Regnan’s impact investing team looks for companies that are well-placed to solve the world’s biggest problems. This is the story of one of those companies, British battery developer Ilika.

• More efficient batteries will revolutionise transport
• Solid-state batteries are at the cutting edge of technology
• Ilika is one of the few listed players in the sector

A FEW big problems are holding back the mass adoption of electric vehicles — and they’re mainly related to battery technology.

Electric vehicle batteries are slow to charge compared to pumping petrol. And they don’t store enough energy for long drives.

British innovator Ilika is developing solid-state battery technology to address both these problems.

“Innovative technologies are providing a solution to better batteries,” said Regnan’s Mohsin Ahmad. “This is the next big leap.”

Battery technology goes back a long way.

In 150 BC in Mesopotamia, the Parthian culture used a device known as the Baghdad battery, made of copper and iron electrodes with vinegar or citric acid. While they were probably used mainly for religious ceremonies, they were also the first known batteries.

Ever since, society has worked to create more efficient batteries – a race that’s been supercharged in recent decades with the development of renewable energy and electric vehicles.

“Batteries are the Holy Grail,” says Mohsin Ahmad, a fund manager in Regnan’s Equity Impact Solutions team. “It’s why we’ve taken a position in Ilika.” (Find out more about Regnan Global Equity Impact Solutions Fund here.)

British-based Ilika is a pioneer in the development of solid-state battery technology.

Lithium ion batteries commonly found in mobile phones have a liquid electrolyte solution keeping the cathode and anode apart.

On the other hand solid state batteries use a solid electrolyte which plays the role of separator, enabling the delivery of much higher energy density.

The benefits range from sharply faster charging rates and longer life cycle and storage rates, to improved safety and easier recyclability, Ahmad says.

Commercial applications

The potential market for solid state batteries is huge — and Ilika has two main targets.

The first is micro batteries used in medical devices and Internet of Things nodes.

The market for medical devices is huge and growing, and the benefits of long life, tiny batteries are clear. Ilika hopes to be producing micro-batteries for commercial use from next year.

The Internet of Things nodes are the infrastructure that will eventually allow driverless cars and communication between objects. While still further away, the potential is huge.

The second target market is electric vehicles (EVs). As Europe and North America continue to mandate far greater use of EVs, solid state lithium cells have the potential to achieve extended range and faster charging – two of the biggest impediments to sales and usage.

“There’s not many pure-play listed players that are focused on solid state batteries. Ilika has a number of partnerships with OEMs [original equipment manufacturers] including Honda, Jaguar, Land Rover and McLaren,” Ahmad says.

“We don’t think the market is appreciating the potential of micro batteries. These tiny batteries can go into implantable medical devices, they can be used in manufacturing facilities, and they can operate at high temperatures.

“They can enable Industry 4.0. Ilika has relationships with customers already and they are expecting first production next year.”

Making good progress

Production of batteries for EVs is still five or six years away, Ahmad says, but they are making good progress and the potential is huge.

“The battery can be one of the biggest cost components of an electric vehicle, and particularly while EV charging infrastructure is still being built, it would solve the ‘range anxiety’ problem,” he says.

Ilika has a bet on EVs and that is a very big potential market. There are also opportunities in medical devices and the Internet of Things.  Other potential applications could include wind turbine blade testing and wireless automotive sensors.

“That makes it an attractive investment proposition, Ahmad says.

“This is the next big leap, and it’s only a matter of time before the technology provides a commercial solution to better batteries.”

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About Mohsin Ahmad

Mohsin is a fund manager with Regnan’s impact investment team. He focuses on Regnan Global Equity Impact Solutions Fund. Before joining Regnan, Mohsin was a senior analyst working on the Hermes Impact Opportunities Equity Fund. He has worked on thematic equity funds such as water, clean energy and agriculture.

Tim joined Pendal Group in February 2017 with responsibility for managing Australian Bond portfolios. Tim has extensive experience in banking, financial markets and funding.

Tim joined Pendal Group from NSW Treasury Corporation (TCorp), where he was General Manager, Funding and Balance Sheet, with responsibility for defining and executing TCorp’s funding programme and strategy. Tim’s prior experience includes senior positions in Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Tim holds a Masters of Economics of Development from the Australian National University and a Bachelor of Commerce from the University of New South Wales.

Fund Objective: The Fund aims to provide a return (before fees, costs and taxes) that exceeds the Bloomberg Global Aggregate Index AUD hedged by 1% p.a. over rolling 3 year periods.

