Debunking a myth about fossil fuels

and sustainable fixed interest

Pendal

October 2024

Exclusion of fossil fuels presents minimal challenges for sustainable bonds compared to other asset classes, writes Pendal head of credit and sustainable strategies, GEORGE BISHAY

SUSTAINABLE funds typically screen out industries such as fossil fuels, tobacco, weapons, alcohol, gaming, pornography and uranium mining.

This is generally with a revenue threshold, where companies with a certain level of revenue linked to a particular activity are screened out.  

Different asset classes have different potential exposures to fossil fuels.

Fossil fuel companies typically make up a large part of equities indices (about 15 per cent of the ASX 300 in July 2024).

By contrast, issuers involved in fossil fuel extraction, exploration or refining are a small component of the Australian fixed-income benchmark.

Chart 1 below shows these issuers make up only about 0.1 per cent of the Australian fixed income benchmark, according to the rules applied to Pendal Sustainable Australian Fixed Interest Fund (see Chart 1 footnote below).

However, there can be variations in the exclusions of different funds.

For example, in Australian equities a fund's revenue threshold can dictate whether a company such as BHP (at about 9% weight in the ASX300 index) is included or not.

BHP's revenue includes coal mining. Other iron ore miners such as Fortescue Metals and Rio Tinto are not typically excluded.

Notwithstanding these variations in exclusions, active performance in the average sustainable equity fund is influenced by changes in oil prices.  

As a result of these differing levels of benchmark exposure, sustainable fixed-income portfolios in Australia are less sensitive to the movements in oil prices than equity counterparts.  

What drives the active performance of Pendal Sustainable Fixed Interest Fund?

Active credit management is the main driver of excess returns in Pendal Sustainable Australian Fixed Interest Fund.

The green circles in the chart below highlight periods when the manager's active de-risking and re-risking of its credit exposures process led to strong outperformance.  

These returns are driven by active management and are delivered despite rising oil markets.

The black circle highlights a period of rising inflation concerns due to Covid supply chain issues driving goods inflation and central bank hiking fears.

This led to a risk-off event in credit markets which saw most active fixed-income funds underperform the benchmark. 

Given the volatility of oil markets, Pendal Sustainable Australian Fixed Interest Fund has delivered consistent returns, outperforming its benchmark in 75%¹ of months since inception to July 2024.   

The chart below illustrates the number of excess return months under different buckets of excess returns.

Social and environmental benefit + portfolio diversification benefit

Many sustainable fixed-income investors are attracted to ESG-labelled bonds which aim to address green, social and sustainability issues.

The proceeds of these bonds are usually ring-fenced for specific environmental or social projects to support climate stability and/or the underserved in society.

The Australian ESG labelled fixed-income market was valued at some $A124 billion in August 2024, constituting 7.6% of the total Australian fixed-income benchmark.

The ESG-labelled bond market offers sustainable Australian fixed interest managers exposure to an additional opportunity set beyond traditional fixed income - environmental and social projects across varying sectors, credit qualities and tenors.

These labelled bonds can complement an overall fixed-income portfolio, bringing added diversification benefits.

The credit spread on these bonds may not directly follow the credit spread on an equivalent vanilla bond issued by the same issuer. This arises from the different technical supply and demand factors affecting these types of bonds.

These bonds are desirable and often in greater demand than vanilla counterpart bonds.

The Australian fixed interest market has ESG labelled bonds in 13 of its 14 sub-sectors (transport is the only missing sector), providing investors with the ability to diversify across numerous sectors.

In August 2024, the Pendal Sustainable Australian Fixed Interest fund held more than 66% in ESG-labelled securities.

Sustainable fixed income as part of your core fixed income allocation

Unlike sustainable equities, which may underperform during periods of rising oil prices, Australian sustainable fixed-income exhibits minimal sensitivity to oil markets or any other screened activities.

This differentiation allows investors to integrate sustainable fixed income into their overall core fixed interest allocation with minimal additional benchmark risk.   

