The fashion industry is responsible for 5% of carbon emissions. But companies like Lenzing are solving that. Regnan’s MAXIME LE FLOCH explains how

• New wood-based fibres make fashion sustainable
• Austria’s Lenzing Group is a pioneer
• Find out about Regnan Global Equity Impact Solutions

What are you wearing?

If you’re like most people, your clothes are probably made of cotton produced with pesticides, fertilisers and hundreds of litres of water.

Or they might be synthetic, manufactured from petroleum and destined to end up as micro-plastic ocean pollution.

“The fashion industry has a lot to answer for,” says Maxime Le Floch, an analyst with Regnan’s impact investing team.

“Fashion is responsible for 5 per cent of annual carbon emissions. Some 6 per cent of global pesticide production is applied on cotton crops alone.”

But what if there was a solution?

Le Floch recently visited the Austrian headquarters of the Lenzing Group, which is pioneering the production of fabrics made from sustainably sourced wood pulp that are suitable for use in everything from shirts, shorts and shoes to towels, nappies and wet wipes.

Lenzing is part of Regnan Global Equity Impact Solutions Fund.

Its flagship fabrics — called lyocell, modal and viscose — are made from cellulose, the compound that makes up the cell walls of plants. They use 10 times less water to make than cotton and produce fewer carbon emissions than polyester.

The forests that supply Lenzing’s wood pulp bring other sustainability benefits, creating habitats for animal and insect life, improving biodiversity and sequestering carbon.

The company even powers its manufacturing plants with the wood left over from pulp extraction.

“And the performance of the fabrics is extremely good — they have good tensile strength, resist crushing, and their moisture management is very good,” says Le Floch.

“They are rapidly expanding the applications — they can even replace fabrics like silk and the denim in jeans.”

Already, some of the biggest names in fashion use Lenzing’s fabrics in their clothing, including H&M, Levi’s and ASOS.

Le Floch says a company like Lenzing suits impact investors because it has the potential to create genuine sustainability alongside strong financial returns.

Currently, wood-based fibres represent just 6 per cent of the $500 billion-plus global textiles market.

“The applications are expanding all the time. It may not completely replace all fabrics but if you go from 6 per cent to say 8 per cent that’s a massive total addressable market expansion.”

Role of an impact investor

As an impact investor, Regnan’s relationship with Lenzing goes further than simply holding shares.

“Using wood fibre for fabric is good but it shouldn’t come from primary forest or ancient forest.

“Lenzing are already auditing to make sure that doesn’t happen, but we have raised it with their head of sustainability and CEO that we want them to have a more systematic approach and communicate it a bit better, because we think this is also something that is part of their advantage.”

Still, for all the benefits of wood-based fabric, the textiles industry has a long way to go to sustainability.

The western world’s shopping habits are only making things worse, with fast-fashion, rapidly-produced, cheaply-made clothes bought and discarded after only a few uses.

“There’s a dramatic lack of recycling — 87 per cent of clothing is incinerated or in landfill,” says Le Floch.

“Half a million tonnes of plastic microfibers are dumped in the ocean each year — that’s the equivalent of 50 billion plastic bottles.

“So, we need to keep perspective — we think lyocell fabrics are a big part of the solution but there are other wider issues within the fashion industry that must also be tackled.”

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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.

China is one of the few countries lowering interest rates. Pendal’s head of income strategies AMY XIE PATRICK explains why — and what it means for investors

You can also listen to this podcast on Apple or Spotify

An excerpt from this podcast

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Amy Xie Patrick, Pendal’s head of income strategies:

The first thing to remember about these China authorities is they are not independent monetary authorities as we know them in Australia and the US.

The central bank in China has been lowering interest rates because the economy quite frankly is in a rut.

Most major investment bank analysts expect growth in China will fall to levels not seen over the last decade.

Quite frankly China will struggle to get above the 4% threshold for the next year or perhaps even more.