Half of all Australian advisers are expected to offer sustainable investing products by next year as interest in green and social bonds grows. Pendal’s Murray Ackman explains why

• 50% of advisers will offer responsible products next year; two-thirds by mid-2020s
• Green, social and sustainability bonds issues growing rapidly
• Not all bonds are alike — investors should watch ‘bang for buck’

A LITTLE over a decade ago, a group of Swedish pension funds phoned the World Bank looking for a way to lend money to projects fighting climate change. The result was the first ever Green Bond.

Today, it’s a market that is growing rapidly.

The number of green, social and sustainability bonds issued in Australia in the first half of 2021 almost equalled the total for 2020.

The variety of issuers is growing too, with more than 30 different institutions issuing bonds across a wide range of sectors.

“This is a market that is becoming more sophisticated and we’re pleased to be able to participate in this fast-growing market,” says Murray Ackman, a credit ESG analyst at Pendal Group. (ESG stands for Environmental, Social and Governance).

“We believe the future of investing will continue to be directly funding impact to benefit our environment and the less fortunate.”

So what is a green bond? And how can they play a part in a well-constructed portfolio?

Fundamentally, the term green bond refers to a bond issued to raise finance for a climate-related solution such as clean energy or energy efficiency.

Similarly, a social bond raises finance for an initiative that aims to improve social outcomes in the community like affordable housing or support for indigenous people. You can read here about a social bond that helped put a roof over the head of Sam and his family.

Green bonds can form an important part of a responsible investing portfolio. Financial advisers are rapidly turning towards responsible investing, according to industry researcher Wealth Insights.

About 40 per cent of Australian advisers now offer responsible or sustainable investing products to their clients. This is expected to rise to 50 per cent by next year — and two-thirds by the middle of the decade.

Pendal participated in a few different types of bonds this year, including a bond issued by the Asian Development Bank which funds projects that improve gender equality and women’s empowerment, known as a gender bond.

The funds raised will be used in projects including training and financing women entrepreneurs in Sri Lanka and providing vocational training to women in Laos.

Other types of green bonds include the Climate Awareness Bond from the European Investment Bank, the lending arm of the European Union.

This bond funds renewable energy and energy efficiency projects across Europe, including an offshore wind farm near Portugal, a battery factory in Poland and an energy efficient shopping centre and railway station in Finland.

Closer to home, the NSW Treasury Corporation Green Bond funds green projects including low carbon transport and buildings, renewable energy and land conservation.

Elsewhere in Australia, the National Housing Finance and Investment Corporation provides cheaper and longer financing to community housing providers to increase the amount of affordable and social housing in Australia.

How can green, social and impact bonds play a part in a portfolio?

Ackman says the performance of green bonds shows they can take the place of traditional bond allocation in a portfolio – and that many investors are taking a broader look at the market.

“We’re finding more and more clients incorporating funds that invest in green, social and sustainable bonds as part of their normal bond allocation,” he says.

When choosing which bonds to invest in, Ackman cautions against simply investing in any bond that says it will bring about an impact.

“We have a rigorous process where all criteria must be met before we can invest. Our impact goals are to find investments that seek to achieve targeted environmental and social outcomes in addition to financial returns,” he says.

Sometimes, the other activities of an issuer can be a warning sign.

“We won’t even look at an impact bond if we’re not happy with the issuer. A tobacco company with a green bond to recycle packaging would not pass our screens or our sniff-test of a sustainable issuer.

“With use of proceeds bonds, we must be happy with the underlying projects.”

Ackman says he has seen a number of impact bonds that ostensibly would support people who impacted by COVID.

“However, after looking a bit closer, we determined these weren’t the types of bonds we wanted to invest in as there were really just repackaged vanilla bonds.”

The other important thing to consider is how much impact the bond will have, what Ackman calls the ‘bang-for-buck’.

“We have an impact database so we calculate and compare how much impact we are helping to achieve by each bond.”

Read the green, social and sustainability bond full report here

Amy is the Head of Income Strategies at Pendal, leading a suite of active income solutions designed to preserve capital and generate attractive returns for investors. She began her career in 2004 at Citigroup in London and moved into asset management with Thames River Capital in 2007. Since 2017, Amy has been a key member of Pendal’s fixed income team, focusing on delivering strong investment outcomes through active asset allocation and rigorous decision-making. With a career built on navigating complex market cycles, Amy believes in the power of active investing to shape lives and afford financial freedom. She holds a Masters degree in Economics from Emmanuel College, Cambridge.

