Inflation, rates and how to think about bonds now, Which sectors look good for global and Aussie equities, How to judge a company’s climate plan

How can responsible investors tell if a company has a robust plan for dealing with climate change? Regnan’s head of research ALISON GEORGE offers a four-point checklist

• Investors need comfort that companies have robust climate action plans
• Regnan has a four-step checklist for analysis
• Find out more about sustainable investing leader Regnan

HOW can you tell if a company has a robust plan for dealing with climate change?

It’s a complicated question, says Alison George, head of research at sustainable investing leader Regnan.

But it’s important that investors have confidence that company climate action plans are appropriate and on track.

“Investors need to have confidence that climate risks are being managed well by the companies in their portfolios,” says George.

“And it is increasingly being brought to the fore in AGM season with an increase in shareholder resolutions and now the introduction of formal ‘Say on Climate’ votes initiated by companies themselves.”

The ‘Say on Climate’ initiative calls on companies to hold an annual vote on their emissions reduction progress. Regnan provides its clients with specific voting recommendations for ASX-listed companies on their climate-related activities.

George says it’s important to be aware that climate expectations vary between companies — some sectors need to move faster, given that there are technological barriers that will make it  more difficult for other sectors to decarbonise.

But she says a broad four step approach can help investors and companies alike understand if plans are on track

1. Is the plan credible?

The first step is assessing whether a plan is credible.

This includes ensuring it comprehensively covers the most material issues for the company and is clearly disclosed with credible and current sources for the analysis undertaken.

But it also means the plan should show evidence of broader considerations of the impact of the transition to net zero, including on the capabilities of the workforce and impacts on the wider community.

2. Is it ambitious?

An ambitious plan shows clear, comprehensive targets in the short, medium and long term on all material aspects of climate change, including emissions in an organisation’s value chain and physical risks to the business of a changing climate.

Ambition should be judged within the context of the sector and with an understanding of the magnitude of the task ahead.

This recognises that some decarbonisation pathways are not yet fully known, so where they are it is reasonable to expect that net zero be achieved ahead of 2050.

3. Is it real?

It is all very well to have a plan, but it must also be activated in the real world.

This means that it must be backed by sufficient resourcing and capability, appropriate organisational structure, capex plans and effective board oversight.

But it also means the company has provided evidence of progress to date and shown that its climate plan is embedded in governance and risk processes and has informed strategy development and decision making.

This also covers companies that aim to achieve emissions reductions through divestment.

The key question becomes whether overall reductions can be achieved or reasonably expected from the divestment? Or are the emissions simply being moved elsewhere.

4. Is the company acting against change?

Finally, and most critically, look for evidence that a company is not merely paying lip-service to climate action while actually lobbying against change.

Policy is crucial to drive meaningful climate action and there is a risk that companies may undertake activities aimed at swaying public sentiment and policy outcomes.

“This is a pre-eminent question,” she says.

“For those companies where there may be a vested interest in the status quo, voting deliberations should be especially attentive to this area as a threshold requirement for endorsement of the plan.”

Regnan says it expects to see evidence that the company is not involved in activities or lobbying that would delay decarbonisation efforts. It also seeks transparent reporting of positions and evidence of effective and ongoing board governance over this issue.

The upshot?

George says a company that passes all four of these tests is likely to have a solid climate action plan.

---

About Alison George

Alison George is Regnan’s head of research. She has deep experience in ESG, responsible investment and active ownership. Alison oversees Regnan’s research frameworks, processes and outputs, ensuring it remains at the forefront of industry practice and meets evolving clients needs.

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

INFLATION has continued to push higher in developed and emerging economies.

It certainly does not look transitory. There is a definite sense that central banks are behind the curve, which has caused significant declines in risk assets globally.

However higher global interest rates are not necessarily a negative for Emerging markets (EM) equity as an asset class.

US headline consumer price inflation in the year to March was 8.5%, a level previously seen in 1981 (when the Federal Reserve’s policy interest rate was 12%).

