Investors in Regnan Global Equity Impact Solutions fund are on a journey with diabetes pioneer Novo Nordisk to treat obesity. Regnan’s Maxime Le Floch explains

• 650 million adults are obese
• Novo Nordisk is an early mover in anti-obesity drugs
• Regnan Global Equity Impact Solutions fund is an investor in Novo Nordisk

INVESTORS can spend years looking for a market-leading company in a fast-growing sector that’s innovative enough to withstand challenges and stable enough to grow with demand.

There are not many such companies — though Danish pharmaceutical group Novo Nordisk might be one of them says Maxime Le Floch, an investment analyst with Regnan’s Global Equity Impact team.

“This is the poster child for finding a really strong solution that’s miles ahead of competitors in a fast-growing market,” he argues.

The market? Anti-obesity treatment.

Novo is best known as a pioneer in diabetes treatment, where it holds about 30 per cent of the global market. Its diabetes drugs reached 34.6 million people around the world in 2021.

About 422 million people worldwide have diabetes and 1.5 million deaths are directly attributed to the disease each year, says the World Health Organisation.

Novo is now developing medical treatments for obesity, which is closely linked with diabetes.

The WHO reports 650 million adults are obese (1.9 billion are classed as overweight) and some 4 million die each year from obesity.

However anti-obesity medication is almost non-existent. “It’s a new category,” Le Floch says.

Novo Nordisk launched its new “Wegovy” injectable anti-obesity drug in the US last June and expects to launch in Europe later this year.

A pioneer in diabetes treatment

Novo Nordisk’s heritage dates back to 1921.

After hearing of the discovery of insulin in Canada, Danish Nobel laureate August Krogh and his wife Marie — a doctor living with diabetes — convinced the researchers to allow production in Denmark.

The first patients were treated in March 1923.

Suddenly diabetes was no longer a death sentence. The original company grew quickly and merged with a competitor.

By 2022 Novo Nordisk was a global leader in the treatment of diabetes.

“It’s very innovative in finding new treatments,” Le Floch says. “It is improving outcomes in terms of co-morbidities, in particular cardiovascular and hypoglycaemia.”

Treatments for diabetes, which is a condition of having too much glucose circulating in a person’s bloodstream, have evolved over time, from daily injections to weekly injections, from the use of syringes to the use of pens.

That’s Novo Nordisk’s base business.

Treating weight-loss

“Over the past few years Novo Nordisk has started working on new treatment pathways using glucagon-like peptide 1 (GLP-1) and realised it had very good outcomes not just for diabetes but also for weight loss,” Le Floch says.

GLP-1 drugs treat type 2 diabetes, the most common form of the disease which affects 380 million people globally.

“They explored that outcome and it led them to develop anti-obesity medication that’s revolutionary. The cardiovascular profile for the treatment looks very compelling as well,” Le Floch says.

Anti-obesity medication

Obesity and diabetes go hand-in-hand. People with a higher body mass index are more likely to develop diabetes.

Humans are getting heavier, according to a range for government funded and private studies. Greater calorie intake, confusion over what’s nutritional and general inactivity are mostly to blame.

It isn’t a challenge just for the health system but for many sectors across the economy.

For example, in June last year, the Levi Strauss boss Chip Bergh told analysts that during COVID around one-third of customers’ waist sizes had changed. In Levi’s case it was a positive because people had to buy new clothes.

But mostly it’s a negative and the health sector is at the forefront of the fight against expanding waistlines.

Novo Nordisk is moving towards treating the source as well as the symptoms, Le Floch explains.

“For some people reducing food isn’t enough to reduce their body mass index. Now there is a treatment pathway …. And the weight loss benefits are very compelling.”

Covid link

People who have contracted COVID may also be more likely to suffer from diabetes, according to early studies.

“That’s not totally proven yet but certainly the potential is there. In France, medical authorities realised that many of the people who ended up in emergency care because of COVID also lived with obesity,” Le Floch says.

Medication for obesity is under-served.

“Anti-obesity medication is almost non-existent, or at least very, very small. It’s a new category,” Le Floch says.