Significant Features: The Pendal Active Long Volatility Fund is managed to generate excess returns from exposure to rising volatility across selected currency, equity and commodity markets. The strategy employs a long volatility approach to achieve this outcome.

Fund Objective: The Fund aims to provide a return (before fees, costs and taxes) that exceeds the RBA Cash Rate by 4-6% per annum over the medium to long term.

Here’s what’s driving Australian equities this week according to Pendal’s head of equities Crispin Murray. Reported by portfolio specialist Chris Adams.

THE FIRST week of reporting season was largely positive, helping Australian equities outperform other markets.

At this point there seems to be surprisingly low levels of concern about the impact of local lockdowns. The S&P/ASX 300 gained 1.33% last week and the S&P 500 was up 0.75%.

Things were quiet on the macro front. US inflation data was strong — but in line with expectations. The focus remains on Delta and the potential implications for economic growth.

Bond yields were stable and there was a small rotation away from growth stocks.

COVID outlook for Australia

The market is grappling with two aspects of the domestic Covid outbreak.

First, the risk that Melbourne also lapses into extended lockdown. This would mean effectively half the nation’s economy was affected by restrictions.

The second issue is speculation on the timing of an easing in restrictions, which is related to vaccine penetration.

Vaccination rates continue to rise — up from 0.74% of the population per day last week to 0.87% now.

NSW is running at more than 1% daily. We could see the rest of the nation reach this point in September as greater supply becomes available. This would be in line with the peak rates of vaccination in other regions.

Simple extrapolation of 1% daily gets us to 70% of the population vaccinated in the first week of October and 80% two weeks later.

The impact of restrictions — combined with the effect vaccinations have on transmission — suggests we could see a reasonable degree of re-opening in October or November.

The question is whether governments will be willing to tolerate a material number of Covid cases, assuming hospital systems are able to handle the pressure.

The link between vaccinations and lower severity of Delta cases — and hence less pressure on medical systems — remains evident in the UK and Israel.

The degree of hospitalisations in these countries equates to 2000 to 2600 hospital patients in Australia, compared to the sub-400 level we see here now. This highlights the policy dilemma we face.

Covid outlook for the US

In the US case numbers and hospitalisations continue to rise.

This reflects a disparity on vaccination rates among the States since fewer than 2% of admissions are fully vaccinated. It also reflects a less systematic approach to protecting vulnerable Americans.

The question is whether the US will follow the Indian and UK path. If so, cases should peak in the next two to three weeks.

This is important given the pressure building on hospital capacity. About a quarter of Americans live in areas where ICU occupancy is running higher than 85%.

Covid outlook for China

The situation in China appears to be stabilising. Seventeen provinces have reported outbreaks — the same as last week — and reported cases are falling.

However the hard measures used to clamp down on the outbreak have come at an economic cost.

The Chinese port of Ningbo-Zhoushan — the world’s biggest by bulk commodity volume — has been largely closed since August 11. Containers are now re-routed through Shanghai, creating greater global supply chain delays. (Ningbo-Zhoushan is the world’s third-busiest container port).

Beijing’s policy response will be important to watch.

Short-term measures include permit renewals for coal mines and extra steel capacity. Priority is placed on supporting activity and economic growth even though the tools are at odds with longer-term policy objectives of more balanced and greener growth.

Economic outlook

There are clear signs that Delta is starting to weigh on business and consumer confidence in the US. Surveys on both measures have turned down recently.

The US CPI print showed year-on-year inflation remains above 5%. While high, this is the first time it did not exceed consensus expectations in recent months.

This signals that some drivers of recent inflation — such as used auto prices — are starting to recede.

On the other hand areas such as shelter — which may drive more persistent inflation — are starting to pick up. 

Market highlights

Concerns over slowing economic growth are reflected in bond yields (which remain well supported) and softness in commodities.

There was an unusual “flash crash” in gold last Monday, when a large seller hit the market during an illiquid Asian time zone. Gold fell 4% before bouncing off the US$1680/ounce support level. This reinforces current scepticism in the metal.

Australian equities outperformed global indices last week after a decent start to reporting season.

Broadly, we are seeing better earnings and higher distributions than expected. Most importantly, a lack of excessive caution among companies regarding the current economic outlook and lockdowns is reassuring the market.

Gold stocks were generally weak following price volatility. Northern Star (NST, -6.5%) was the worst performer in the S&P/ASX 300. Evolution (EVN) was down 4.9%.