As the Fed slowly moves to tighten monetary policy, bonds have reacted. The 10-year UST has risen from 1.5% at the start of the year to 3.1% at the time of writing.

About three quarters of the increase is from higher real interest rates and only a quarter from higher inflation expectations.

Other developed market central banks are also slowly tightening in the face of rampant inflation data.

The Bank of England last week accepted that inflation was likely to reach double digits later this year — a level not seen in 40 years.

Emerging markets are largely countries that are dependent on capital flows.

Domestic demand economies (such as India and Turkey) require capital inflows to finance their current account deficits.

Export economies (such as Korea and Taiwan) are exposed to EM capital flows through their partial dependence on end demand from emerging markets (eg Korean companies selling to Latin American consumers); international financing of corporate borrowing in export economies (eg Brazilian companies borrowing in US dollars); and portfolio flows generally into emerging markets.

The US effect

When we talk about capital flows, we mean US dollar capital flows.

As Bank of England governor Mark Carney noted in 2019, the dollar represents the currency of choice for at least half of international trade invoices. That’s about five times greater than the US’s share in world goods imports and three times its share in world exports.

This gives the US dollar a massively outsized role in the global economy.

Carney said: “Given the widespread dominance of the dollar in cross-border claims, it is not surprising that developments in the US economy, by affecting the dollar exchange rate, can have large spill-over effects to the rest of the world via asset markets… The global financial cycle is a dollar cycle.”

A tightening of US monetary policy can have a drag on emerging economies and markets.

In the 1990s the US rate-hiking cycle began in April 1994 and finished in February 1995, which marked the end of the rally in EM equity.

This was a time, however, of fixed exchange rates. That accelerated the transmission of US monetary policy into emerging economies and is a poor analogue for today’s global financial system.

In the 2000s, with floating exchange rates in most of the emerging world, the Fed’s first hike was June 2004 and the last was June 2006.

EM equities (as measured by the MSCI EM Index) peaked in October 2007, having returned more than 230 per cent in USD terms from that first hike.

This strong performance was supported by the global economy which remained strong, with consequent support for the main exports of emerging economies.

In that cycle — from the first rate hike to the cyclical peak — commodity prices (as measured by the S&P GSCI Index) trebled, while Korean exports doubled.

The economic cyclical sensitivity of emerging market equities substantially outweighs their sensitivity to risk-free rates.

The view from here

The current cycle does resemble the 2002-07 cycle in some ways, with very strong commodity prices and many key emerging economies recovering from extended downturns.

The pattern of overlooking traditional industries in favour of high-tech business is another similarity.

There are also differences — for example the strength of the Chinese economy in the 2000s and its weakness now. Overall, though, it’s important to remember that in the last extended EM bull market the Fed hiked 17 times — from 1% to 5.25% — without stopping the strong returns from EM equity as an asset class.

---

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

It’s not an about-face, but there are signs the relentless pace of bearish bond news may be moderating, says Pendal’s head of government bond strategies TIM HEXT

THIS WEEK there’s no sign of volatility slowing down.

But something strange happened in the past few days: equity weakness finally seemed to give bonds a slight bid.

Normally equity weakness means worries about a slowdown — which means a bid for bonds. But with high inflation as the driver they have largely been moving together this year.

So what has gone on the past few days?

Well, there have been a few very early green shoots of easing pressure on inflation. Not enough to change the narrative, but enough to question the relentless moves higher in rates.

Firstly, Friday’s US job numbers showed that Average Hourly Earnings had a modest 0.3% increase in April. The last 3 months have now had an annualised equivalent rise of 3.7% — the lowest since March 2021 and down from a 6.3% pace late last year.

Secondly, commodity prices have started to better reflect the lockdowns in China.

Thirdly, the Goldman Sachs Financial Conditions index has finally hit 99 — the level where it spent most of 2018 and 2019.

This is a lot higher than the 97 last year which triggered the Fed’s concerns of conditions being too loose at the start of 2022, as this Bloomberg graph shows:

Clearly these do not represent an about-turn, but rather a moderating of what has been a relentless pace of bearish bond news so far in 2022.