“Novo Nordisk is investing in clinical trials to prove further the benefits of its treatment. It could end up in a new market where there aren’t many solutions and there is a massive opportunity.

“That’s the investment case for Novo Nordisk. Not just treatment of diabetes but attacking the source of the disease, opening up a whole new market.”

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About Maxime Le Floch

Maxime is an analyst with Regnan’s impact investment team. He focuses on Regnan Global Equity Impact Solutions Fund. Maxime has more than 10 years of experience in sustainable investment. Before joining Regnan he was an investment analyst with Hermes where he helped launch and manage the Hermes Impact Opportunities Equity Fund.

Australia this week sped past the RBA’s 2-to-3% inflation target and caught up with other global economies.

What’s next?

Beyond the headlines of yesterday’s 5.1% CPI result, the contribution of new dwelling purchase price and rents are useful bellwethers, says Anna Hong from Pendal’s Income and Fixed Interest team.

“New dwelling prices came in at 5.7% for this quarter — the highest since the turn of the century. Builders are finding it difficult to quote given the cost pressures they’re facing.”

Meanwhile rents turned the corner, contributing 0.6% this quarter. “Rent growth is accelerating across capital cities and there is more to come.”

This means increased pressure on the RBA to hike rates during the election campaign, says Anna.

“Markets have already priced in aggressive rate hikes in 2022 and a cash rate forecast above 3% by end of 2023. This may come as a shock to mortgage holders.

“The RBA is increasingly looking like it must join other central banks in dampening demand to rein in inflation rather than waiting for supply to fix itself.”

Investors are closely watching the upcoming COP26 climate change conference and hoping for certainty around net zero targets. Regnan’s Maxime Le Floch explains what to look for

• COP26 can provide greater certainty for investors
• Rich v poor countries a sticking point
• Find out about Regnan Global Equity Impact Solutions Fund

WHAT’S will investors be looking for from the much-vaunted United Nations COP26 Climate Change Conference starting in a little over a week?

Greater certainty, says Maxime Le Floch, investment analyst with Regnan’s impact investment team.

Le Floch wants to see “countries arrive in Glasgow and have targets and commit to net zero. Countries arrive with a plan to reduce emissions. The most important thing is the individual country’s plans.”

Forums such as COP26 allows nations to outline how they plan to get to net zero emissions, theoretically by the middle of this century.

Those pathways give investors greater certainty on the rules they face in the future. And that certainty is good for investing.

More countries have made commitments in recent months, including China, Japan and South Korea.

Others, including Australia, are still debating the politics.

In Australia, the federal coalition is yet to outline its ambitions, in part because of disagreements between the Liberal and National parties. However it’s likely that Prime Minister Scott Morrison will have some sort of offering by the time he leaves for Glasgow. 

Game theory

Global conferences like COP26 involve plenty of game theory, Le Floch says.

“If countries turn up and commit, or have previously announced their intentions, that’s a positive for other countries to commit to reducing greenhouse gases.

“That’s why China already committing to net zero emissions by 2060 is such a big deal,” he says.

Nations that provide concrete evidence of a pathway to reducing emissions are enabling greater investment, Le FLoch says.

It might be subsidies for electric vehicles, or carbon offset schemes or changed taxation arrangements.

Those factors become part of the investment decision, albeit not the central reason for buying or selling.

“As impact investors, we don’t rely on regulation, and we’re not waiting for it to happen,” says Le Floch, who is part of a four-person team managing Regnan Global Equity Impact Solutions Fund.

“There has to be an underlying economic dynamic to unlock value, without any change to regulations.

“But we do recognise that regulation drives adoption and creates an environment in which laggards are forced to improve and leaders and green innovators can thrive.”

He points to European offshore wind subsidies which were initially generous as part of a push to achieve carbon neutrality. But they have been phased out in some jurisdictions as offshore wind generation becomes cost effective. Investors in wind farms had to look well beyond the short-term subsidies.

Stumbling blocks to watch out for

The optimism of a global event like COP26 is well founded, but it can easily become unstuck.

“Typically, in a negotiation like this, the stumbling block is the distributive impact of climate change, both in terms of mitigation and adaption. Who is responsible for what, and what should we expect from rich and poor countries,” Le Floch says.

