy per unit of weight, also increases the range potential in a vehicle application. n

WHAT ARE THE RISKS? Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. The companies and case studies shown herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The opinions are intended solely to provide insight into how securities are analyzed. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. This is not a complete analysis of every material fact regarding any industry, security or investment and should not be viewed as an investment recommendation. This is intended to provide insight into the portfolio selection and research process. Factual statements are taken from sources considered reliable but have not been independently verified for completeness or accuracy. These opinions may not be relied upon as investment advice or as an offer for any particular security. Past performance does not guarantee future results. IMPORTANT LEGAL INFORMATION This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. All investments involve risks, including possible loss of principal. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction. ClearBridge Investments is a wholly owned subsidiary of Franklin Resources, Inc. Issued by Franklin Templeton Investment Management Limited (FTIML). Registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML is authorised and regulated by the Financial Conduct Authority. Investments entail risks, the value of investments can go down as well as up and investors should be aware they might not get back the full value invested.

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ON THE ROAD TO A GREEN AND DIGITAL FUTURE Hamish Chamberlayne, Head of Global Sustainable Equities, reflects on the digital and green advances made in the past six months and looks to the opportunities ahead for sustainable funds. A renewed approach to sustainability in the US From a sustainability perspective, the most significant event of the past six months and perhaps the whole year, was Joe Biden’s victory over Donald Trump. While Trump’s presidency has not done as much damage to the decarbonisation trend as initially feared, his hostility to climate change and his efforts to undo environmental regulations and undermine global political co-operation, have certainly not helped progress. Fortunately, innovation in clean technology and business investment has superseded his political destructiveness.

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by 2035. It cannot come too soon — while 2020 witnessed the steepest decline in greenhouse gas emissions in history, it is also on track to be one of the hottest years. According to insurance group Munich Re, climate change cost the world US$210 billion in damage in 2020. It is a promising prospect that three of the largest emitters of CO2 – the US, the EU and China – are now on the same path towards carbon neutrality. It is astonishing to reflect that, against a backdrop of a global pandemic, which has caused (and is still causing) extreme social and economic disruption, many equity markets delivered double-digit gains in 2020 with the MSCI World Index, the S&P 500 Index and some Chinese indices recording all-time highs. It is true however, that many businesses have successfully adapted and even thrived in this turbulent environment. The global pandemic has caused societal change at a pace that is hard to comprehend and there are many companies on the right side of these changes.

Conversely, president‑elect Biden has put the climate agenda at the front and centre of his policy objectives. His climate plan is the boldest of any US presidential candidate in history. He has now signed an executive order to rejoin the 2015 Paris Climate Agreement and announced a massive green focused investment plan for a nationwide mobilisation to reduce emissions and build and retrofit infrastructure, creating new jobs and advancing social justice.

Digitalisation: an agent for positive change

Matching the goal of the European Union (EU), Biden has pledged to make the US climate neutral by 2050. His Green New Deal will involve US$2 trillion investment in clean energy over the next four years in the US, and he has called for 100 per cent clean electricity

If we had to choose one word to summarise everything, it would have to be 'digitalisation'. Already a very well-established investment trend, it has only been accelerated by the events of the last year, and we believe that it is a powerful agent of positive change with

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regards to both societal and environmental sustainability goals. From telemedicine to workfrom-home setups, digitalisation has provided solutions to several of the problems faced in 2020 and we expect many of these societal changes to endure into 2021 and beyond. Digitalisation is playing a positive role in economic development and social empowerment, and we also see a close alignment between digitalisation and decarbonisation. By nature, digitalisation results in a lesser physical impact on the planet. Virtualisation of otherwise physical activities or products – such as travelling and using tangible physical products – is just one example. Digitalisation is also key to advancing social goals around knowledge sharing and economic empowerment and development. It is important to recognise that this trend is impacting all industries and blurring the lines between sector classifications. Many people call this the 4th Industrial Revolution. So what can we see as we look to the future? We believe it is instructive to distinguish between the near term and long term when it comes to thinking about the outlook for markets and identifying investment opportunities. In the near term, we are conscious that valuations are high in some parts of the market. With extremely accommodative monetary policy, and central banks committed to supporting higher growth, the conditions do exist for further equity market upside; however, we are becoming more sensitive to near-term valuations, and are

therefore focused on maintaining discipline in our portfolio construction.