This week’s US CPI numbers will be watched closely.

With the market pricing cash rates in Australia at 2.75% by the end of this year — and 10-year bonds at 3.5% — there is a lot priced in. So any signs central banks can ease the pace of tightening will lead to a significant fall in yields.

We will keep a close eye on equities and commodities in the week ahead to see if this is just a correction or has more legs.

---

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

---

About Pendal

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

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

Contact a Pendal key account manager

Here are the main factors driving the ASX this week according to our head of equities Crispin Murray. Reported by portfolio specialist Chris Adams.

Find out about Crispin’s Pendal Focus Australian Share Fund
Find out about Crispin’s sustainable Pendal Horizon Fund

TIGHTENING monetary policy prompted further market falls last week.

The issue is not so much the rate hikes — which have been well flagged — but widespread scepticism that central banks can tame inflation without causing recession.

Inflation is presented as a material issue. But in the same breath central banks are saying rates only need to get back to neutral levels to contain it.

The market is concerned that the goal of a “soft landing” is wishful thinking.

Negative sentiment was compounded by the Bank of England warning of recession as they increased rates, raising the risk of stagflation. China’s reiteration of Covid-zero adherence also weighed last week, as did weaker US productivity data and the need to rebuild oil reserves.

The positive correlation between equities and bonds continued.

US 10-year Treasury bond yields rose 19bps, breaking through 3%. Meanwhile the S&P 500 failed to maintain a mid-week bounce, finishing the week down 0.2%. It is now off about 11% since March 29 and down 13.1% for the calendar year to date.

Growth continues to do worse. The NASDAQ is given up 17% since Mar 29 and 22.2% year to date.

The S&P/ASX 300 could no longer maintain its previous disconnection, falling 3.2% for the week as REITs joined growth stocks in underperforming under the weight of higher bond yields.

Resource stocks also declined as commodity prices weakened on concerns over future demand.

Confidence in the RBA’s inflation credentials appears low — 10-year yields rose 35bps to 3.47%, versus 1.6% at the start of the year.

We continue to remain cautious on markets in the near term.

Economics and policy

The US Fed raised rates 50bp and indicated moves of the same size at the next two meetings, with 25bp per meeting likely thereafter.

Chair Powell said a 75bp move would not be necessary. This initially reassured markets. But it was later viewed as an unnecessary constraint on the Fed’s ability to react to inflation, and bond yields continued to sell off.

Powell continues to soothe market concerns, saying he can bring inflation back to target without causing a recession. He noted the risk of recession was below what the market was pricing. He was also non-committal on the need to raise rates above the neutral level, which he puts at 2-3%.  

However, the market is far more sceptical.  There is a view – reflected in comments from recently retired Fed member Richard Clarida – that rates need to go well above neutral to reduce inflation.

Clarida estimates at least 3.5%. Others are saying 4%.

The way to think about policy is that financial conditions need to tighten to a level which brings growth materially below the trend of 2%.

Based on historic relationships this requires equities to fall further, higher rates, wider credit spreads and a stronger US dollar.

This is all consistent with weaker markets. As long as it remains orderly we are unlikely to see the Fed intervene.  

Another way to think about this paradox is that unemployment is probably running 50bp below sustainable levels.

To dampen wage inflation unemployment needs to increase by at least that amount, which history indicates is consistent with a recession.

The latest employment data was broadly neutral.

Payrolls were a touch better than expected at 428,000 new jobs versus 380,000 expected. However the previous two months were revised down 39,000, offsetting the gap. Average hours worked were +0.3% vs expectations of 0.4%. All this signals the rate of expansion in jobs is slowing.

The household survey saw a significant drop in jobs (-353,000) — but this needed to be -559,000 to be considered statistically significant.

The participation rate also declined, reversing positive signs of people returning to work in the last couple of months.

All up, none of this shifts the dial for the Fed in terms of resolving the fundamental problem of too few people available for each vacancy.