By incorporating Australian sustainable fixed income alongside other traditional assets, investors can achieve a robust portfolio while also supporting climate stability and/or the underserved in society.

Author: George Bishay

Funds operated by this manager:

¹ Pendal Sustainable Australian Fixed Interest outperformed the Bloomberg AusBond Composite 0+yr in 72 of 96 months from inception (Aug-16) to July 2024, gross of fees.  

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 8, 2021. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient's personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

Anticipating the Future of Luxury

Insync Fund Managers

October 2024

Investing is more than data; it requires anticipating future trends. This is why relying on past performance is often risky. Generational shifts, rising geopolitical tensions, and evolving consumer behaviours demand excellence in trend spotting.

Luxury goods, where China's rising affluent class is undergoing significant changes in spending preferences is  a case in point. Whilst luxury has historically been a secular growth story, we believe that more nuanced factors are at play, making active stock picking essential.

China's economic challenges have slowed luxury market growth. A notable shift is the rise of "quiet luxury"-- discreet, minimalist products reflecting a reluctance to display wealth. A recent survey revealed that 24.8% of Chinese consumers find Western brands less desirable, with younger generations increasingly favouring niche, culturally aligned local brands. Their younger demographic is now prioritizing experiences over luxury goods. Spending on travel, concerts, and cultural events are taking precedence. Whilst Luxury's long-term growth is supported by global affluence, future affluent consumer's evolving preferences make investing here more complex. China accounts for 23% of global luxury sales today, and 30%-40% of sales by 2030, so understanding their mindset is crucial in identifying the winners.

Funds operated by this manager:

Insync Global Capital Aware Fund, Insync Global Quality Equity Fund

Disclaimer
Equity Trustees Limited ("EQT") (ABN 46 004 031 298), AFSL 240975, is the Responsible Entity for the Insync Global Quality Fund and the Insync Global Capital Aware Fund. EQT is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). This information has been prepared by Insync Funds Management Pty Ltd (ABN 29 125 092 677, AFSL 322891) ("Insync"), to provide you with general information only. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Neither Insync, EQT nor any of its related parties, their employees or directors, provide and warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before making a decision about whether to invest in this product.

Quarterly State of Trend report - Q3 2024

East Coast Capital Management

October 2024

Funds operated by this manager:

ECCM Systematic Trend Fund

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Australian Secure Capital Fund - Market Update

Australian Secure Capital Fund

October 2024

Funds operated by this manager:

ASCF High Yield Fund, ASCF Premium Capital Fund, ASCF Select Income Fund

Stock Story: Medibank

Airlie Funds Management

October 2024

Playing a pivotal role in Australia's health transition.

The Medibank and ahm private health insurance brands serve over 4.2m customers and play a vital role in funding medical care in Australia. In the most recent financial year, Medibank paid out $6.3bn in health insurance claims, taking a significant burden off the public healthcare system. 

Yet recently, the sector has come under fire from both the government and hospitals accused of making too much profit. In this article, we explore this regulatory tension and why we think Medibank looks an attractive investment opportunity.  

Private hospital profits affected by new models of care 

There is no doubt the past few years have been challenging for hospitals - labour shortages have affected service levels and inflation has been rampant. Private hospital operators have responded by launching a campaign against the health insurers and pressuring the government for a bailout. While additional payments or a tax may provide short-term relief to hospitals, they do not solve the structural issues facing the sector and ultimately would drive up the cost of healthcare and premiums for millions of Australians. To build a sustainable private healthcare system, all participants must work together to find efficiencies and drive down the overall cost of care.  

Medibank is doing its part to lower costs by investing in new models of care away from overnight stays in expensive acute care hospitals to virtual, short-stay hospitals and home care. Without this transition, Medibank estimates the government will need to spend 50% more on healthcare as a percentage of GDP in forty years. While this transition does come at the expense of hospitals that typically earn more for longer in-hospital stays, it is beneficial for the wider healthcare system. Higher hospital costs would simply translate to higher premiums, which are likely to push more members out of private health insurance and place further strain on an already stretched public healthcare system.  