REA Group (REA, -6.1%) delivered a reasonable result, though the market focused on management’s note that Sydney listings were down 22% in July due to lockdowns. The fact that lockdowns saw 40-50% falls in Melbourne listings last year shows the industry is getting better at managing this issue.

REAemphasised how quickly the market has consistently bounced back from previous lockdowns. The property website has a number of longer-term growth opportunities, including data and insight services as well offshore ventures in India and the US.

Transurban’s (TCL, -5.8%) revelation of a $3.3 billion cost blow-out on Melbourne’s West Gate project — off an initial cost base of $6.7 billion — disappointed the market. The toll road operator conceded it would have to bear some of the pain in covering these costs to achieve some resolution on the issue. This was despite claiming that the blame lies with the government and contractor.

The market is also wary about the impact of lockdowns on traffic volumes, though this has little impact on longer-term valuation. TCL may need to raise capital if it successfully buys out the remainder of the Westconnex project.

QBE (QBE, +12.1%) was the best performer on the ASX 100 last week. It delivered its first well-received result for some time. Insurance premium growth is driving strong revenue momentum. Costs remain under control, supporting an earnings recovery. QBE is attractively valued in this light — well below historical relative valuations — which helped drive a strong stock price response.

Elsewhere in insurance we saw results from Suncorp (SUN, +8.4%) and IAG (IAG, +8.8%). SUN is enjoying revenue momentum and flagged a constructive outlook for insurance margins. This is allowing strong capital return, with a payout ratio at the top end of expectations, a special dividend and a market buyback.

IAG’s result was less compelling, having pre-announced. It is demonstrating lower revenue growth and less clear cut margin improvement than peers. Nevertheless, the stock reaction reflects more confidence in the insurance sector.

Downer’s (DOW, +12%) result was good. Free cash flow was strong and the company is buying back stock. Markets fears around wage pressure and the impact of lockdowns largely failed to materialise. DOW has successfully shifted from a capital-intensive model with unpredictable earnings and a large exposure to mining service contracts, to a more predictable urban services business with lower capital intensity. We expect this to improve the valuation rating over time.

James Hardie’s (JHX, +6.2%) result for 1Q FY22 demonstrated how a strong, well-managed franchise operating with cyclical tailwinds can deliver more operational leverage than the market expects.

The combination of a supportive cycle, higher pricing, more favourable product mix and gains in market share saw JHX grow revenue 21% versus the same quarter in FY19. Management guided to 20% revenue growth for the full financial year.

The longer term outlook is positive. There is an emphasis on gaining share in the home remodelling market in regions such as the north-east US, where JHX has not previously done as well.

Telstra (TLS, +4.2%) was largely in-line with expectations. The Network Applications and Solutions (NAS) division slightly disappointed. But the clear message was the rebasing of earnings as a result of NBN was over and earnings were now growing.

Mobile is key. It grew 18% in the second half, with average revenues per user increasing. This should continue to flow through, as will more cost-out. Further detail is expected in a September Investor Day. The dividend looks underpinned and may grow. TLS is returning some proceeds of their asset sales via buy-back.

Elsewhere Commonwealth Bank (CBA, +0.3%) beat the market’s earnings expectations, largely due to lower provisioning for bad debts. It is performing better than the other big banks in terms of loan growth, particularly in the small business sector.

Overall this did not translate into much growth in revenue or pre-provision profits due to margins and higher costs as the company invested in its digital shift. Whether this is an opportunity to differentiate itself from the other banks, or more a defensive move in response to competition from other payers, is key area of debate.

CBA’s outlook for margins was subdued, which weighed on the stock. On the plus side, it announced a $6 billion buy-back and flagged no significant concerns from current lockdowns. CBA remains on a punchy valuation despite limited growth opportunities. We continue to prefer other names in the financials space.

National Australia Bank (NAB, +3.8%) provided a quarterly update. There was little new information, but cash earnings were running higher than market expected and margins remained stable. Costs and impairments were both a bit lower than expected.

Goodman Group (GMG, -3.1%) grew EPS 14%, but disappointed a market which was looking for an upgrade to FY22’s guidance of 10% earnings growth. It continues to do well operationally and the development pipeline is strong as are assets under management.

A fall in cap rates has revalued their portfolio upwards. This means an upgrade may only be a matter of time. However a valuation over 30x P/E is factoring in a lot of good news.

Finally, AGL (AGL, +0.3%) reminded the market of the challenges it faces, with earnings guidance for FY22 coming in 15% lower than market expectations. The big issue is the company’s path out of trouble, given earnings declines and excess debt.

