Financial markets have been through all sorts of crises and this is one from which the economy will eventually emerge, explains Pendal Head of Multi-Asset, Michael Blayney
Commuters take precautions against cornonavirus in the central Chinese city of Chongqing, January 23, 2020. Source: Shutterstock
TWO THINGS are clear about COVID-19 (coronavirus) at the time of writing:
a) The attempt to contain the coronavirus spread in China will have a very significant impact on economic data and corporate results.
b) The scale of the impact is very unclear and most commentators are just guessing.
We do not have any unique source of information regarding the Chinese economy and its implication for Chinese financial markets.
As per our process, though, we believe levels and trends in shorter-term economic data are generally under-appreciated by equity investors.
This note aims to focus on some of the data series we believe will be important to understand growth and activity levels in the Chinese economy.
It is important to note, when looking at all Chinese data, that the first quarter includes the Spring Festival (Lunar New Year), which is highly disruptive to calendar month data. In 2019 the New Year was in February but in 2020 it’s January.
Key data sources
In terms of sources, firstly there are Chinese government-related media sources.
These include the Global Times (a news service run by the Chinese Communist Party’s People’s Daily news organisation) and the Xinhua News Agency (the official Chinese state press agency).
For example, a Global Times article published on February 3 opened: “The novel coronavirus outbreak in China is expected to harm economic growth by at least two percentage points during Q1 2020, according to forecasts.”
The Chinese Communist Party (CCP) expects Q1 to be bad. This is not an exercise in managing market expectations on anything.
Car sales are often an important metric of domestic demand in middle-income economies and China has high-quality vehicle sales data released in the second week of the following month.
This has to be taken in the context of the economic cycle (and also the possible realisation of “peak car” in urban China). Year-on-year car sales have been negative since mid-2018 but the next few months will be an important guide.
Trade data is highly useful.
Import data (in both US dollar and Chinese yuan we prefer the dollar data) also comes in the second week of the month.
Like the car sales data series, this showed clear signs of a recovery in the December numbers. The size of any reversal will be key.
Similarly, China takes 25.1% of Korean and 23.9% of Taiwanese exports. Korean preliminary export data (released around the 22nd of the month, covering the first 20 days of that month) are particularly advanced.
The January print showed a continuation of a recovery that began in October 2019. The next release, due February 21, will be another important sign.
Other data released on a timely, monthly basis include rail, air, toll road and port volume metrics. For example, train passengers departing Beijing in the first 21 days of the Spring Festival travel rush were -11% year-on-year.
Classic economic data that must also be considered include PMI surveys and credit and loan volume data (we have written extensively on the importance we place on credit and loan data in EM in general and in China in particular).
Less reliable data
Some of the less reliable higher-frequency data sources include Leading Economic Indicators (LEIs), commodity prices and market moves.
LEIs are infamous for correlating with market moves. But the OECD China LEI, as an example, has six underlying constituents — one of which is… the Shanghai Stock Exchange.
Similarly, it is too easy to construct a process that notes the rising price of a commodity, extrapolates strong demand in China for that commodity, and then buys the shares of the producers of that commodity which have already benefited from the rising product price.
Ultimately, we believe monthly top-down economic data is generally overlooked by equity investors focused on quarterly or semi-annual bottom-up corporate results.
We expect this process to be of significant advantage in the next few months in China, as the impact of coronavirus plays out.
With concern growing among clients about the impact of their investments on the environment and society, combined with the increase in fund managers talking about ESG and responsible investing, the Sustainable Development Goals (SDGs) are in the spotlight. 
They are shaping the way investors of all sizes and persuasions are thinking about the social and environmental impacts of their investments. Fund managers are responding with products that contribute to the achievement of the SDGs.
But what are they, and how do they actually apply to investments?
The SDGs were borne out of the United Nations as a blueprint for economic development that is just and sustainable, now and into the future. The SDGs agenda is a set of 17 globally agreed Goals – each with a subset of targets and indicators – to be achieved by the year 2030.
While the SDGs were intended to guide policy makers around the world, there is a clear role to play for the private sector. Companies and investors alike are well positioned to allocate capital that will contribute towards the Goals.
There are a number of ways the SDGs can apply to investments – and some are more credible than others. The SDGs are especially helpful for those interested in ‘impact investing’, or achieving environmental and social outcomes alongside financial returns.
