For the month ending 30 April 2020, the Fund returned 4.7% compared to the MSCI World Net TR Index (AUD unhedged) which returned 3.7%.
After the crash in March, April saw a meaningful recovery in the global stock markets. While large parts of Europe and the US remained in lockdown in April, China began to reopen its economy. The signs of recovery in China gave hope to investors. It provided a glimpse of what it would look like when the western world reopens their economies.
Amid this sharp market rise, the Fund kept up and outperformed its benchmark MSCI World. Our Sustainable Transport theme was the best performer, followed by the Water Management theme. Our Environmental Services and Wellbeing performed poorly in the month.
The Sustainable Transport theme was lifted by a rally in the automotive industry. Stocks in this sector were hit hard early in the pandemic, and even after the April rally remain under pressure. There will clearly be a dramatic drop in global demand for cars in 2020. We look beyond that, keeping our positions in several companies that are well positioned to benefit from the shift to electric vehicles and advanced safety. These include Aptiv, Norma and Hella, which were the major positive contributors this month.
Our Water Management was another positive contributor. This was due to the strong performance of Advanced Drainage Systems. It is a leading player in the stormwater management industry. It provides innovative water management solutions to manage storm and wastewater efficiently and safely. It also keeps millions of pounds of plastic out of landfills each year by using recycled resin as its major raw material. The rising incidence of storm events have given this business real momentum in recent years. The markets reacted positively to its full-year results preannouncement.
Our Environmental Services theme was the worst detractor as a result of poor performance of Arcadis. Arcadis is an international consulting and engineering company, active in the fields of infrastructure, environment and buildings. Sustainability is a fundamental part of the projects and solutions it delivers for its clients. While the trading update for the first quarter of 2020 was solid, markets were worried that projects might get postponed in the near future due to the pandemic.
Our Wellbeing theme was another relative detractor to our performance. In a month of market growth, many defensive companies underperformed, including Orpea in our Wellbeing theme. Orpea is a leading global player in aged care, with an extensive network largely in continental Europe. Nevertheless, Orpea has avoided difficulty due to its high quality approach. It swiftly implemented new protocols and set up crisis units across all its countries in late February. So far, the fatality rate in the group’s nursing homes has been lower than last year when the flu epidemic was more severe. As the pandemic and its after-effects unfold, we are confident that Orpea will emerge in an even stronger position.
We are wary of the market strength in April, as the world faces huge economic uncertainty in the near term. But this experience has made us even more positive on sustainability over the long term. Some governments, especially those within the European Union, are considering sustainability investments as part of the plan to stimulate economic recovery. The pandemic has also focused minds on the importance of resilience, and sustainable business models. We think our strategy is well-aligned to a post-pandemic world.
Noisy signals at the end of the Age of Oil
By Ted Franks
At the risk of stating the obvious: there is a lot going on at the moment. The COVID-19 pandemic is changing the very fabric of society. We’ve had to carefully re-evaluate every position we hold in the last two months.
Usually our focus on long-term signals makes it relatively easy to screen out the noise, which tends to be shorter term. At the moment, even the noise is long-term. Picking which trends will and won’t stick needs unusual amounts of insight. You can draw a wide range of conclusions from most of the datapoints.
And even among all the startling datapoints we are currently seeing, one stands out. The price of West Texas Intermediate, the US oil benchmark, actually turned negative on 20 April. At the lowest point, you would have had to pay US$37.63 to get someone to take a barrel off your hands.
This is something of an apparition. The negative prices come about because of a technicality in futures contracts. But the underlying price of oil is extremely low – somewhere under US$20.
So what is the signal, and what is the noise?
I’d be surprised if you couldn’t guess what we think the signal is. The end of the Age of Oil is in sight.
The COVID-19 crisis has led to an extreme reduction in demand at this point in time. Much of that demand will come roaring back. But before the crisis hit, the future for fossil fuels was already looking shaky at best. The cost of unsubsidised renewable energy keeps on falling. And oil’s killer use-case, for personal mobility, is about to be destroyed by electric cars.
So the pandemic creates a real problem for oil investors. The long term outlook for oil stocks is bleak. And now the short term is even worse. So when do you want to own it? The signal is that the petroleum era is ending.
Of course we think like this. WHEB’s core thesis is based on a transition to a zero-carbon sustainable economy. But the beauty of any market is in its breadth. It takes many views to fix a price. Even now it’s not hard to find oil industry commentators who are drawing different conclusions from that sub-US$20 price.