Seeking persistent and bankable trends As we look to the next several years, we are optimistic. We see some very persistent, solid opportunity investment trends that are closely aligned with sustainability. With a pro-climate US President, the EU putting climate-related investment at the heart of its economic recovery plan, and China recently reaffirming its commitment to green investment and decarbonisation, the stars are aligning for a globally synchronised clean energy and technology investment boom. We do expect to see some normalisation and reversion to the mean as the vaccines are rolled out, but we believe this pandemic has accelerated and cemented some trends such that many of the societal and economic changes we have experienced will prove durable. 2020 has been a challenging year but we are optimistic that the global economy will emerge from this pandemic more resilient, and on a more sustainable trajectory, than before. Instead of undermining it, we believe this crisis will serve to underline the attractiveness of sustainable investing and how it leads to better outcomes, not only for investors but also for the environment and society. n l For further information please contact your local sales representative or email sales.support@janushenderson.com www.janushenderson.com

This document is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and is not for general public distribution. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially. Nothing in this email is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

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Richard Wiseman, Senior Client Portfolio Manager, Goldman Sachs Asset Management Fundamental Equity Team

Q&A: INVESTING IN MILLENNIAL TRENDS

Richard Wiseman, senior client portfolio manager for Goldman Sachs Asset Management’s fundamental equity team discusses the millennial trends, including how the economic shutdown is accelerating growth across industries like video conferencing, e-commerce, streaming and social media, and the investment impact of these changes.

1. You have focused on companies that benefit from the behaviours of Millennials for 5 years. Why focus on Millennials? Millennials are the world’s most powerful consumer force. With 2.3 billion Millennials worldwide entering the work force and climbing up the corporate ladder, they are the main drivers of spending growth. They have grown up in the time of rapid technological change and are the first generation of ‘Digital Natives’ that have also come of age on the back of the global financial crisis. This has led to the rise of tech enabled consumption such as ecommerce, social media, gaming, and video streaming. These technology-based spending differences would be disruptive to many traditional businesses. We saw investment in companies that benefitted from these trends as a great long-term secular growth opportunity.

2. How do you see the consumer behaviour of Millennials changing over time, and how do you see this impacting the GS Global Millennials Equity Portfolio? 32

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The focus of millennial spending will evolve over time. As the generation matures, priorities will change: the self-indulgent lifestyle of the single Millennial will give way to the responsibilities that come with having a family, and then to the financial and health care pressures of an increasingly extended life. At every stage in this life cycle, technology is likely to exercise a greater influence than ever before; it will spawn new companies, business models and opportunities that are likely to transform industry and society from what we know today. The Portfolio seeks to invest in companies that are benefitting from the impact of Millennial spending today, as well as those companies that are well positioned for the changing patterns of the Millennial spending in the future – whatever that will look like.

generation, the lock-down has brought about a sudden change in habits, with many areas of daily life quickly moving from offline to online. Despite the prevalence of eCommerce in most of our lives, online retail sales only accounted for just over 14% of global retail sales pre-coronavirus, that figure is forecasted to rapidly increase to 25% by 2026. There is a new level of dependency on the internet and our mobile devices and we think this new found need and familiarity with navigating the world online will endure past the current crisis. The crisis has highlighted the importance of online business models for consumer-facing companies; many of these businesses have seen a significant upturn in users and subscriber growth as economies have moved into lockdown. We estimate that around 70% of the Millennials strategy is exposed to online businesses, and we believe they will be important drivers of returns in the future.

Data Consumption In Italy the first weekend of lockdown resulted in a 75% rise in data traffic according to Telecom Italia1

We look for companies whose growth has been catalysed and driven by Millennial spending, with leading products in growing markets, and which remain attractively valued. However, to find companies with long term sustainable growth prospects, it is important that we engage with company management to understand their strategies for this demographic. We know that Millennials care about environmental issues more than older generations, and that their spending choices increasingly match their life values. So we also look for companies who align with millennial values through producing sustainable goods and services, such as renewable energy or healthy foods. n

Social Media SNAP reported record number of Snapchats and Group Chats, with

video-calling rising by more than 50% during March vs February2 Healthy Living

eCommerce Online grocery providers have been overwhelmed with demand, with UK market

4. How do you select the companies to invest in?

In China, Nike reported that users of its exercise apps jumped by 80% in 3 months to the end of Feb5

leader Ocado experiencing ‘a staggering amount of traffic’4

Online Entertainment US video-streaming rose 85% in the first three weeks of March3

Working Online Slack Inc reported 40% more customers for its workplace software in the 6 weeks since the end of Feb than the whole of the previous 3 months6

For Third Party Distributors Use Only Not For Distribution to your clients or the General Public

control regulations in the countries of their citizenship, residence or domicile which might be relevant.