In this article, we provide context on the SDGs, outline investment approaches that make a meaningful contribution to the Goals, and support investors in navigating this emerging investment theme.
Pendal Global Emerging Markets Opportunities Fund
(APIR: BTA0419AU ARSN: 159 605 811) – Important information
Reduction in management costs from 6 February 2020
With effect from 6 February 2020, the Fund’s management costs will reduce from an issuer fee of 1.40% pa to 1.18% pa.
The Australian bushfire crisis has prompted an unprecedented response from everyday Australians offering help to those affected.
Pendal is supporting these efforts with a program to match employee donations for bushfire relief and recovery.
We are matching 1:1 staff donations to registered charities assisting with bushfire relief and recovery up to a total of $200,000.
As a global initiative this includes staff at our UK-based subsidiary J O Hambro Capital Management.
Pendal is providing additional paid leave for Australian employees directly affected by the bushfires or involved in recognised voluntary emergency services.
We are also providing Australian employees with five days of paid volunteer leave for the purpose of helping with bushfire related volunteer work.
Counselling services for employees are also available.
Pendal offers our thanks and acknowledgement to volunteers helping to fight fires and support recovery efforts across Australia.
Pendal International Share Fund (APIR: BTA0056AU, ARSN 087 593 299)
Investment Manager
As stated in our notice of 22 November 2019, we have decided to replace AQR Capital Management, LLC (AQR) as the investment manager of the Pendal International Share Fund (Fund) and appoint the Pendal Global Equities team. The change will take place on or around 21 February 2020.
We wish to provide further details regarding the change of manager and the potential impact to investors. This update should be read in conjunction with the notice of 22 November 2019.
Transaction costs
The change in investment manager will require the sale and purchase of securities within the Fund as we transition to the new portfolio. As is currently the case there will be costs such as brokerage and taxes involved in these transactions which will be borne by the Fund.
Pendal estimates that the total cost of changing the investment manager will be in the order of 0.35% to 0.45%. This will be a one off cost that covers: the sale of current securities; the purchase of securities selected by the Pendal Global Equities team; and the increase of the buy-sell spread detailed in our notice of 22 November 2019. This amount represents transaction costs incurred by the Fund and is not a fee paid to Pendal.
These costs were taken into account in assessing whether the proposed changes to the portfolio was in the best interests of investors.
Tax impact
Pendal does not provide advance notice of the tax impact of transactions within the portfolio to investors. This was, however, a factor in our consideration of whether the proposal is in the best interests of investors.
At 30 June 2019, the Fund had sufficient net realised capital losses to cover any unrealised capital gains. We expect these losses to be available to offset any realised capital gains in the current financial year.
Pendal Core Global Share Fund (APIR: RFA0821AU, ARSN 089 938 492)
Investment Manager
As stated in our notice of 22 November 2019, we have decided to replace AQR Capital Management, LLC (AQR) as the investment manager of the Pendal Core Global Share Fund (Fund) and appoint the Pendal Global Equities team. The change will take place on or around 21 February 2020.
We wish to provide further details regarding the change of manager and the potential impact to investors. This update should be read in conjunction with the notice of 22 November 2019.
Transaction costs
The change in investment manager will require the sale and purchase of securities within the Fund as we transition to the new portfolio. As is currently the case there will be costs such as brokerage and taxes involved in these transactions which will be borne by the Fund.
Pendal estimates that the total cost of changing the investment manager will be in the order of 0.35% to 0.45%. This will be a one off cost that covers: the sale of current securities; the purchase of securities selected by the Pendal Global Equities team; and the increase of the buy-sell spread detailed in our notice of 22 November 2019. This amount represents transaction costs incurred by the Fund and is not a fee paid to Pendal.
These costs were taken into account in assessing whether the proposed changes to the portfolio was in the best interests of investors.
Tax impact
Pendal does not provide advance notice of the tax impact of transactions within the portfolio to investors.
This was, however, a factor in our consideration of whether the proposal is in the best interests of investors. At 30 June 2019, the Fund had net assets of $181.7M of which $0.8M were net unrealised capital gains.
Pendal Core Hedged Global Share Fund (APIR: RFA0031AU, ARSN 098 376 151)
Investment Manager
As stated in our notice of 22 November 2019, we have decided to replace AQR Capital Management, LLC (AQR) as the investment manager of the Pendal Core Hedged Global Share Fund (Fund) and appoint the Pendal Global Equities team. The change will take place on or around 21 February 2020.