So the reason why China central bank is easing when the rest of the world is tightening, is because its economic situation looks a lot more dire.

China’s economic cycles over the last decade have largely been self-engineered.

It usually booms to a point where authorities get concerned about whatever is causing that boom.

And typically that’s always been property. China’s property market is quite unique — it is the one place in the world where its top-tier cities have vacancy ratios of around about 25%.

So just think about that.

About a quarter of the properties in big cities like Shanghai and Beijing sit vacant. They’re not even being rented out. There is a huge oversupply of properties.

Property is a store of wealth for the Chinese population as a whole.

But the amount of debt that gets accumulated behind the sector (mainly on the developer side) has gotten authorities worried that debt levels will become unsustainable if they continue to stimulate the economy out of trouble.

Regnan has just published its first annual impact report, showing how investors are helping make the world a better place

• Impact investors aim to make a positive difference and strong returns
• Regnan’s impact report shows how investing makes a difference
• Download Regnan Global Equity Impact Solutions Impact Report 2021 (PDF)

CAN you make the world a better place by carefully choosing where to invest?

Regnan’s equity impact investing team believes the answer is yes – and they lay out their case in their first annual impact report.

Regnan Global Equity Impact Solutions fund invests in businesses we believe are best placed to solve the environmental and social challenges of our time.

The goal?

Generate market-beating, long-term returns by identifying companies that are innovating and disrupting their way to solutions for the planet’s biggest problems.

The report shows investee companies in the fund are:

• Training young doctors in Brazil, one of the most medically under-served countries in the world (Afya)
• Producing low-carbon cement to transform the building industry (Hoffmann Green Cement)
• Fighting homelessness in the UK (Home REIT)
• Developing better batteries for electric vehicles that charge 6 times faster (Ilika)
• Making fabric from tree fibres to replace cotton, using less water and emitting no net carbon (Lenzing)

And these are just the companies added to the portfolio in 2021.

The team’s proprietary taxonomy — built on the United Nation’s Sustainable Development Goals — has identified eight themes for making an impact, from improving life expectancy to the energy transformation.

Two themes stood out in 2021:

• Health and well-being was thrust into the spotlight by the pandemic, which has lifted policy-maker emphasis on healthcare provision, well-being and prevention
• A growing realisation that the world consumes resources at a higher rate than they can be replaced put the concept of the circular economy — which reuses and recycles production — into the global discourse

Investing in these enormous undertakings is made possible by Regnan’s “systems thinking” approach which seeks to generate positive, measurable social and environmental impact alongside a financial return.

“Our approach is to include impact in the investment decision, not to treat it as an afterthought,” says head of equity impact solutions Tim Crockford in the report.

“Investors can be confident that we assess impact every step of the way.”

As part of its approach, Regnan conducted 67 portfolio engagements in over the year, including 37 linked directly to environmental, social, governance or disclosure objectives.

Environmental engagements were dominated by decarbonisation, with several portfolio companies announcing net zero commitments. Diversity, equity and inclusion featured in the social engagements.

Details of these and other investments are in the Regnan Global Equity Impact Solutions Strategy’s inaugural Annual Impact Report 2021, which can be downloaded below.

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• Digital simulation drives innovation
• Software that supports UN Sustainable Development Goals
• Find out Regnan Global Equity Impact Solutions Fund

YOU’VE driven a car designed on a computer — but have you driven one designed by a computer?

The rising sophistication of simulation software means your next car — or at least parts of it — will have had it performance simulated and tested by computer software, says Regnan analyst Maxime Le Floch.

Engineering simulation integrated into computer-aided design software is providing important innovations across many different industries, dramatically cutting the time to create and test new designs, improving manufacturing efficiency and slashing costs and resource usage.

“We need to speed up innovation across the global economy — it is specifically something called out by UN Sustainable Development Goals nine and 12 which highlight resource efficiency and enhancing scientific research,” says Le Floch, an investment analyst with Regnan’s Global Equity Impact Solutions team.