3. It seems the world is becoming more Millennial. What changes has the current crisis had and how much will it impact in the future?

In the United Kingdom, this material is a financial promotion and has been approved by Goldman Sachs International, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Billions of people forced to remain at home during the shutdown had no choice but to live most of their lives online. Regardless of

Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice. Past performance does not guarantee future results, which may vary. Capital is at risk.

This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. No part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. © 2021 Goldman Sachs. All rights reserved.s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. © 2021 Goldman Sachs. All rights reserved. 231797-TMPL02/2021-1360654

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Performance and volatility targets are subject to change and may not necessarily be achieved, losses may be made. 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. Calendar year performance: 2020: 4.6%; 2019: 5.4%, 2018: 0.4%; 2017: 4.8%; 2016: 5.9%; 2015: 2.0. 1UK Equities defined as FTSE All Share TR. ‘Bond-like’ volatility defined as less than half that of UK equities. These internal parameters are subject to change not necessarily with prior notification to shareholders. 2Source: Morningstar, 31 December 2020. Performance is for the I Acc share class, net of fees (NAV based, including ongoing charges), gross income reinvested (net of UK basic rate tax pre 5 April 2016) in GBP.

AN ALTERNATIVE SOLUTION TO A BLEAK OUTLOOK FOR YIELD

nvestors have been struggling to find yield from traditional sources since the global financial crisis, and this has been exacerbated by COVID. The policy response to the pandemic accelerated pre-existing trends and pushed interest rates to previously unthinkable levels as central banks doubled down on using ever-looser monetary policy in an attempt to protect the economy. Investors now face very limited options with respect to defensive assets, such as cash and developed market sovereign bonds. Even high yield corporate bonds now offer very little income. Against a backdrop of low yields and possible inflation, we believe the future for fixed income assets and their ability to provide income is bleak.

Casting the net wide To navigate the environment ahead, we think it is important to take advantage of a broad multi-asset opportunity set. For example, we see compelling opportunities in high yielding equities whose dividends are underpinned by strong cash flows. As the world recovers and returns to normality, these cash flows can rise, which in turn can fund distributions to investors. Fixed income isn’t completely barren, but it is crucial to be selective, focusing on those yields that are backed by resilient cash flows and compensate for the level of risk taken. Crucially, given the less reliable diversification and returns offered by

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traditional fixed income assets, the need to manage risk at a portfolio level is paramount.

Delivering a defensive income For those investors seeking a stable, defensive income stream, we’d encourage them to look across the whole market for the best opportunities, be flexible enough to take advantage and be able to weather less stable market conditions. In essence, this is the core philosophy of the Ninety One Diversified Income Fund, which has been successfully accomplishing this since 2012. The Fund aims to produce a defensive total return which, to us, is participating in up markets to a greater degree than when markets are falling, we use resilient income as the engine of these total returns, and look to achieve this with `bond-like’ volatility – less than half the level of UK equities.

Reliability in an uncertain environment Given the weak fixed income outlook, and equities reaching ever more lofty valuations that are vulnerable to correction should the road to recovery disappoint, the outlook remains uncertain. Our team is used to navigating uncertainty. For those looking for a smoother journey ahead, no matter what the environment, we believe our tried and tested approach makes the Fund a strong candidate as a reliable core holding in investor portfolios. n

David Eiswert, Portfolio Manager, Global Focused Growth Equity Strategy

THE “IN-BETWEEN”, THE “NEW NORMAL”, AND WHAT’S NEXT…

ometimes in life, you find yourself “in between". In between seasons, in between relationships, in between jobs. One season is ending, and the next has yet to begin. This is where markets are now.