There are signs that inflationary pressures are beginning to moderate. Average hourly earnings are plateauing, some commodity prices (including copper) have stalled and money supply growth has decelerated.

This is not enough to dampen fears around the level of required tightening.

The market is also mindful of:

• Higher oil prices
• A stronger dollar
• Higher nominal yields
• High mortgage rates
• Tighter policy

All this suggests markets will remain under pressure in the near term.

Market outlook

The positive correlation between bonds and equities remains, which encourages portfolio de-risking.

Looking at technical indicators, there is a lot of focus on sentiment being at levels consistent with a market low.

However we counsel caution on this view, since flows into the equity market have remained strong. This suggests we have not yet seen the capitulation on equities – particularly on the retail side – which could signal a true trough in sentiment. 

We may need to see the FAANGs roll over for this to occur – and there are signs that this may be in train.

Australia participated in the sell-off. This was partly due to concern over the impact of slowing growth on commodity prices. The big move in bond yields also weighed on REITs and the growth names. Energy is remaining defensive, with oil prices proving resilient.

There has been large sector divergence across the ASX300 in the calendar year to date.

From the best-performed to the worst:

• Energy: Positive fundamentals, making it the most defensive
• Consumer staples: Supported by predictability and lack of cyclicality
• Financials: Becoming less defensive in the past two weeks, probably as the market has started to focus on the prospect of a domestic economic slowdown
• Property: The break-out in Australian bond yields has turned this sector from defensive to under pressure in last two weeks.
• Healthcare: Has lagged due to growth characteristics, but becoming more defensive recently
• Discretionary: Has been under pressure due to cyclical concerns and the unwind of Covid benefits
• Tech: Remains the weakest

Last week we saw some bank half-yearly results and a number of company updates.

The bank results were reasonable, but cost pressures seem to be emerging as an offset to the benefit of higher rates. The issue going forward is that they are domestic cyclicals.

We do not expect a major bust in the housing market. A softer outlook is likely to weigh on sentiment but corporate updates were generally positive.

But the market is increasingly looking through the near term and focusing on the reality that the RBA — like the Fed — needs to engineer a material economic slowdown which will not be good for cyclical earnings.

---

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  

Contact a Pendal key account manager

How to think about cash right now, China’s impact on fixed interest and global equities, a critical juncture for Aussie equities

The RBA’s credibility has taken a hit, but it can now get on with normalising policy like most other developed market central banks, says Pendal’s TIM HEXT

TODAY’S RBA announcement indicates rates are headed back to neutral (at least) and stagflation has arrived.

The RBA has finally capitulated on what was obvious to everyone else – inflation isn’t going to behave and the time for accommodative monetary policy has long passed.

Other central banks got the memo late last year but the RBA clung to the idea that inflation was temporary and would behave itself.

Now its forecasts are for headline inflation at 6% this year, underlying at 4.75% and only/maybe falling back to 3% by mid-2024.

That last forecast assumes they have tightened rates back to neutral.

The Reserve is now wary of giving too much guidance. But it’s trying to make up for lost ground, assuring everyone it will do “what is necessary to ensure that inflation in Australia returns to target over time”.

This is a little short of “whatever it takes”. But it opens the possibility of tight monetary policy (above 2.5%). The market certainly thinks so as cash rates in the market for 2024 nudge above 3.5%.  

This should concern not only bond holders, but holders of all financial assets as the RBA seems to be no longer separating supply-led and demand-led inflation.

Given its lack of ability to control supply-led inflation, it sounds like the RBA is prepared to hit demand harder than previously thought… Not that different to the US Federal Reserve after all.

The RBA also confirmed it will not be reinvesting maturing bonds — and not selling any of its holdings.

This glide path to a smaller balance sheet can be called Quantitative Tightening (QT) — but is largely what everyone expected and really is a sideshow.

The RBA will feel relieved that what must have been a constant stress of being so far behind the market is now over.

Their credibility has taken a big hit. But they can now get on with normalising policy, just like every other developed market central bank (okay, except the Bank of Japan).