“Simulation software helps improve efficiency in the way we use environmental resources and it’s also greatly improving innovation.”

Cloud-based simulation software has made staggering strides in recent years. Systems that once simulated a single feature of a vehicle like its reaction to wind flow can now run 1000s of tests across a wider range of physics, testing a vehicle design for safety, engine performance, fuel efficiency and more.

“Physical prototyping is expensive and it uses resources,” says Le Floch.

“In the car industry, simulation means that instead of having to build physical prototypes of cars and smash them into walls at all kinds of speeds and angles, you can instead run more simulations.

“This means you can run thousands of different simulations, changing lots of different small parts, which you wouldn’t be able to do otherwise.

“It means you also get much better products that are more optimised and more efficient, with a reduced risk of defects.”

It is not just the car industry that has latched on to simulation software — the techniques are equally well used across industries as diverse as healthcare, energy, construction and consumer products.

And it’s not only used for new product design but also to monitor and optimise existing systems.

“A ‘digital twin’ is a 3D software model of a machine or piece of equipment or even a full factory,” says Le Floch.

“The model gets fed real time data from sensors on its real-world counterpart and can simulate and predict what might happen.

“It can be used for predictive maintenance that issues a warning ahead of a part failing and allows you to intervene.

“And you can test what might happen if you want to make a change like running a production line faster.”

Simulation supports sustainable innovation

The software is also being used extensively in the renewable energy industry, for example to simulate different wind conditions and understand how that affects the performance of the turbines, says Le Floch.

Le Floch says simulation software is providing three benefits for investors and for the planet:

• It’s improving the performance of products in use by maximising their efficiency and reducing their downtime and energy usage.
• It’s saving money and resources that used be consumed in the R&D process.
• And it’s speeding up R&D and spurring innovation, which is critical to the world solving its sustainability problems.

Regnan’s Global Equity Impact Solutions Fund has a position in US-listed simulation software leader Ansys, which has a stated aim of “helping innovative companies deliver radically better products”.

“The world has a broad need to innovate to meet the SDG goals — not least in decarbonisation where we have a lot of existing technologies but there’s a need to greatly enhance innovation,” says Le Floch.

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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.

Pendal portfolio manager BRENTON SAUNDERS explains which sectors look interesting for mid-caps right now — and how to think about the ESG transition

An excerpt from this podcast

When investing in the current environment, how do you think about long-term themes such as Environmental, Social and Governance (ESG) factors?

There are several different timeframes over which to think about ESG.

The development of the de-carbonised economy by its very nature will take a long time.

There will be three periods broadly:

• The existing status quo
• A transition period where we’ll have an overlap between old and new technologies, and
• A transition to the new

Once you understand that, it’s really about characterising companies in terms of where they sit in these transitions.

Are their business models aligned with any one specific phase?

If so, are they making their way across those phases to an environment where they can contend with the de-carbonised, ESG kind of world?

Or are their business models fairly constrained to one of those thematics?

In the latter case we are very careful about how and if we invest in those sectors because this transition will take place over the course of the next 10 years.

That’s definitely within the context of an investible timeframe.

So we have to be very careful about assessing a company’s ability to make the transition.

Rising commodity prices are triggering investor interest in companies that can recycle, process waste and optimise production to reduce costs, says Regnan’s TIM CROCKFORD

• High demand for recycling and automation solutions 
• Environmental challenges are also economic challenges
• Find out about Regnan Global Equity Impact Solutions fund  

RISING commodity prices are triggering investor interest in companies that can recycle, process waste and optimise production to reduce costs, offering opportunity for sustainable investors, says Regnan’s Tim Crockford. 

The concept of sustainable consumption and production is part of UN Sustainable Development Goal 12, which highlights that the global material footprint – the total of all raw materials used in production – has increased 70 per cent between 2000 and 2017. 