They don’t see an end to the oil epoch just yet. Their arguments come in two broad categories.
The first group, I will call “ostrich” arguments, as they ignore half the picture. As amazing as it might seem, much of conventional analysis of the oil price doesn’t refer to the impact of renewable energy at all. These analysts believe the oil market is simply out of balance.
Particularly in the USA, there is a tiny minority who refuse to even acknowledge the climate crisis. The larger part is actually a specific phenomenon amongst oil industry experts. For more than one hundred years, demand has just not been something oil analysts focus on. All their analysis is on supply side issues such as OPEC negotiations and discipline, wider political considerations, storage capacity and refinery levels.
In the short or medium term, some of these ostriches may be right. A combination of supply factors, combined with returning demand, may lift the price in the short term. That might give the impression that nothing fundamental is changing.
But at some point, the finer workings of the oil industry will no longer matter. The important analysis will all be on demand, which is likely never to return to previous levels. We may already be there. It feels like there are still plenty of ostriches who will be surprised by this.
Sticking with the avian theme, the second category could be called “hawkish” arguments. For these more cynical observers, the signal is that the low price will itself prolong the fossil fuel era.
We’re in an economic crisis, run these arguments. Faced with recession or even a possible depression, who will turn down cheap energy, even if it comes with carbon emissions and environmental degradation attached? Who will sacrifice their own economic growth to solve environmental problems that we all share?
The answer, increasingly, is a lot of people. The EU’s commitment to its Green Deal, in face of obstruction and opposition by the fossil lobby, is a political example of this. But this isn’t just political. There is already plenty of evidence that the COVID-19 is changing social attitudes. Sustainability concerns have moved up everyone’s agenda in recent years, and the pandemic has reinforced this.
In the end though, this argument will fail on hard economics rather than moral choices.
Fossil energy prices may fall, but renewable energy prices will continue to chase them downwards. The current cost advantage can never be sustained. And it won’t be great enough to outweigh the volatility that comes with oil.
These signals were there before the pandemic. They have become even clearer now. The rest is just noise.
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Ansys | United States | Information Technology |
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Daifuku | Japan | Industrials |
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Danaher | United States | Health Care |
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Ecolab | United States | Materials |
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Icon | Ireland | Health Care |
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Keyence | Japan | Information Technology |
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Koninklijke DSM | Netherlands | Materials |
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MSA Safety | United States | Industrials |
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Steris | United States | Health Care |
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Thermo Fisher Scientific | United States | Health Care |
1 Month | 1 Year | 3 Years P.A. | 5 Years P.A. | SINCE INCEPTION | |
---|---|---|---|---|---|
Fund | 4.7% | 1.3% | |||
Strategy (partial simulation2) | 8.9% | 7.4% | 5.6% | ||
Benchmark | 3.7% | 3.2% | 9.7% | 8.9% | 5.8% |
Noisy signals at the end of the Age of Oil
By Ted Franks
At the risk of stating the obvious: there is a lot going on at the moment. The COVID-19 pandemic is changing the very fabric of society. We’ve had to carefully re-evaluate every position we hold in the last two months.
Usually our focus on long-term signals makes it relatively easy to screen out the noise, which tends to be shorter term. At the moment, even the noise is long-term. Picking which trends will and won’t stick needs unusual amounts of insight. You can draw a wide range of conclusions from most of the datapoints.
And even among all the startling datapoints we are currently seeing, one stands out. The price of West Texas Intermediate, the US oil benchmark, actually turned negative on 20 April. At the lowest point, you would have had to pay US$37.63 to get someone to take a barrel off your hands.
This is something of an apparition. The negative prices come about because of a technicality in futures contracts. But the underlying price of oil is extremely low – somewhere under US$20.
So what is the signal, and what is the noise?
I’d be surprised if you couldn’t guess what we think the signal is. The end of the Age of Oil is in sight.
The COVID-19 crisis has led to an extreme reduction in demand at this point in time. Much of that demand will come roaring back. But before the crisis hit, the future for fossil fuels was already looking shaky at best. The cost of unsubsidised renewable energy keeps on falling. And oil’s killer use-case, for personal mobility, is about to be destroyed by electric cars.
So the pandemic creates a real problem for oil investors. The long term outlook for oil stocks is bleak. And now the short term is even worse. So when do you want to own it? The signal is that the petroleum era is ending.