---

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

---

About Pendal

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

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

Contact a Pendal key account manager

Here are the main factors driving the ASX this week according to our head of equities Crispin Murray. Reported by portfolio specialist Chris Adams.

Find out about Crispin’s Pendal Focus Australian Share Fund
Find out about Crispin’s sustainable Pendal Horizon Fund

US equity markets continue to fall and have now erased the March rebound, breaking through to new lows.

The S&P 500 fell 3.3% last week and is now down 12.9% for the calendar year to date. The NASDAQ was off 3.9% and has lost 21% for the year.

The S&P/ASX 300 continues to display more resilience — down 0.8% for the week but still up 1.2% for the year. It has now reversed almost all its underperformance of the US market since the start of the pandemic.

The expected hit to resources occurred on Tuesday, but hope of Chinese stimulus led to much of that unwinding through the week.

Four issues are weighing on markets:

1. The pace and scale of central bank tightening, with the Fed due to meet this week
2. The impact of China’s lockdowns on supply chains and economic growth
3. The effect of the Ukraine war on growth and energy supply
4. The emerging headwind of cost inflation to corporate earnings

While some economic data released last week looks a bit soft, it is unlikely to change the Fed’s current course of back-to-back 50bp rate hikes.

There was some improvement in sentiment on China following comments from President Xi around supporting growth via stimulus.

We saw Russia turn off gas supply to Bulgaria and Poland, raising concerns over an escalation. There was some speculation over the weekend that the EU may start refusing Russian oil in May.

An ugly inflation print in Australia means this month’s RBA meeting is now “live” in terms of a rate hike.

A 2% drop in the Australian dollar as the US dollar continues to rise adds to the RBA’s conundrum regarding inflation.

Markets

There are signs of stress building in markets. But we are also seeing weak sentiment and some pockets that look to be oversold.

This is a critical juncture in terms of which way markets break. We remain cautious in the near term.

Key areas of concern include:

1. Dislocations in foreign exchange markets. The Japanese yen and Chinese yuan continue to fall, while the euro is now also testing downside support levels against the US dollar. The last time it traded at parity was 2002.
   The yen has already broken down to 20 years lows. Such US dollar strength can be a problem for markets since it complicates the ability to contain inflation outside the US. It also leads to potentially significant capital outflows and puts a lot of strain on emerging markets, particularly those with US dollar denominated debt. Markets tend to be more volatile when currencies are not stable.
2. Credit markets continue to deteriorate as the US high yield credit default swap index moves higher. It has more room to go as the economy slows.  
3. The correlation between bonds and equities appear to have reversed.  Correlation has been low post-GFC, where bonds offered protection against equity sell-offs. It is now high, making it harder for investors to hedge portfolios.
   This has an impact on the amount of money investors can deploy in equities – as does recent high levels of volatility. This means lower liquidity, exacerbating the likely effect of quantitative tightening. 

US earnings

At a headline level the season looks good so far (about 55% of the market has reported).

Aggregate earnings per share (eps) for the year are up 9% versus an expected 5%. There are more beats than usual.

However a lot of the momentum is driven by the energy sector. Stripping it out, eps growth falls to 3%, which is a material deceleration.

The market was hoping decent earnings from Meta, Apple and Microsoft would improve sentiment towards technology — but it was not enough to hold the sector up.

Amazon disappointed after logistic and fuel costs were US$2 billion higher than expected. It wore also US$4 billion of internal costs relating to sub-optimal staff issues and excess capacity in fulfilment.

While Amazon sees no signs of a slow-down in consumer demand, it could still come later in the year.

This result highlights the emphasis that will now be placed on cost. This may be the first warning sign of a weaker labour market.

The other issue to watch is that Amazon alone represents 10-11% of total US private non-residential construction activity, and that share has doubled since 2015. They also represent 25% of US warehouse construction. So clearly any signs of slower capex spending may also affect other sectors.

Buy-backs will start to kick again soon which should support the market.