Extreme outcomes have unfolded because of Coronavirus Discussing COVID‑19 and markets should begin with an acknowledgment of the human suffering that the crisis has caused and the injustices that it has revealed. There is more to this experience than market uncertainty, but that uncertainty is what our clients trust us to navigate. The coronavirus crisis was unexpected, even though predictions of some sort of global pandemic were not new. Human beings struggle to imagine the implications of something so unexpected. Billions of people stopped what they were doing and changed their behaviour almost simultaneously. We found ourselves in a time of extremes. The COVID-19 economy is a contrast between extreme positives and extreme negatives. We all know the examples: the positive extremes of new pet adoption and new computers, video games, home exercise equipment, video streaming, video calls, food delivery, home improvements, and time with immediate family.

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By contrast, we have the negative extremes of empty office buildings, airplanes, hotels, and theatres; disruption of schools and education; separation from extended families; shuttered restaurants; and empty brick‑and‑mortar shops. In peacetime, it is likely that the world has never seen such a synchronized shift in behaviour.

“Crossing the chasm” – moving from concept to profitable business at pace This shift has intersected a dynamic time for technology and communication. Many technology-enabled businesses crossed the chasm into critical scale, adoption, and habit. The adoption of innovation has happened in just a few weeks instead of years. This is an important insight because we are not headed back to the “same normal” of preCOVID-19 but, rather, a “new normal",where many of the innovations brought about or accelerated by COVID-19 will be durable and long term. Picking between the chasm crossers—those that will succeed and thrive— and the imposters—those that will not prove durable—will be yet another test for us as active investors.

the support of our global health care team to keep us focused on what matters. Our takeaway from their work is that things will get better in 2021, potentially much better in many countries. What we think matters most is that vaccines seem to prevent serious disease and death. In short, we will learn to live with COVID-19. The path continues to be uncertain, but the destination of a new normal looks more and more likely.

Positioning for the future

Science has put us on a path to improvement in 2021

What does this mean for equity markets? We find ourselves in an extreme environment for liquidity, government debt, and stimulus, and this is influencing the market’s appetite for risk assets. Many trends are being extrapolated far into the future, potentially fuelled by stay-at-home behaviour and some speculation. The market’s behaviour, in the simplest of terms, is focused on the extreme short-term winners and the extreme longterm dream.

It can be exhausting to follow the daily news on vaccines and virus variants. Luckily, we have

The market also appears very confident in the Federal Reserve’s ability to control

inflation and interest rates for a long time. Although it is too early to drive portfolio investment decisions, we do worry about how this level of stimulus will be removed from the system in the future. Understanding where the world is on the path to recovery is crucial. The question we ask ourselves is, “What if the first half of 2021 is the “in between” of a COVID-dominated world and a post‑COVID‑19 world?” If this is the case, then focusing on short‑term winners or extreme long-term dreams may be exactly the wrong thing to do. The game is about to change, as our lives and activities shift once again. We find ourselves looking for investments that will experience accelerating returns as we move out of the crisis, even if they are out of favour and have faced crisis headwinds. This kind of investing is difficult because it requires imagination and a carefully contrarian mindset. In short, now is the time to imagine what companies will evolve or reemerge as “winners", as we move through the in‑between phase and into a postcrisis world. n

INVESTMENT PROFESSIONALS ONLY. NOT FOR FURTHER DISTRIBUTION. IMPORTANT INFORMATION Past performance is not a reliable indicator of future performance TThe value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. Issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. © 2021 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.

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HOW COVID IS CHANGING THE WAY WE SHOP Sponsored

With the high street either shut down or harder to get to during the pandemic, consumer habits had to change. Baillie Gifford investment manager Moritz Sitte explores what this means for the future of shopping. The value of your investment and any income from it can go down as well as up and as a result your capital may be at risk.

ermany is Europe’s largest economy, but when it comes to online shopping, it’s the UK that takes the prize. More consumers bought goods or services online in the UK last year than anywhere else in the EU. Germany trailed in fifth.