And conferences such as these don’t operate in isolation.

The International Energy Agency earlier this month forecast a need to triple investment in renewable energy to ensure fossil fuels were replaced without triggering an energy crisis.

“There’s a big gap at the moment and the IEA is explaining what’s needed to get on track. To accelerate that you need incentives and conferences like COP26 can help do that.”

It’s been six years since the Paris Accord.

That treaty was the first legally binding agreement to limit global warming to well below two degrees — preferably to 1.5 degrees Celsius — compared to pre-industrial levels.

As part of that, 196 parties agreed to reach peak greenhouse gas emissions as soon as possible and achieve climate neutrality by 2050.

This time around the UN Climate Change conference is being hosted by the UK in partnership with Italy.

It will take place from October 31 to November 12.

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About Maxime Le Floch

Maxime is an analyst with Regnan’s impact investment team. He focuses on Regnan Global Equity Impact Solutions Fund. Maxime has more than 10 years of experience in sustainable investment. Before joining Regnan he was an investment analyst with Hermes where he helped launch and manage the Hermes Impact Opportunities Equity Fund.

Impact investors are turning their attention to a human-made chemical that’s a big problem for water supplies. Regnan analyst Maxime Le Floch explains the opportunity

• Human-made chemical PFAS is a danger to waterways
• Innovative solutions are providing investment opportunities
• Find out about Regnan Global Equity Impact Solutions Fund

ABOUT 97 per cent of the world’s water is salty, or otherwise undrinkable.

The other 3 per cent needs to quench the thirst of nearly 8 billion people, water about 38 per cent of the global land surface to help grow crops and provide a myriad of other uses.

While it’s not always a scarce resource, water is limited. It needs to be appreciated as critical for life and fundamental to economic activity. It needs to be looked after.

Contaminants have always proven a major challenge for humans, and that’s only been exacerbated by urbanisation.

One particularly challenging contaminant is polyfluoroalkyl substances (PFAS). These are human-made chemical compounds that don’t otherwise occur in the environment.

They are very stable and resilient to breakdown — which is why they have been used extensively in industry and are now a problem in our waterways. In fact, it can take decades for the chemical bonds of PFAS to breakdown.

PFAS contamination was the cause of water contamination around the Williamtown air base in NSW in 2015, which triggered precautionary dietary advice and closure of fishing in the region.

A major problem for water supplies

Since the 1950s PFAS have been developed to make products resistant to heat, water, stains and fire. Most people have them in their homes in products such as carpet, food wrappers, non-stick cookware and fire-fighting products.

As a result, PFAS are now a major problem for water supplies.

“PFAS are problematic because they are widely used, highly persistent in the environment, bioaccumulate and biomagnify, are highly toxic across a range of human health factors, and are highly mobile,” says Regnan investment analyst Maxime Le Floch.

Le Floch is part of a four-person impact investment team at Pendal’s sustainable investment business Regnan. Maxime and his team manage the Regnan Global Equity Impact Solutions Fund.

“There are thousands of different PFAS. So far the regulatory focus has been on a subset of long-chain PFAS. But this is starting to change at least in Europe and Australia.”

Long-chain PFAS have a chemical make-up of more than six carbons. Short chain PFAS have fewer.

The trend towards short chain might eventually exacerbate the problem because they are harder to treat, Le Floch says.

Impact investing opportunity

Treating water — and specifically PFAS in water — is a long-term opportunity for investors.

Depending on regulators — and how they set maximum allowable concentration of PFAS — it could be an opportunity worth tens of billions of dollars in the US alone, Le Floch says.

“PFAS can be treated with established technologies but needs to be customised to each site to be effective.

“The value chain includes site assessment, project management, water treatment and waste disposal. Site assessment and waste disposal are the most difficult parts of the value chain.”

Water treatment innovator Evoqua targets PFAS

One company working on treating PFAS is US-based Evoqua Water Technologies.

Municipal drinking water suppliers provide a big opportunity for Evoqua — as do airports and military bases, construction and commercial de-watering and industrial water.

Regnan Global Equity Impact Solutions Fund holds a stake in Evoqua.