Higher inflation underpinned by soaring prices for energy, metals and food have put SDG12 at the centre of the global macroeconomic debate. 

“SDG12 is focused on minimising your inputs, minimising your wastage,” says Crockford, who heads up equity impact solutions at Pendal’s responsible investing unit, Regnan.

“That’s been a big area of focus for me and the team for the last 18 months or so. 

“There is obviously an environmental imperative there, but increasingly with the cost of inputs rising dramatically there is now a financial imperative.” 

Crockford says there is an opportunity for investors to lean in to SDG12 and identify companies that can help reduce input needs, recycle and drive towards a circular economy that reuses waste. 

“If your bill of material is increasing, and a company can sell a product or service that can reduce the bill of material for you, that company is now going to see some demand off the back of what’s going on in the commodity space.” 

Leaders in SDG #12

Crockford offers three examples of companies placed to win from the principles in SDG12:

Toronto-listed ATS Automation Tooling Systems provides automation systems to manufacturing companies in industries like healthcare, food and beverage, transportation and consumer products. 

“Its reason for existence is to help customers optimise the cost of production by reducing the cost of doing business,” says Crockford. 

Another example is Nasdaq-listed PTC, which offers digital transformation and internet-of-things software that integrates devices and sensors for businesses. 

“The idea is that you can figure out where your pressure points are in terms of manufacturing mistakes and wastage in terms of too much material being used, using sensors and data to analyse the manufacturing process,” says Crockford. 

At the other end of the production cycle, Crockford points to Germany’s Befesa, a recycling company that collects hazardous waste and residues and processes them back into raw inputs. 

“They can extract the zinc content out of recycled steel. They are solving a double problem – finding a way to dispose of this hazardous material and extract economically useful commodities out of it. 

“They are the biggest steel dust recycling company in the world. They are the only one that has started recycling in China, which is of course the largest steel producing market in the world.” 

These companies help save material – which is critical for building a sustainable future – but they also provide the immediate benefit of saving costs. 

“Environmental challenges are also real economic challenges,” says Crockford. 

And they are winners in an inflationary environment: “The financial return on investment for these sorts of products increases as the cost of your inputs goes up.” 

About Tim Crockford

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

Few sectors of the economy are as sensitive to changes in interest rates as property. Pendal portfolio manager JULIA FORREST explains the outlook for REITs in this fast podcast

An excerpt from this podcast

The REIT sector has priced in assets falling probably 15 to 18%. So it has been fairly efficient in terms of predicting where interest rates and bond rates would go, and the likely impact on asset values.

We’re already seeing that reflected in pricing at the moment.

So the sector does look like reasonable value, factoring in where we think interest rates will go.

We’re not expecting any severe stress in the sector, unlike in the GFC.

The sector is reasonably well positioned. It’s offering a reasonable dividend yield, 5% to 6% for the yield for the stocks that we like.

There is still some earnings growth coming through for some of the larger mall landlords.

Given what we’ve seen happen in the last two years – and the concessions that they’ve made to tenants for rents during Covid – we will see some rents coming back.

It will to some extent be moderated by rising cash rates and what that does to debt cost going forward.

But the sector is reasonably well positioned.

I think management still have the GFC in their corporate memories and have positioned their portfolios accordingly.

As a stronger US dollar attracts investors it might be time to consider high-quality, long-duration assets in sectors such as healthcare, says Pendal’s NUDGEM RICHYAL

• Opportunities in some long-duration assets like healthcare
• Only risk-off asset in the market is the US dollar
• Find out about Pendal Global Select Fund

A LESSON from the volatile global financial markets this year, particularly in recent weeks, has been the safe haven status of the US dollar.

Against a basket of major currencies, the greenback is trading around 20-year highs.

While equities and bonds have fallen, and crypto currencies have been dumped, investors have flocked to the US dollar, says Nudgem Richyal, co-manager of Pendal Global Select Fund.