Of course we think like this. WHEB’s core thesis is based on a transition to a zero-carbon sustainable economy. But the beauty of any market is in its breadth. It takes many views to fix a price. Even now it’s not hard to find oil industry commentators who are drawing different conclusions from that sub-US$20 price.
They don’t see an end to the oil epoch just yet. Their arguments come in two broad categories.
The first group, I will call “ostrich” arguments, as they ignore half the picture. As amazing as it might seem, much of conventional analysis of the oil price doesn’t refer to the impact of renewable energy at all. These analysts believe the oil market is simply out of balance.
Particularly in the USA, there is a tiny minority who refuse to even acknowledge the climate crisis. The larger part is actually a specific phenomenon amongst oil industry experts. For more than one hundred years, demand has just not been something oil analysts focus on. All their analysis is on supply side issues such as OPEC negotiations and discipline, wider political considerations, storage capacity and refinery levels.
In the short or medium term, some of these ostriches may be right. A combination of supply factors, combined with returning demand, may lift the price in the short term. That might give the impression that nothing fundamental is changing.
But at some point, the finer workings of the oil industry will no longer matter. The important analysis will all be on demand, which is likely never to return to previous levels. We may already be there. It feels like there are still plenty of ostriches who will be surprised by this.
Sticking with the avian theme, the second category could be called “hawkish” arguments. For these more cynical observers, the signal is that the low price will itself prolong the fossil fuel era.
We’re in an economic crisis, run these arguments. Faced with recession or even a possible depression, who will turn down cheap energy, even if it comes with carbon emissions and environmental degradation attached? Who will sacrifice their own economic growth to solve environmental problems that we all share?
The answer, increasingly, is a lot of people. The EU’s commitment to its Green Deal, in face of obstruction and opposition by the fossil lobby, is a political example of this. But this isn’t just political. There is already plenty of evidence that the COVID-19 is changing social attitudes. Sustainability concerns have moved up everyone’s agenda in recent years, and the pandemic has reinforced this.
In the end though, this argument will fail on hard economics rather than moral choices.
Fossil energy prices may fall, but renewable energy prices will continue to chase them downwards. The current cost advantage can never be sustained. And it won’t be great enough to outweigh the volatility that comes with oil.
These signals were there before the pandemic. They have become even clearer now. The rest is just noise.
VOLATILITY3 | 13.2% | NUMBER OF STOCKS | 52 |
Partner, Fund Manager
Partner, Head of Research
The Pengana WHEB Sustainable Impact Fund invests in companies with activities providing solutions to sustainability challenges. WHEB have identified critical environmental and social challenges facing the global population over coming decades including a growing and ageing population, increasing resource scarcity, urbanisation and globalisation. The Fund invests in companies providing solutions to these sustainability challenges via nine sustainable investment themes – five of these are environmental (cleaner energy, environmental services, resource efficiency, sustainable transport and water management) and four are social (education, health, safety and well-being). WHEB’s mission is ‘to advance sustainability and create prosperity through positive impact investments.’
1. From August 2017, performance figures are those of the Pengana WHEB Sustainable Impact Fund’s class A units (net of fees and including reinvestment of distributions). The strategy’s AUD performance between January 2006 and July 2017 has been simulated by Pengana from the monthly net GBP returns of the Henderson Industries of the Future Fund (from 1 January 2006 to 31 December 2011) and the FP WHEB Sustainability Fund (from 30 April 2012 to 31 July 2017). This was done by: 1) converting the GBP denominated net returns to AUD using FactSet’s month-end FX rates (London 4PM); 2) adding back the relevant fund’s monthly ongoing charge figure; then 3) deducting the Pengana WHEB Sustainable Impact Fund’s management fee of 1.35% p.a. The WHEB Listed Equity strategy did not operate between 1 January 2012 and 29 April 2012 – during this period returns are zeroed. The Henderson Industries of the Future Fund’s and the FP WHEB Sustainability Fund’s GBP net track record data is historical. Past performance is not a reliable indicator of future performance. The value of the investment can go up or down.
2. The Fund incepted on 31 October 2007 as the Hunter Hall Global Deep Green Trust. The Fund was relaunched on 1 August 2017 as the Pengana WHEB Sustainable Impact Fund employing the WHEB Listed Equity strategy. This strategy was first employed on 1 January 2006 by the Henderson Industries of the Future Fund and currently by the FP WHEB Sustainability Fund.
3. Annualised standard deviation since inception.
4. Relative to MSCI World Total Return Index (net, AUD unhedged)
* For further information regarding fees please see the PDS available on our website.