A demerger remains planned, but it is clear the company is under-capitalised given the pressure on earnings and remediation costs of future plant closures. Ultimately this will need some form of policy from the government to help underwrite the outlook, but we have no certainty this will occur.

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.

A monthly insight from James Syme and Paul Wimborne (pictured), managers of Pendal’s Global Emerging Markets Opportunities Fund 

• As vaccination rates increase we’re starting to see what a post-Covid world will look like
• Suggestions of a ‘new-normal’ are often wrong, but some recent trends will endure
• Find out about Pendal Global Emerging Markets Opportunities Fund

As US author William Gibson said: “the future is already here — it’s just not very evenly distributed.”

From an investing viewpoint, the big change in developed and emerging economies is the shift in fiscal and monetary policies.

Support to economies and financial systems after the 2008 crisis was at the time shockingly large. But it has been dwarfed by the stimulus response in 2020-21.

JP Morgan estimates the balance sheets of central banks in developed economies will increase by US$11.7 trillion in 2020-21. The aggregate size will be US$28 trillion by the end of this year.

In most of these countries central banks are the biggest single buyer of government bonds due to those economic support programs as well as vastly-expanded healthcare systems.

As economies recover, policy focus is turning to ending quantitative easing and tightening policy. But this is deliberately slow.

The stimulus will sit on government and central bank balance sheets for years to come, but the tapering is carried out with an eye on allowing inflation to run at higher levels.

This tolerance of inflation should be a net positive for nominal GDP growth around the world and also for commodity prices.

This should create a different, more positive, economic environment for more indebted and more commodity-intensive emerging economies.

The enduring ‘new normal’

We have seen signs of shifts in some industries in Emerging Markets.

Suggestions of a “new normal” are often proved wrong, but some recent trends may endure.

The move to an online, digital and e-commerce-based world is a long-term trend, but that trend has accelerated markedly in the last 18 months. Most companies that have benefited expect to keep their new customers.

We have various exposures to this theme in the portfolio, particularly food delivery and online games.

Another shift likely to endure is the shift in travel and tourism patterns.

International travel has collapsed, but so, noticeably, has business travel.

This has been partly replaced — particularly in big countries such as Brazil and China — by very strong growth in internal travel and tourism, including high-end travellers who would previously have gone abroad. Wide-body jets normally used for international long-haul flights are now servicing internal tourist routes.

There has also been a strong rise in dedicated freight flights as cargo capacity in passenger flights declines and e-commerce volumes ramp up.

Also, online bookings continue to replace brick-and-mortar travel agents. We have exposure to all these trends in the portfolio.

Covid drives political change

Covid has driven changes in the stability or direction of politics in several countries.

Some governments have overseen weak or chaotic responses to the pandemic. In places where infection rates and death tolls have been high, it’s been difficult or impossible to govern.

The main incidence of this has been in Latin America, where the human impact of Covid has been worst.

We wrote in June about the challenging political environment in smaller countries of the region. The human and economic impacts of the pandemic have been major drivers of the swing towards populism or socialism in Chile, Peru and Colombia.

A combination of Covid-driven lockdowns and poverty have led to the worst unrest in South Africa in more than 20 years (though it’s yet to coalesce into a coherent political movement).

Where populists are in power, the pandemic has been a major challenge to incumbents’ popularity.

We see this starkly in Brazil, where opinion polling on the Bolsonaro presidency has largely tracked Covid case data.

In Turkey, economic stress is elevated because of policy mistakes as well as the impact of Covid. But the effect is that the governing Justice and Development Party (AKP) and President Erdogan are closer to losing power than at any time since the AKP came into power in 2003.

Governments claiming to operate on a more technocratic basis (sometimes using this as an excuse for holding to weaker democratic values) have not been immune.

In Malaysia the governing Bersatu party lost its coalition partner and was (at the time of writing) using the pandemic-driven suspension of parliament as a tool to cling to power.

So far only the smaller Latin American countries are showing evidence of permanent change as a result of Covid. But there will be many electoral cycles in emerging markets in the next few years.

The pandemic may well prove a decisive factor in next year’s elections in Brazil, Colombia and the Philippines.

Some of these changes may not prove lasting, and doubtless others will appear. But it is definitely the case that the post-Covid world will differ from what came before.

Investors need to factor in those risks and opportunities.

About Pendal Global Emerging Markets Opportunities Fund

James Syme and Paul Wimborne are senior portfolio managers and co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here.
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here.