A quick round-up of interesting titbits today from the land of funds investing…
First off, it’s always worth listening to the latest from hedge fund supremo Bill Ackmann of Pershing Square. Jefferies’ fund’s analyst Matt Hose listened in to the latest investor call and summarised the case for buying into Agilent below.
“The analytical measurement company was explained in terms of having an ‘attractive “razor/razor blade” business model, where instrument sales drive recurring consumables and services revenue’. The opportunity for Pershing Square is twofold – targeting significant margin expansion and balance sheet optionality given both a large margin gap and underleverage relative to peers. What wasn’t completely clear to us is how ‘hands on’ Pershing will be in its approach. That said, it feels like a case of backing the Agilent management team to achieve more stretching margin targets, while reserving the right to increase the level of active engagement if required”
I’ll be returning to matter ESG related after my event from last week but for now one quick observation. Everyone at our event seemed to think that within equities there is no obvious performance downside from following an ESG screening strategy. I’m not quite so sure of that consensus. My hunch is that performance has been flattered by the underperformance of fossil fuel and specifically energy-related stocks. Take these out and then compare with tech stocks and I suspect performance has been more subdued.
Anyway, this might all be beside the point as I think that the more interesting story is that ESG is actually less about alpha generation and more about risk reduction. In particular, I think sensible ESG investing can help avoid potential sectoral secular bear markets. And that’s especially important for fixed income investors who are less interested in alpha and more about avoiding capital destruction. So, in my humble opinion ESG actually makes a great deal more sense for fixed income types.
Happily, that receives some backing from a recent Amundi study which finds that “ESG integration has outperformed the market since 2014 in Europe”.
“Since 2014, the integration of ESG has created alpha in EUR-denominated fixed income portfolios. Indeed, for Euro-denominated investment grade (“IG”) bonds portfolio, the annual excess credit return* of long/short strategy between best-in-class bonds (20% best-rated according to ESG scores) and worst-in-class bonds (20% worst-rated according to ESG scores) bonds reaches 37 bps. …In the case of Dollar-denominated IG bonds, the results are more disappointing in absolute value, but the correlation between ESG and performance is positive. Indeed, ESG investing was a source of underperformance from 2010 to 2019 if we consider both long/short, best-in-class versus worst-in-class strategies and benchmark-controlled optimized portfolios. Nevertheless, we noticed that the large underperformance during the 2010-2013 period has decreased significantly in the more recent period. The annual cost of ESG investing is 9 bps per year for benchmarked strategy since 2014 vs 24 bps from 2010 to 2013.”
Lastly, I do suggest getting a subscription to an excellent new research publication aimed at CEOs and C suite types. It’s called Sunday Briefing. It tries to outdo the Economist on insights, and I have to say it’s an excellent read.
One story from the most recent edition resonated with me.
One recurring theme in the US stock market has been the increasing dominance of mega large caps and their respective market shares. This is driving very high-profit margins. The Economist also ran a story on this theme this week suggesting that concentrated market power is also on the rise in the UK.
Sunday Briefing suggests the next frontier may be Japan where competition is much more intense. The publication suggests that the average market share of the top four companies in each industry is just 11% compared to 35% in America. This has an inevitable effect on profits (higher) and prices (lower).
Japanese corporates are now realizing the error of their ways (though competition regulators might take a different view) and are kicking off more M and A to consolidate market share positions.
If all this is true – and I suspect, there’s more than a germ of truth lurking here – then that could help underpin demand for shares in the AVI Japan Opportunity Trust (AJOT). The fund has recently announced that it would like to issue more equity as its shareholder engagement/activist approach starts to pay off. According to a recent N+1 Singer update
“Since IPO in October 2018 to end of December 2019 (first full accounting period) AJOT has delivered a NAV total return of +14.3% vs +7.9% total return generated by the trust’s benchmark MSCI Japan Small Cap Index (both in sterling terms). This outperformance has been achieved by a high degree of corporate activity with ten companies announcing share buybacks over the period and three were subject to takeovers. AJOT has enjoyed an average premium rating of 3.5% since IPO and this has enabled the Board to issue a further 34.9m shares via tap issues at small premiums to the prevailing NAV.”
“Already within its short existence since IPO, AJOT has received three takeover approaches for its investee companies. Toshiba Corp, made an offer to buy out its subsidiaries NuFlare at 46% premium, and Toshiba Plant at a 28% premium, these added 4.1% and 1.5% to the AJOT NAV. The third approach was for Nitto FC by a Japanese private equity firm, which took the company private at a 38% premium; this added a further 1.4% to the AJOT NAV.”