Moritz Sitte, joint manager of the Baillie Gifford Growth Trust and the European Fund, is well placed to compare both countries, having spent his pandemic between Munich and Edinburgh. He saw first-hand a big shift in his parents’ generation’s attitude to shopping online, “For Germans, sharing credit card details online is a big thing because you’re always distrustful of giving away too much information. But people are realising the convenience of having things delivered to your house. The habits being formed will stick.” The crisis has sped up the digital disruption of retail, but the changes in how people shop predate the pandemic and will persist once high streets and ‘non-essential’ shops reopen. Ecommerce grew from 7 per cent of retailing in western Europe (UK, Germany, France,

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Netherlands, Italy and Spain) in 2014 to 12 per cent in 2019. By the end of 2020, it’s expected to reach 16 per cent and continue growing steadily from there. Understandably, in the near future, ‘bricksand-clicks’ retailers will fare better than those overly dependent on footfall. At the peak of the first lockdown in April, the Spanish company Inditex (owner of the Zara and Massimo Dutti brands) saw sales plummet by around 70 per cent year-on-year. But Sitte is pleased with how quickly the company has adjusted, “Over the years, it built a strong ecommerce business, which pre-pandemic was about 10-15 per cent of sales. That should now be substantially higher.” Another European company to stand out for Sitte has been Zalando, Europe’s leading online fashion retailer. It was already shifting from being an online store that takes inventory and controls much of the supply chain towards a platform model, offering services including warehousing, distribution and marketing to suppliers. He says, “What has stood out is how well it has executed on the opportunities presented to it, accelerating the shift towards the platform business

model.” Zalando’s platform sales and gross merchandise volumes have grown to upwards of 30 per cent as a result, and its marketplace, which attracts customers in their millions, has also proved a lifeline for many of businesses selling their goods on it. Europe’s luxury brands, largely reliant on their retail footprint to provide a highend shopping experience, have also had to adapt creatively. Sitte singles out Kering, the French holding company that controls or owns the Gucci, Alexander McQueen and Bottega Veneta brands, for managing the online transition successfully. Rather than viewing online as a distribution and sales channel, the company has used Instagram and its websites to engage both existing and potential customers. Kering is one of the many brands eschewing traditional advertising in favour of experimenting on YouTube, Instagram, Twitch and other platforms. Sitte points to Burberry’s recent fashion show on Twitch, a video streaming platform for video gamers, as an example of the experimentation and innovation released by the pandemic. These brands are being met online by an audience eager to engage. Adidas’ one-minute YouTube film with Siya Kolisi, the first black test captain of the South African rugby team, has been viewed over 45 million times. Sitte expects the presence of European companies on social media to continue growing and evolving. “TikTok has been one social media platform that has really seen a massive ascent during this pandemic in the west. I wouldn’t be surprised if this became an important platform to engage consumers and to create that direct

connection with consumers” he says. Social media is something that Adidas excels at. “Once you’re on consumers’ smartphones as an app, you can engage through notifications. You can come up with special deals. And we’ve seen that already happening with Adidas’ close relationship with the consumer. It gets more information, learns more about the consumer, and not just what they like, but what they don’t like.” And as relationships deepen over time, Adidas and Nike have demonstrated that consumers become more brand conscious, less interested in discounts and more willing to up their spending on special editions of products. From a purely financial point of view, the direct-to-consumer online business cuts out the middleman and therefore should, even in

the medium term, lead to higher margins. All it takes is an app, your own warehouses, and a production model that works for the platform. That’s why Sitte believes it’s an avenue that companies will pursue more aggressively. It’s also a good indicator of how innovation, born of necessity during the pandemic, means there’s no going back to our old shopping habits. n l You can hear more of Moritz’s thoughts on the future of online shopping in the Baillie Gifford podcast Short Briefings on Long Term Thinking. l You can listen to the podcast here

This article contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned. Investment markets and conditions can change rapidly. The views expressed should not be taken as fact and no reliance should be placed upon these when making investment decisions. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The trust invests in overseas securities. Changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up. Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA). The investment trusts managed by Baillie Gifford & Co Limited are listed UK companies. The Baillie Gifford European Growth Trust is listed on the London Stock Exchange and is not authorised or regulated by the Financial Conduct Authority. A key information document is available at bailliegifford.com.

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William Lam, Co-Head of Asian and Emerging Market Equities, Invesco

I THOUGHT YOU SAID YOU WERE CONTRARIAN Question: You say you are a contrarian investor. If we look at your top holdings in the Invesco Asian Fund (UK), such as Taiwan Semiconductor Manufacturing (TSMC) and Samsung Electronics, they don’t seem very contrarian ideas. Have your philosophy and process changed?