Richyal uses a water tower analogy to describe what’s happened in financial markets in recent years.

“Financial markets are like a water tower. The US Federal Reserve has put a lot of liquidity into the system since 2008, and that’s the equivalent of filling up the water tower,” Richyal explains.

“But then there was too much liquidity in the system, or water in the tower, and the frothy stuff at the top flowed over.

“That’s the risk assets that we’ve seen come off in recent months like cryptocurrencies and speculative technology stocks.

“More recently we’ve seen a mopping up of the overflow – the excess liquidity. As the excess liquidity, or flow of water, stops, levels start to even up and that’s what’s happening now,” he says.

The disturbance in the market, or water tower, hits risky assets (or the highest water levels) most — but everything underneath is also affected.

“We are now getting to the point of last man standing, because pretty much everything has been hit,” he says.

Where we’re at

Richyal isn’t calling the bottom of the market.

Some sectors haven’t sold down, and they remain at risk. But it might be time to put some duration back into portfolios – stocks with long-term growth prospects, he says.

“The valuations of some duration assets have become much more attractive.

“Health care is one area we like. It is a long-term play, and usually when inflation peaks, the baton is passed from energy stocks to healthcare stocks,” Richyal says.

“Healthcare is a quality, long-duration asset, as opposed to speculative tech.”

In the meantime, investors are looking for an asset that isn’t losing value.

Risk parity – a portfolio allocation strategy that uses risk to determine asset allocation – hasn’t worked well because bonds haven’t protected investors when equities have fallen, Richyal says.

“But as both equities and bonds have fallen, the US dollar has gone up. The dollar has become a stagflation hedge.

“Another way to think about it: non-US investors might be selling equities and they might be selling bonds, but they’re not repatriating dollars.”

Richyal says it’s worth remembering crypto currencies — which have tumbled in value this year but in 2022 were considered by some investors as a hedge against inflation.

“Compare that to the US dollar, which is a risk-off currency.

“There’s a big difference. It just shows there really is only one risk-off asset in the world and it is still the US dollar.”

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About Nudgem Richyal

Nudgem Richyal co-manages Pendal Global Select Fund with Chris Lees. The pair have been working together in global equities investing for more than 20 years.

Nudgem has 22 years of industry experience, joining J O Hambro Capital Management (a wholly owned subsidiary of Pendal Group) with Chris in 2008. He was previously an investment director with the Global Equity Group of Baring Asset Management, where he worked closely with Chris since 2001.

About Pendal Global Select Fund

Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach.

Fund managers Chris Lees and Nudgem Richyal have worked closely together for more than 20 years.

They manage a portfolio of 30-60 stocks using quantitative analysis and fundamental research based on decades of experience.

The team draws on the experience of 40-plus investment professionals at JOHCM and Regnan.

Contact a Pendal key account manager here

How should global equities investors approach this market? Which sectors should investors consider? Here’s a view from Pendal’s CHRIS LEES

• Healthcare and semi-conductor stocks favoured
• Watch out for growth traps and value traps
• Find out about Pendal Global Select Fund here

GLOBAL equities investors are navigating a range of factors right now including rising inflation and interest rates, the continuing Ukraine conflict, Chinese Covid lockdowns and slowing global growth.

How should global equities investors approach this volatile market? Which sectors should they consider?

Chris Lees, co-manager of Pendal Global Select Fund, points investors towards industries such as healthcare and semicondictors.

“According to our process, healthcare is the best defensive growth sector, semiconductors are the best cyclical growth industry, and the commodity-exporting countries are attractive because they have both defensive and cyclical growth characteristics,” says Lees.

“Our top-down monthly sector/regional scorecard has seen Europe, Japan and the consumer discretionary sector all deteriorate, with the more defensive healthcare sector improving. 