Le Floch says Evoqua’s work is very promising. But it is a young industry and there is little built-up knowledge around remediation project economics.

“Project length is a key question, in particular the initial assessment and pilot-testing phase before the full treatment equipment is installed,” he says.

But as the wealth of knowledge increases — and the size of the challenge and the opportunity become more apparent — investing in treatment of PFAS could prove rewarding.

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About Maxime Le Floch

Maxime is an analyst with Regnan’s impact investment team. He focuses on Regnan Global Equity Impact Solutions Fund. Maxime has more than 10 years of experience in sustainable investment. Before joining Regnan he was an investment analyst with Hermes where he helped launch and manage the Hermes Impact Opportunities Equity Fund.

 

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 EQUITY markets remained soft last week. The S&P500 fell 0.5%, bringing month-to-date performance to -1.9%.

In Australia the S&P/ASX 300 was flat, though there was some meaningful sector divergence. Metals and Mining came off 4.4% while Energy was up 3.5%.

There were two key drivers of this performance:

1. Concerns about Chinese growth in the wake of a potential default of Chinese property giant Evergrande, which led to a slump in bulk commodities
   
2. Concerns that central bank policy tightening may come through sooner than expected due to building inflation pressures

Covid and vaccines

Domestic news has been generally positive.

NSW Covid cases peaked at a lower level than feared and vaccine penetration has continued to grow solidly.

Take-up rate for the first dose has risen to 82.2% — up 3.7% compared to last week. This rate has been holding up well. That’s important since a higher rate will help relieve potential strain on hospital systems in future outbreaks and reduce the likelihood of future lockdowns.

The seven-day moving average for second-dose vaccinations is close to 61,000 this week — up from about 50,000 last week.

If this trend continues we might get to 80% full vaccinated — and further relief from lockdowns — before October 18.

Globally case numbers continue to improve, albeit marginally in the UK and the US.

Return-to-school impact can be seen in the higher ratio of kids in case numbers. Though this is tending to sustain case numbers rather than increase them.

Hospitalisation numbers have been slowly improving in both counties. This is leading to some evidence of improved sentiment in the US.

Economics and policy

Tension has been building for weeks around Evergrande, China’s (and the world’s) most indebted property developer.

Evergrande’s bond interest payments are due on September 23. The question is whether the market will see a bankruptcy or some form of debt restructure.

More importantly, people are contemplating whether this will have a cascading effect on China’s other property developers and the economy more broadly.

Weakened sentiment contributed to the precipitous drop in iron ore over the week.

We see great uncertainties around how this will eventually play out. There is a good chance a default is possible with the Chinese government choosing to send a strong message on property speculation.

But we think the outcome will be something the government can manage, since Evergrande is not a state-owned enterprise and is not as systemically important.

That said, we will reach a crescendo of concern over the next couple of weeks.

Outside China, the focus has been on renewed concerns that inflation is set to be persist for longer, leading to faster tapering and potentially an earlier move in rates.

Inflation fears in the US have come mainly from a combination of labour shortages and unemployment insurance (UI) payments coming to an end. The next few weeks will be an important test of the durability of labour tightness.

Recent pricing power surveys clearly indicate that US companies are pushing through pricing increases in a number of sectors. This reflects input price pressures, constrained availability of product and higher labour costs.

Also, gas prices continue to remain far higher than we have seen for years in the US and Europe.

Inventories are low heading into winter. There is a 70% probability of a La Nina weather event, which may lead to a colder winter. There are concerns elevated gas prices will persist, which has already led to higher electricity prices in the US and UK.

All eyes are on the Fed’s September meeting this week.

The market will closely watch how they signal the pacing of tapering and their quarterly update on the dot plots. The dots are expected to have shifted forward again towards the median rate rise around the turn of 2023. The other focus will be on the number of rate rises through to the end of 2024.

Similarly, there was media attention on unpublished forecasts by the ECB, which could see inflation rising 2% by 2025. This may lead to rates rising in 2023.

All this has added to the market’s wariness on the inflation impact on central bank policies.

Markets

The market saw a continued drop in iron ore price. The seaborne benchmark fell 22% last week and is now down 37% for the calendar year-to-date. In contrast the oil price was up by 3% and 45% in the same periods.

