Significant Features: The Regnan Credit Impact Trust is an actively managed portfolio of fixed interest securities. The trust focuses on investments anchored to impact goals adapted from the United Nations Sustainable Development Goals.

Fund Objective: The trust aims to generate positive and measurable social or environmental impact, or both; and a return (before fees, costs and taxes) that exceeds the RBA cash rate over rolling 3-year periods.

Think impact investing is only about solving problems in less-developed nations? You might be surprised to find opportunities in the developed world — such as water preservation. Regnan’s Tim Crockford explains in this fast podcast.

Listen to the podcast above or read the transcript below

Interview with Tim Crockford, head of Regnan’s impact investment team

Interviewer Sean Aylmer: Tim Crockford, explain exactly what impact investing is.

Tim Crockford, senior portfolio manager of Regnan Global Equity Impact Solutions Fund:
Impact investing is ultimately a form of investing where your investments are going towards companies that can solve problems relating to some of the major environmental or social challenges that we face globally

The idea behind the concept is if you can finance the companies that are trying to solve these challenges, ultimately these companies are able to come up with some pretty innovative and unique solutions for this set of problems, which of course is getting increasingly urgent to solve.

Interviewer: Why are we hearing so much more about impact investing now than say two years ago, let alone five years ago?

Tim Crockford: Good question. There are multiple catalysts, not least the Covid crisis we’ve all been facing over the last 18 months. That’s brought to light the effect of human activity and human economic activity. More generally we’ve got a number of underlying challenges which have been snowballing over the last five or 10 years. They are probably accelerating more recently since we’re getting to the stage that we can no longer procrastinate. We can no longer delay trying to address them.

Interviewer: What are the sectors or geographies where impact investing is most likely to play its greatest role?

Tim Crockford: It’s broad. It’s really across the board. The UN Sustainable Development Goals (SDGs) – when they were released back in 2015 – brought to light how some of the sustainability challenges that we face.

We tend to think of sustainability challenges as something for the more remote corners of the earth, in developing regions or frontier regions. But the interesting thing about the UN SDGs is they brought to light the extent to which some of these challenges are much closer to home to us.

You have issues like extreme poverty and improving social mobility which are typically challenges faced by some of the less-developed nations.

But if you look at challenges we face around waste and waste management and water, you’re talking about developing nations or indeed some of the most developed and mature countries.

So what’s increasingly changed over the last few years is this view that some of the major sustainability challenges are much closer to home.

Interviewer: In some ways that must make them more investable.

Tim Crockford: Yes, absolutely. We’ve been talking a lot this year about water as one of the major issues that needs to be addressed sooner rather than later. When it comes to water transmission and water infrastructure, the biggest problem is in the most developed of nations like the US, the UK and Australia, where you have water infrastructure, that’s aged so much and has been in the ground for so many years.

And it’s facing challenges, for example leaking. If you look at the US there is this massive problem where the US grid system loses the equivalent of 4 million Olympic-sized swimming pools worth of water every year, just through infrastructure leakage.

So one of the challenges there is just plugging the holes and stopping that massive loss of water – which would otherwise be potable and going to more productive uses.

So that is a good example of something that is a challenge being met by companies that are investable in places like the US.

Interviewer: So if I’m thinking about investing impact investing in terms of portfolio construction, it’s not really a discrete part of my portfolio. It’s more tied to the different asset classes that I want to invest in?

Tim Crockford: That’s what we think. We don’t see this as something that should be niche or the cherry on the cake in people’s portfolios.

The vast majority of our clients tend to not have a specific allocation for sustainable or impact equity. The vast majority will place us in their broader global equity allocations. Ultimately the fund we are running (Regnan Global Equity Impact Solutions Fund) is a global equity fund.

Given the differentiated collection of equities that they get with our portfolio, when they put our portfolio together with their other global equity managers they get access to a collection of companies and stocks which otherwise wouldn’t typically be in your average global equity fund.

So there’s a have-your-cake-and-eat-I approach taken by a lot of our investors. They’re seeing an opportunity to get exposure to some of these themes and to allocate more of their portfolios towards sustainable and impact.

On the other hand, from a portfolio construction point of view, they’re getting a nice diversified and differentiated collection of companies which they otherwise wouldn’t be investing in.