Answer: Absolutely not. The process and philosophy have not changed. The thing about being contrarian is that when you own an out-of-favour stock, the whole point of owning it is that you hope it will one day turn into an in-favour stock. This is what we mean when we talk about “riding the transition from contrarian to popular”. Back in 2007, I clearly remember that TSMC and Samsung were very much out of favour. The kinds of stock that were in

INVESTMENT RISKS The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. The fund invests in emerging and developing markets, where there is potential for a decrease in market liquidity, which may mean that it is not easy to buy or sell securities. There may also be difficulties in dealing and settlement, and custody problems could arise. The Fund may use Stock Connect to access China A Shares traded in mainland China. This may result in additional liquidity risk and operational risks including settlement and default risks, regulatory risk and system failure risk.

favour back then were Korean shipbuilders, Chinese steel and Chinese cement.

The fund may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the fund. The Manager, however, will ensure that the use of derivatives within the fund does not materially alter the overall risk profile of the fund.

Now in 2021 it is fair to say that TSMC and Samsung have never been as popular, while many of the popular stocks of 2007 have never recovered to their 2007 highs. We have held both TSMC and Samsung all the way through this transition. This is evidence of the process and philosophy working – it is not evidence of the process changing.

Some contrarian ideas today

Of course the process is ongoing, and part of our process is to sell when a holding reaches our estimate of fair value and use the proceeds to buy stocks which are currently out of favour. And then we hope that together with our clients we can ride a similar transition over time with those newer holdings.

China Overseas Land – a Chinese property developer trading on 5x P/E with a 6% dividend yield; we expect both its earnings and dividend will grow steadily from here.

Figure 1: Market divergence in 2007

Today some of our newer, more out-of-favour holdings include:

Largan Precision – the world-leading maker of lenses for smartphones. Huawei was one of its major customers; the sanctions on Huawei have hurt Largan’s share price in the short term, which provided us with an opportunity to buy at an attractive price. Largan remains the best company in this field in our view and we expect it will successfully transition to other customers over time. Autohome – the leading internet content provider in the autos segment in China. Automakers and dealers rely on Autohome as the best source of information on consumer trends and preferences, while consumers rely on Autohome as the best source of information on auto products and performance. Also, we believe Autohome can benefit from other structural growth drivers in its favour due to the low penetration of auto ownership in China and the potential for rapid growth in secondhand vehicle purchases. n

Past performance is not a guide to future returns. Source: Bloomberg, December 2007.

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l Find out more. For more information about the Invesco Asian Fund (UK) and William’s investment approach, visit : invesco.co.uk/asianfund

IMPORTANT INFORMATION This article is for UK Professional Clients only and is not for consumer use. All data is as at 31.12.20 and sourced from Invesco unless otherwise stated. Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. This article is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities. For the most up to date information on our funds, please refer to the relevant fund and share class-specific Key Investor Information Documents, the Supplementary Information Document, the Annual or Interim Reports and the Prospectus, which are available using the contact details shown. Issued by Invesco Fund Managers Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.

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James Carrick, Global Economist Legal & General Investment Management

COVID-19: VACCINATIONS VS MUTATIONS

ow can investors reconcile the encouraging news on vaccination rates with concerns about new strains of the virus?

What are you most looking forward to when the lockdown eventually ends? For my son, it will be seeing his friends at school. I’m missing everyone at work too, as well as the discipline of cycling to and from the office. At the time of writing, Boris Johnson is set to announce the UK’s reopening roadmap on 22 February and there’s intense speculation about what will open when. Businesses are understandably pushing for a fast return to normality, but the government is hinting at a more cautious approach. The UK is in a better position than many other countries, having given first vaccination shots to 23% of the population, almost double that of the US and seven times that of the EU.

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However, it’s unclear how much of this is biological (due to viruses being better able to bypass our immune systems) or sociological (due to less time spent indoors where the virus is easier to catch). We could already be enjoying some of these benefits by being in lockdown: for example, virus growth might slow when schoolkids play outdoors at break time, but at the moment they’re not even at school!

European hospitals are likely to remain under pressure for longer, until they have vaccinated the vulnerable.

This is important because the oldest 25% of the population accounts for 95% of COVID-19 deaths and two-thirds of hospital and ICU visits, as I discussed in December. We should therefore soon see a divergence between case numbers and deaths/hospitalisations in the UK, whereas European hospitals are likely to remain under pressure for longer, until they have vaccinated the vulnerable.