China

Concerns over Chinese growth continue to mount. However last week we saw more confidence in the policy response from Beijing.

The Politburo’s April 29 meeting emphasised keeping the epidemic contained and the economy on track.

These twin goals are clearly contradictory — but the message is China will strive for its growth target.

This may indicate they would accept falling short, given the extenuating circumstances. But it also suggests they will take action to try to get close, which likely means substantial infrastructure stimulus.

Chinese stocks and resources stocks performed well in response.

Beijing is facing a myriad of issues: the effect of lockdowns on consumer demand, supply chain disruption, a weak housing market, high household debt, slowing global growth and a currency appreciating against competitors.

The question is whether policy measures will be effective in dealing with these issues.

Projects have lagged, there are constraints on labour and materials and cost inflation is high. There is a risk the infrastructure lever won’t work this time.

European gas

Russia turned off the gas to Bulgaria and Poland raising the risk of more broad-based disruption.

The move looks carefully considered as a signal. Both countries only import small amounts and have alternative sources of supply, so the economic impact is likely to be limited.  It does demonstrate that the risks to supply disruption are higher than the market is pricing.

There is speculation the Europeans may begin to restrict Russian oil imports, having found some alternative sources.

This would probably underpin oil prices if it occurs, which have been under pressure from Chinese lockdowns.

Macro data

Last week we saw:

1. Eurozone inflation came in higher than expected at 7.5% year-on-year. Core inflation was 3.5% — the highest level in 20 years. Expectations around EU rate hikes have been brought forward from September to as soon as July.
2. Headline quarterly US GDP growth was weak. Though this reflected the previous inventory build unwinding and high net exports, so it’s not yet a sign of consumer weakness.
3. US PCE indicators of inflation were a bit lower than expected, coming in at +0.3% month-on-month and 5.2% year-on-year. This is a result of some goods disinflation, softer health care inflation and a decline in financial services and insurance costs. Ultimately, the policy goal is 2% inflation, so this is not likely to shift the Fed’s current hawkish stance.
4. The US employment cost index rose to new cycle highs in Q1. Other, more temporal measures have already signalled this. But the need to contain the flow-on effects of wage inflation are driving the need to raise rates materially. Private sector wages and salaries were up 5% year-on-year.
5. Australian inflation was worse than expected, rising 2.1% quarter-on-quarter and 5.1% year-on-year. The trimmed mean (the RBA’s preferred measure) was up 1.4% quarter-on-quarter versus an expected 1.2% — and is at its highest level since 1990. It was up 3.7% year-on-year versus the 3% expected by the RBA and 3.4% consensus. This is the highest level since 2009. Housing construction was up 13.7% year-on-year and was a key driver. Food inflation is running at 4.3% year-on-year and rents are starting to rise.

This is expected to lead to faster and earlier rate moves in Australia.

Two-year rates are now expected to hit 3%, which is among the highest in developed nations. This is surprising given the degree of household debt and variable mortgages.

This highlights the challenge that the economy needs to be slowed quickly. If rates don’t get high it will only be because the economy is weak.

---

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  

Contact a Pendal key account manager

Pendal Sustainable International Share Fund (APIR: BTA0568AU, ARSN 612 665 219)

Investment Manager, Strategy and Exclusionary Screens

We have decided to replace AQR Capital Management, LLC (AQR) as the investment manager of the Fund and bring management of the Fund in house, leveraging the expertise of Pendal Group’s global equities teams. The change will take place on or around 31 May 2022.

The Fund will continue to be an actively managed global equities portfolio. The portfolio will typically comprise around 90 stocks (though this will fluctuate over time), blending the Pendal Global Select and Pendal Sustainable Concentrated Global Shares strategies with a much stronger focus on fundamental stock analysis. There will also be enhanced scope for company engagement and the incorporation of ESG and sustainability considerations in the management of the Fund.

The exclusionary screens of the Fund will be enhanced consistent with broad market feedback around the screens required for a contemporary sustainable strategy, improving the Fund’s sustainability footprint by tightening the screens for fossil fuels and weapons.