Interviewer: We’re five weeks away from the 26th United Nations Climate Change Conference in Glasgow at the beginning of November. What sort of difference does a conference like that make to investing?

Tim Crockford: At the margin it’s another catalyst bringing to light the huge financing gap that needs to be plugged.  A lot of this is about raising awareness of just how much funding is required to solve some of these environmental, as well as social challenges.
But we are more likely around that time to be making a bit of noise, not just about the problem aspect, but about the solutions. Because from an investment point of view, the flip side of the coin is that this is a massive investment opportunity for those investors who are willing to get ahead of the curve.

This is a massive investment opportunity for investors who can see that this gap in financing exists and those early players – those investors that are early to the party – are going to be well-rewarded.

So it is an opportunity on one hand to bring the challenge and the problems to light, but for us it will be making noise about some of the solutions that exist and the opportunity side of things.

Interviewer: Tim, thank you for talking to Pendal newsletter The Point. That was Tim Crockford, lead of the Regnan Equity Impact Solutions team.

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About Tim Crockford

Tim Crockford leads Regnan’s Equity Impact Solutions team and is senior fund manager of Regnan Global Equity Impact Solutions Fund. Tim previously managed the Hermes Impact Opportunities Equity Fund after co-founding the Hermes impact team in 2016.

As Portfolio Manager, Lewis co-manages our Australian smaller companies and micro-cap funds and conducts fundamental analysis on a range of smaller companies. Lewis joined the Pendal Smaller Companies team in 2013 as a small cap analyst, before being promoted to the role of Portfolio Manager in 2018. Lewis brings 20 years of industry experience with previous roles spanning equities research at boutique stockbroking firm, Taylor Collison, as well as commercial and investment banking roles at Westpac Bank and Commonwealth Bank. Lewis holds a Bachelor of Commerce (Corporate Finance) from the University of Adelaide.

As Portfolio Manager, Patrick co-manages our Australian smaller companies and micro-cap funds and conducts fundamental analysis on a range of smaller companies. Patrick has been part of the Smaller Companies team for a collective period of eleven years. Patrick initially joined the company in 2005 and developed his career as a highly regarded small cap analyst. Patrick worked at a small cap boutique as a portfolio manager for 3 years before re-joining Pendal’s Smaller Companies team in January 2018. Patrick holds a Bachelor of Commerce (1st class Honours) from the University of Queensland and is a CFA Charterholder.

Here are the main factors driving Australian equities this week according to our head of equities Crispin Murray. Reported by quantitative analyst Lee Ma

GLOBAL markets rebound marginally last week. The S&P500 gained 0.5% while the S&P/ASX 300 index finished in the red (-0.8%).

The market is clearly weighing up negatives around central banks removing stimulus earlier than expected versus the positives of a strengthening global economy.

Our view is that the taper is now largely priced in by the market. The incremental news is that the global economy is re-accelerating after the Delta-driven slowdown and an easing of some supply chain bottlenecks.

This should lead to an equity market rally into the year’s end.

The main news last week was the ongoing Evergrande story amid Chinese property concerns; and the Fed’s slightly more hawkish messaging, with the pace of tapering now slightly faster than the market expected.

Covid and vaccinations

Global trends have continued to improve, notably in the US. After school re-openings led to a rise in cases, US infection rates are now falling along with hospitalisations in some states.

Emerging markets are also improving as they ramp up vaccination. This is important since supply bottlenecks stemmed from factory closures in a number of EM countries such as Vietnam.

US data continues to show most hospitalisations and deaths are among the unvaccinated. This shaped the US Food and Drug Administration’s view on booster doses — which are approved only for over-65s.

The view is that the role of the vaccine is to stop people getting too sick, rather than completely stop the virus. The FDA did not see a need to approve an extra dose for the broader population given a lack of data on long-term effects.

This will give time for a variant-specific booster to be trialled (which is now underway).

At home, NSW is going better than expected and Victoria is in line with forecasts.

First-dose vaccination rates in NSW are averaging 42k per day v 46k last week. This has taken NSW to 88% first dose and potentially 90% this coming week. Second-dose vaccinations are more in line with expectations at 70k per day v 61k last week. The run rate is expected to pick up to 72k this week.

NSW is on track to reach 70% on October 5 and 80% by October 15.