The main reason for this disconnect was iron ore’s reliance on Chinse demand, compared to oil’s link to global demand.

The fall in iron ore has been driven by a number of factors.

It had an over-extended starting point, driven by surging steel production in China in 1H21.

The production surge was then met by a dramatic slowdown starting from 2H21: steel production was down 18% in July and a further 10% in August.

The Chinese government has an aggressive rhetoric around holding down steel production through 2H21 for environmental reasons and trying to keep production growth flat for the full year.

These restrictions are expected to continue limiting steel production through to the end of the winter Olympics in late February next year.

At the same time the Chinese government has introduced policies to maintain controls of the property sector, which is a key driver of steel demand.

Fears for the overall sector have been exacerbated by the Evergrande situation.

Also weighing on demand, the Chinese economy has been generally softer recently due to rolling COVID lockdowns. More stimulatory policies on local government bond issuance that funds infrastructure spend are unlikely to kick in until 2022.

Lastly, the deteriorating relationship between China and Australia may have led to other measures impacting on the commodity price.

Where to from here? The debate is not so much whether iron ore bounces much, but rather whether it can hold in the US$100s or if it continues to move towards a longer term price of US$70.

The Evergrande final resolution may mark a sentiment low in China and its property sector.

Consequently, some measures to support the economy may be introduced such as the RRR cut.

We should still expect relatively subdued demand from China, but the real-time indicators on the economy look to be near their lows.

Global demand for steel remains strong, as evident from the very high global steel spreads, suggesting there are still cyclical tail winds.

Supply disruption also continues to emerge, with Vale announcing this week its iron ore production next year will be lower than expected.

Overall, this week could be the crescendo in negative sentiment before investors start to rebuilding confidence slowly.

Against this backdrop, equity markets overall are re-testing support levels.

There could be support in early evidence that the US economy is experiencing a re-acceleration as Covid cases start to stabilise and fall. And liquidity from Central Banks remains abundant.

Lastly, we note the rotation of value to growth has been mirrored by fund flows. Inflows to tech and outflows from cyclicals look to be at extremes.

As such, we continue to see cyclicals holding better from here.

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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.

Jeremy leads the Responsible Investment Distribution strategy across Institutional, Wholesale and For-Purpose clients.

He works closely with the Investment boutiques and Regnan Advisory to deliver client solution that seek meet both investment outcomes and sustainable goals.

Prior to joining the company, Jeremy held senior product and distribution roles at the Westpac-owned BT Financial Group (Listed Equity Products), Westpac Institutional Bank (Equity Derivatives and Debt Markets) and Citi (Global Markets and Banking).

Jeremy holds a Bachelor of Business (Charles Sturt) and a Masters of Applied Finance (Macquarie University). Jeremy is a CIMA® professional.

 

Notice of Termination: Pendal Total Return Fund (APIR: RFA0108AU, ARSN: 092 178 704)

 

The Pendal Total Return Fund (Fund) will terminate effective Thursday, 16 September 2021.

As an existing investor in the Fund, you are affected by this decision. 

Why is the Fund being terminated?

We consider that it is in the best interest of investors to terminate the Fund as we are no longer able to efficiently manage the Fund in accordance with its investment objective and investment strategy. We also consider that the Fund has little prospect of significant growth in funds under management in the foreseeable future.

How this affects you?

We will terminate the Fund on Thursday, 16 September 2021 and as soon as practicable, we will begin winding up the Fund. The assets remaining in the Fund will be realised and the proceeds distributed to all investors in proportion to their unit holding.

Applications, transfers or withdrawal requests received after 2:00pm (Sydney time) on Wednesday, 15 September 2021 will not be accepted.

What does this mean for you?

The cash proceeds from the termination of the Fund will be paid directly to your nominated bank account on or around Friday, 1 October 2021.

If there is a final distribution for the Fund, this will be paid directly to your nominated bank account prior to the cash proceeds from the termination. The details of the final distribution will be included in your December quarterly statement. 

You will also receive an annual tax statement following the end of the financial year during July/August 2022.

Questions?  

If you have any questions, please contact our Investor Relations Team during business hours on 1300 346 821.