The Fund will avoid investing in companies which directly:

• extract or explore for fossil fuels (specifically, coal, oil and natural gas); or
• produce tobacco (including e-cigarettes and inhalers); or
• manufacture controversial weapons (such as cluster munitions, landmines, biological or chemical weapons, nuclear weapons, blinding laser weapons, incendiary weapons, and/or non-detectable fragments).

The Fund will also avoid investing in companies which derive 10% or more of their total revenue directly from:

• fossil fuel-based power generation, or fossil fuel distribution or refinement (coal, oil and natural gas)*;
• the production of alcoholic beverages;
• manufacture, ownership or operation of gambling facilities, gaming services or other forms of wagering;
• manufacture of non-controversial weapons or armaments;
• manufacture or distribution of pornography; and
• uranium mining for the purpose of nuclear power generation.

* Companies with a climate transition plan may be exempted from this exclusion, provided that they have in place a Paris Agreement aligned transition plan and produce climate-related financial disclosures annually, which in both cases we consider credible. We define fossil fuels as coal, oil and natural gas.

Why are we making the change?

We have decided to implement these changes because we believe it is in the best interests of investors to bring the management of the Fund’s international strategy in-house, following a review of the Fund’s existing external investment manager, AQR. We expect the changes will deliver improved investment and sustainability outcomes for the Fund, providing investors with better risk-adjusted returns over the medium to long term.

What will stay the same?

The Fund’s investment objective, benchmark, management fee and buy-sell spread will remain unchanged.

What do you need to do?

No action is required. You will be able to continue to invest or withdraw from the Fund.

An updated Information Memorandum (IM) reflecting the change in investment manager, investment strategy and exclusionary screens is available on request. If you would like a hard copy of the IM, please contact us.

If you have any questions about your investment or would like further information regarding the changes, please contact our Investor Services Team on 1300 346 821 (for Australian investors) or +612 9220 2499 (for overseas investors) from Monday to Friday, 8.30am to 5:30pm (Sydney time). For any questions regarding how this change may impact your own financial situation we recommend that you speak to your financial advisor and/or tax accountant.

Pendal Active High Growth Fund (APIR: BTA0488AU, ARSN: 610 997 674)
Pendal Active Growth Fund (APIR: BTA0125AU, ARSN: 087 593 682)
Pendal Active Balanced Fund (APIR: RFA0815AU, ARSN: 088 251 496)
Pendal Active Moderate Fund (APIR: BTA0487AU, ARSN: 610 997 709)
Pendal Active Conservative Fund (APIR: BTA0805AU, ARSN: 087 593 100)
Pendal Balanced Returns Fund (APIR: BTA0806AU, ARSN: 087 593 011)

Investment Manager

We have decided to replace AQR Capital Management, LLC (AQR) as the investment manager of the international shares portion of the Funds and bring management in house, leveraging the expertise of Pendal Group’s global equities teams. The change will take place on or around 31 May 2022.

Why are we making the change?

We have decided to implement this change because we believe it is in the best interests of investors to bring the management of the Funds’ international strategy in-house, following a review of the Funds’ external investment manager, AQR. We expect the change will deliver improved investment outcomes for the Funds, providing investors with better risk-adjusted returns over the medium to long term.

What will stay the same?

The Funds’ investment objective, benchmark, management fee and buy-sell spread will remain unchanged.

What do you need to do?

No action is required. You will be able to continue to invest or withdraw from the Funds.

An updated Product Disclosure Statement (PDS) for each Fund reflecting the change in investment manager is available on www.pendalgroup.com. If you would like a hard copy of the PDS, please contact us.

If you have any questions about your investment or would like further information regarding the changes, please contact our Investor Services Team on 1300 346 821 (for Australian investors) or +612 9220 2499 (for overseas investors) from Monday to Friday, 8.30am to 5:30pm (Sydney time). For any questions regarding how this change may impact your own financial situation we recommend that you speak to your financial advisor and/or tax accountant.