We wish to provide further details regarding the change of manager and the potential impact to investors. This update should be read in conjunction with the notice of 22 November 2019.
Transaction costs
The change in investment manager will require the sale and purchase of securities within the Fund as we transition to the new portfolio. As is currently the case there will be costs such as brokerage and taxes involved in these transactions which will be borne by the Fund.
Pendal estimates that the total cost of changing the investment manager will be in the order of 0.35% to 0.45%. This will be a one off cost that covers: the sale of current securities; the purchase of securities selected by the Pendal Global Equities team; and the increase of the buy-sell spread detailed in our notice of 22 November 2019. This amount represents transaction costs incurred by the Fund and is not a fee paid to Pendal.
These costs were taken into account in assessing whether the proposed changes to the portfolio was in the best interests of investors.
Tax impact
Pendal does not provide advance notice of the tax impact of transactions within the portfolio to investors. This was, however, a factor in our consideration of whether the proposal is in the best interests of investors.
At 30 June 2019, the Fund had net assets of $220.2M of which $22.1M were net unrealised capital gains (before the application of the 50% CGT discount). The Fund also had carried forward revenue losses of $10M related to currency hedging which may be available to offset realised capital gains.
Pendal has appointed a London-based impact investment team to launch a Global Equity Impact strategy in late 2020.
The team will join Regnan, a leading provider of ESG research, engagement and advisory services, which is wholly owned by Pendal.
The appointment marks the expansion of Regnan’s capabilities into responsible investment funds management.
The four-person team will be led by Senior Fund Manager Tim Crockford working with Mohsin Ahmad, Maxime Le Floch and Maxine Wille.
The team previously managed the Hermes Impact Opportunities Equity Fund, which Mr Crockford co-launched in 2017.
The team will be based in the J O Hambro Capital Management office in London.
‘Global leader in responsible investment’
“One of our strategic objectives is to become a global leader in responsible investment,” said Pendal’s Chief Executive of Group, Emilio Gonzalez.
“The move to 100 per cent ownership of Regnan in early 2019, and now the appointment of a specialist impact investment team, demonstrates our commitment to delivering on this strategy.
“The impact investment market is currently worth over half a trillion US dollars and there is an obvious and growing demand from clients for this capability.
“Given our 35-year heritage in responsible investment, we believe we have an important role to play in delivering positive impact alongside strong investment returns for clients.
“Our combined deep knowledge and expertise in this area enables us to deliver innovative and credible Environmental, Social and Governance (ESG) and impact investment solutions that will meet client needs and grow funds under management.”
Late 2020 launch
Regnan’s Global Equity Impact strategy is expected to launch in late 2020 and be available across Pendal’s global distribution network.
The team will aim to generate long-term outperformance by investing in mission-driven companies that generate value for investors by providing solutions for the growing unmet sustainability needs of society and the environment.
The fund will use the United Nations Sustainable Development Goals (SDGs) as an investment lens:
“We are delighted to welcome Tim and his team to Regnan and the Pendal Group,” Mr Gonzalez said.
“The team hire expands our investment capability while enabling us to leverage Regnan’s ESG expertise.”
Background on Regnan
Regnan is a leading provider of ESG research, engagement and advisory services.
Its focus on environmental and social issues traces back to Melbourne’s Monash University in 1996.
Regnan was established to investigate and address ESG-related sources of risk and value for long-term shareholders in Australian companies.
It has evolved to become a global leader in long-term value, systemic risk analysis and responsible investment advisory.
Regnan’s in-house team of experienced analysts produce rigorous, relevant ESG investment analysis.
From this research and insight, the team tailors solutions to meet the specific needs of its asset-owner clients.
These clients use Regnan’s services for a range of purposes from stock selection, portfolio construction and stewardship, through to all aspects of responsible investment framework development and implementation.
Regnan also advocates for ESG considerations to become mainstream through contribution to the public policy debate, board and committee-level participation in industry bodies, and submissions to government.
Regnan staff recently co-authored a UN Principles for Responsible Investment report, Active Ownership 2.0: the Evolution Stewardship Urgently Needs.
Pendal Sustainable Balanced Fund – Fee Change
Pendal Sustainable Balanced Fund (Fund} APIR: BTA0122AU, ARSN: 637 429 237)
Reduction in management costs from 2 December 2019
From 2 December 2019, the issuer fee for the Fund will reduce from 0.90% pa to 0.80% pa