Another positive factor is the weather. Just as we worried about the winter impact on respiratory viruses, we should be sanguine about the spring. Academic research suggests the reproductive growth rate (R) for flu can swing by 30% due to seasonality.

The mutation question

On the downside, we also have mutations to consider. There are two key mutations that have occurred around the world. First, the N501Y mutation (which is already dominant in the UK) is estimated to make the virus more transmissible because it can attack us more easily. Second, the E484K mutation has proven to be harder for our immune systems and vaccines to fight, particularly the AstraZeneca vaccine which is the most widespread jab used in the UK. Several strains have both mutations – South Africa, Brazil, and recently the UK. Both of these mutations could undermine the ‘herd immunity’ benefits from vaccination.

For N501Y, a given level of social activity is associated with a 50% higher R. For E484K, the efficacy of some vaccinations may be reduced, but so far evidence suggests that it is the effectiveness of preventing transmission of infections that is affected, rather than the effectiveness of preventing serious outcomes. It is also possible (though not yet proven) that vaccinated individuals who catch the virus could be less infectious than normal if they have a lower viral load. But Israeli data suggests the vaccines aren’t 100% effective against serious outcomes – even with two doses – and there are still vulnerable people across all age groups, so we don’t want to see another surge in the virus. So far, re-infection has only been observed in very isolated cases, but there is still much to learn and further mutations could increase the risk. Taken together, these competing dynamics suggest the UK should maintain a cautious approach to reopening. It is likely that Europe will need to wait a couple of months longer. We hope vaccinations, seasonality, and a gradual approach to reopening will keep squashing the virus to manageable levels (like those seen in China and Australia) and that adapted ‘booster’ vaccines can be rolled out in the autumn. There is nevertheless a risk that some countries or states reopen too quickly as the virus continues to mutate. We will continue to monitor these developments closely, and a forthcoming blog will consider the implications of these trends for investors. n

l To read more of our latest thought leadership, visit our blog.

KEY RISKS Past performance is not a guide to the future. The value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. Views expressed are of Legal & General Investment Management Limited as at 23 July 2020. Forwardlooking statements are, by their nature, subject to significant risks and uncertainties and are based on internal forecasts and assumptions and should not be relied upon. There is no guarantee that any forecasts made will come to pass. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be solely relied on in making an investment or other decision. *For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.

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Jonathan Allison, Investment Director European Equities and Dr Mark Vincent, Global Head of Equity

WHAT MAKES A ‘QUALITY’ COMPANY? AND WHY DO WE INVEST IN THEM?

s active investors, one of the inefficiencies we see repeatedly is the market’s inability to price quality and the persistency of returns correctly. Evaluating the quality of every stock we research helps us to ensure that we have properly understood its opportunities and risks. In our long-term quality strategies we choose to invest only in high-quality companies, aiming to exploit this pricing inefficiency.

The five fundamentals of quality We have developed a framework to help us evaluate the different dimensions of quality. These are: z Industry z Business model z Financials z Management z Environmental, social and governance (ESG) analysis. By blending our analysis of these factors, we aim to arrive at a full understanding of a company’s quality. Let’s look at each in turn.

1. Industry First, we believe it's important to evaluate the industry in which a company operates from many angles. Understanding the potential

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for growth requires investors to assess the maturity of the industry and the competitive environment. For example, analysts need to ask whether there are opportunities to allocate capital in ways that add value. Forecasts should also take account of the cyclicality of the business. Meanwhile, regulations, both local and global, can affect returns. Additionally, investors should explore the potential for companies to disrupt the status quo – or to be left behind by the disruption of others. By contrast, investors might want to be more wary of industries where shifting customer preferences can make products obsolete. These include sectors like fashion or those where competitive pressures are intense, such as airlines. True, these industries can produce investment opportunities from time to time. However, a quality approach will put a higher burden of proof on ensuring that the returns on offer have longevity.