“We have been buying some new stocks in the healthcare sector and think it could be one of the leading sectors for the next several years.”

But Lees warns of “demand destruction” in commodities as central bankers around the world continue to put interest rates up to slow down demand to reduce inflationary pressures.

He says it’s a good time to sell both “growth traps” — speculative, unprofitable, concept stocks, and “value traps” — cyclicals with leveraged balance sheets.

“Look to buy the dip in steady growth ‘compounders’ once the worst of the interest rate rises are over,” Lees says.

“As Warren Buffet wrote in his 1989 letter to shareholders, ‘it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price’.”

The outlook for commodities

Lees also believes this commodity cycle will be different from the last one.

The 2002-2008 commodity cycle was driven by the positive demand shock from China joining the World Trade Organisation.

The current commodity cycle is driven by the negative supply shock from Russia invading Ukraine.

“If policy makers recognise and react to this new radically different regime and realise that putting up interest rates does not cure a supply-side problem, then this will probably turn out to be a mid-cycle correction,” he says.

“If not, and policy makers keep raising rates while yield curves flatten then invert, credit spreads widen, and we go into a global recession … many low-quality stocks with stretched balance sheets will have a very long way to fall.

“In that case we would move the portfolio up the quality curve and focus on those companies with rock-solid balance sheets that can weather the difficult combination of rising interest rates, rising input costs, and slowing economic growth. “

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About Chris Lees and Nudgem Richyal

Chris Lees co-manages Pendal Global Select Fund with Nudgem Richyal. The pair have been working together in global equities investing for more than 20 years.

Chris has more than 32 years of investment industry experience. He joined Pendal Group’s UK-based asset manager J O Hambro Capital Management (JOHCM) in 2008 after spending 19 years at Baring Asset Management, ultimately as head of its global sector team.

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About Pendal Global Select Fund

Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach. Fund managers Chris Lees and Nudgem Richyal have worked closely together for more than 20 years.

They manage a portfolio of 30-60 stocks using quantitative analysis and fundamental research based on decades of experience.

The team draws on the experience of 40-plus investment professionals at JOHCM and Regnan.

When is the right time to buy global equities and how best to value stocks during volatile times? Pendal global equities fund manager NUDGEM RICHYAL has some answers in this quick podcast

You can also listen to this podcast on Apple or Spotify or read an edited transcript below

An excerpt from this podcast:

What signpost should global equities investors be looking for right now?

Nudgem Richyal, co-manager of Pendal Global Select Fund: It goes back to the need to see a shift in Fed policy. Once we see a clear change in language, that the Fed is no longer worried about the politics and inflation, at that point, it will be safe to go back in.

The challenge is, markets are discounting mechanisms.

The market may anticipate any such shift in the Fed before it’s actually articulated. That’s always the $64 million question.

So that’s what we’re looking for. What we’re expecting is the market will discount a change in Fed policy, and so we’ve got to anticipate that.

One of the ways to do that would be to see if the inflation data itself peaks. That hasn’t happened. It was expected to happen last week, but it didn’t.

Chair Jerome Powell isn’t talking down interest rate rises at the moment.

But at some point the market will anticipate he will shift.

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About Nudgem Richyal

Nudgem Richyal co-manages Pendal Global Select Fund with Chris Lees. The pair have been working together in global equities investing for more than 20 years.

Nudgem has 22 years of industry experience, joining J O Hambro Capital Management (a wholly owned subsidiary of Pendal Group) with Chris in 2008. He was previously an investment director with the Global Equity Group of Baring Asset Management, where he worked closely with Chris since 2001.

About Pendal Global Select Fund

Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach.

Fund managers Chris Lees and Nudgem Richyal have worked closely together for more than 20 years.

They manage a portfolio of 30-60 stocks using quantitative analysis and fundamental research based on decades of experience.

The team draws on the experience of 40-plus investment professionals at JOHCM and Regnan.

Contact a Pendal key account manager here