Hospitalisations in NSW appear to have peaked at 1268 and are now down to 1146. ICU cases peaked at 234 and are now 222. Both figures are well below forecasts from the start of September.

We remain of the view that we will see a sharp recovery in activity on the east coast coming into November.

We are positive on domestic stocks leveraged to this.

Economics and policy

Updates from the US Federal Reserve last week were broadly in line with market expectations — with a slightly more bearish tilt.

The taper is due to start in November and finish by mid-year — two-to-three months earlier than consensus.

This implies a reduction of $15 billion per quarter rather than per meeting as the market previously thought (or $18 billion per meeting v $15 billion expected).

The dot plots were in line with an even split for the first hike in 2022 versus 2023. The logic for the faster taper is to give the central bank some flexibility if inflation stays higher next year.

The market has 25bp priced in by the end of 2022.

On the data front, median expectation for inflation has risen 20bp to 2.3%, implying the 30bp average increase in rate levels by the end 2022 in the dots.

The 2022 median GDP growth rate forecast has also risen by 50bps to 3.8%. Unemployment is now expected to fall to 3.8% by the end of 2022.

Fed chair Jerome Powell’s language has become more cautious on inflation, with the “transitory” period now lasting into 2023 and even 2024.

Overall, the underlying message was that inflationary pressures have been more resilient, particularly given supply chain bottlenecks.

This extended period of higher average inflation means the Fed will need more flexibility to respond, potentially before the end of 2022.

China

China remained in the limelight last week. Property giant Evergrande appears to have missed interest payments due on bank loans and offshore bond issues due last week. A grace period is likely to involve negotiating some form of restructure.

Cash flow appears to be directed into funding projects, which is politically sensible. We may see unfinished units sold at a discount to other developers, potentially those backed by the state.

Our view remains that this will not be a systemic issue. There will be some attempt to put a floor under the economy given the importance of the property market.

Market moves suggest this is the case — the Chinese currency, credit spreads and equity market did not move much despite the headlines.

Against this backdrop we think the case for a policy shift in China is high, which will support cyclicals.

There is a lot of sensitivity about an overly sharp slowdown next year as president Xi Jinping locks in his third term. The need for economic growth remains important.

Meanwhile the UK is experiencing some chaos from rising electricity prices, gas shortages and labour shortages (notably truck drivers).

This is leading to some food and fuel shortages. The issue reinforces the need for more inventories of strategic commodities, higher wages and more investment. This probably contributed to a more hawkish Bank of England meeting last week. A rate hike is now becoming likely by May.

A positive outlook

Overall we are becoming more positive as falling global Covid cases allow economies to re-open.

We can see the Fed GDP numbers start to tick better, having weakened sharply over the last two months.

The bond market also continues to signal that the economy is faring better. US bond yields are following their European counterparts in breaking out of their recent trading range.

The economic surprise index also looks to be bottoming. And a significant inventory re-build is required in a number of industries as soon as supply chain blockages are resolved.

All in all, this should be supportive of cyclicals and financials v defensives. Cyclical growth will continue to do well, but more defensive growth, such as healthcare may underperform.

Markets

Bond yields went up last week in the US and Australia. Commodities generally recorded gains.

Iron ore had a wash-out last week, bottoming in the US$90s, before sharply bouncing off these lows. In the $90s, the cost curve will start to move.

We have already seen a lot of marginal suppliers for iron ore — such as Ukraine and India — redirect stocks back into their own markets as prices fall. This will make China more reliant on Australian ore.

While we don’t expect a big bounce in iron ore, we do believe the falling prices have come to an end for this year.

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About Crispin Murray and Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal Focus Australian Share Fund here.  

Contact a Pendal key account manager here.

Oliver co-manages the Pendal income strategies with Amy Xie Patrick. He has extensive experience in macro, quant and credit research. Primarily, his role is to enhance the Income & Fixed Interest team’s quant process including development of machine learning models and big data capabilities. Prior to joining the team, Oliver spent two years in the Pendal Investment Products team, where he worked closely with both the portfolio management and distribution teams, providing quantitative support, portfolio positioning and commentary to the business and clients. Oliver received his Bachelor of Commerce (Finance) from the University of Sydney and is also a CFA Charterholder.