2. Business model and 'moat' Question: if a company earns a return above its cost of capital, will this persist? Answering this requires an understanding of a company’s position in its value chain. This means assessing its competitive strengths and weaknesses at every stage of its activities. Quality increases with the size of its ‘economic moat’. That is, the distinct

advantage a business has over its competitors which allows it to protect its market share and profitability. Analysts should therefore seek high barriers to entry that prevent competitors eating into outsized returns. On the flipside, investors should ask if margins are too high and therefore unsustainable at a given company. This includes being wary of companies that are overly dependent on external factors beyond their control, with no economic moat. The global financial crisis provided many examples of companies that failed because of their reliance on short-term funding from the interbank market. Accessing this source of finance required no particular competitive advantage, and when this source dried up, many of these companies failed.

3. Financial strength Assessing a company’s historic cashflow generation can help ascertain future prospects. One could ask how capitalintensive or margin-dilutive future growth might be, for example. It also helps to understand if a company can fund its growth through internal cash generation or existing reserves – or whether it will need to source funding externally, thereby increasing risk. For us, it’s essential to understand how a business generates its returns. It is also important to understand how the business gains finance by analysing the balance sheet. What are the firm’s liabilities? Is the capital structure sustainable? The balance sheet can reveal vital information about the capital intensity of the business. Analysts should assess whether or not the company will be able to withstand any shocks that hit its industry or the wider economy. This ability to weather challenging economic environments is particularly important for companies operating in cyclical industries with more unpredictable or volatile revenue streams. Stronger companies may be in a position to benefit from the stresses of their weaker competitors. Again, by contrast, investors should to be mindful of companies with high debt levels or poorly managed financial risks.

4. Management We think it’s important to judge the ability of management teams to allocate

capital effectively. Their projects need to add economic value and drive future cash generation. Investors might want to know whether the management in question has a history of spotting and delivering valuecreating opportunities, or if it squanders capital on projects outside its core expertise. How the team has managed its business through tough times also gives important clues about the future, providing reassurance or provoking concern. It is also important to consider how management is incentivised. What are the key performance indicators for senior team members? Are these aligned with shareholder interests? These are important governance issues. Investors need to consider whether management is properly motivated to manage risk in the business, as well as to drive growth. The collapse of Enron provides an extreme example of how the wrong incentives can lead to poor management practices. Different risks apply to different companies and industries. How do management identify and prioritise their key risks? How often do they review them? How do they mitigate those risks? Investors also need to be clear on where responsibility for managing risk lies: with the board or with the executive team? Management teams that discuss these issues openly with fund managers – and answer these key questions – are, in our experience, the ones that are most likely to avoid corporate catastrophe.

5. ESG analysis The full integration of ESG is core to our research and decision-making process. In our view, companies that take a comprehensive approach to ESG issues can minimise the associated risks. With investors scrutinising these risks more closely, markets are likely to reward companies that adopt best practice with a higher valuation. It is not just about perusing some disclosure metrics or looking at a score from a data provider. Investors must understand the culture of a company: poor culture usually leads to poor risk management. This can affect companies in many ways, from financial disclosure to labour relations. These are important issues for both operational performance and business reputation.

Corporate culture is notoriously difficult to define and measure, but it is not an undertaking that should be skipped. Meaningful analysis requires deep knowledge of the company and engagement with management over a prolonged period. Corporate culture is notoriously difficult to define and measure, but it is not an undertaking that should be skipped. By contrast, poor governance is a red flag for analysts. Investors need to know that company management is acting in the best interest of all shareholders. Additionally, analysts should be wary of companies that show little regard to their environment or society at large. These managements risk reputational damage, regulatory fines and an unmotivated workforce: major impediments to long-term value creation.

Next steps… Our five-factor framework provides a holistic definition of quality. We combine this analysis with traditional quantitative measures to assess the quality of companies. But this ranking is not sufficient to make an investment decision. Investors must also consider other factors such as valuation, the state of the economic cycle and the potential for quality to change over time. Only then can they take a view on whether there is financial upside in holding a quality stock. n Important information: The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested. Before investing, investors should consider carefully the investment objective, risks, charges, and expenses of a fund. This and other important information is contained in the prospectus and KIID document. The information is intended to be of general interest only and should not be considered as an offer, investment recommendation or solicitation, to deal in the shares of any securities or financial instruments. Aberdeen Asset Managers Limited, registered in Scotland (SC108419) at 10 Queen’s Terrace, Aberdeen, AB10 1XL. Standard Life Investments Limited registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Both companies are authorised and regulated in the UK by the Financial Conduct Authority.

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