It is for this reason the Federal Health Minister following a review has conceded, "There's no silver bullet from Canberra or funding solution from taxpayers to deal with what are essentially private pressures in the system". Ultimately, it is not the government's job to prop up unprofitable business models and in some cases it is healthy for some private hospitals to shut where there is overcapacity in the system.  

Has Medibank profited at the expense of hospitals? 

Medibank has stuck to its promise not to profit from the pandemic and returned a total of $1.46bn in givebacks to customers for permanent claims savings due to COVID-19. This is evident in the chart below which shows Medibank's health insurance gross profit margin is still below FY19 levels.   

Figure 1 - Medibank Health Insurance Gross Margin 

Source: Company filings

Fear of regulation creates opportunity to invest 

While there remains uncertainty as to how the regulatory situation will unfold with a federal election coming up, we think it's unlikely the government will step in and prop up private hospitals where there is a clear shift to lower-cost care outside the hospital. In the meantime, we believe this creates an opportunity to invest in Australia's largest health insurer, which has grown its earnings per share at 8% p.a. over the past decade. 

Medibank screens as a high-quality business under our investment process for the following reasons: 

1. Financial strength: Medibank has a strong capital position with a capital ratio of 14.1%, well above its 10-12% target range, and has zero debt on its balance sheet. 

2. Business quality: Medibank is Australia's largest health insurer with 4.2m members (27% market share). This scale enables Medibank to negotiate better terms with hospitals keeping a lid on claims inflation while sharing these savings with members to lower premiums and improve retention.  

3. Management quality: David Koczkar has been the CEO since 2021 and prior to this was the COO since 2014. Over this period, the company has seen a return to policyholder growth, expanded its health offering and tightly managed its costs.  

Finally, from a valuation perspective, Medibank is trading on less than 17x P/E (below its long-term average of 19x) and offers investors an attractive dividend yield of 4.6%. 

Figure 2 - Medibank NTM Rolling PE 

Source: FactSet

Author: Emma Fisher and Vinay Ranjan

Funds operated by this manager:

Airlie Australian Share Fund

Important Information: 

This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 trading as Airlie Funds Management ('Airlie') and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation.  This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement ('PDS') and Target Market Determination ('TMD') and consider obtaining professional investment advice tailored to your specific circumstances before making a decision about whether to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to an Airlie financial product or service may be obtained by calling +61 2 9235 4760 or by visiting www.airliefundsmanagement.com.au.

Past performance is not necessarily indicative of future results and no person guarantees the future performance of any financial product or service, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. This material may contain 'forward-looking statements'. Actual events or results or the actual performance of an Airlie financial product or service may differ materially from those reflected or contemplated in such forward-looking statements.

This material may include data, research and other information from third party sources. Airlie makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Airlie. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. No representation or warranty is made with respect to the accuracy or completeness of any of the information contained in this material. Airlie will not be responsible or liable for any losses arising from your use or reliance upon any part of the information contained in this material.

Any third party trademarks contained herein are the property of their respective owners and Airlie claims no ownership in, nor any affiliation with, such trademarks.   Any third party trademarks that appear in this material are used for information purposes and only to identify the company names or brands of their respective owners. No affiliation, sponsorship or endorsement should be inferred from the use of these trademarks.  This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Airlie.

Magellan Global Quarterly Update

Magellan Asset Management

October 2024

Arvid Streimann, Nikki Thomas and Alan Pullen discuss key market themes and how the global strategy is positioned to capitalise on emerging opportunities, whilst monitoring the risks. Arvid also discusses the potential market impacts of the upcoming US election based on various possible outcomes.

Funds operated by this manager:

Magellan Global Fund (Hedged), Magellan Global Fund (Open Class Units) ASX:MGOC, Magellan High Conviction Fund, Magellan Infrastructure Fund, Magellan Infrastructure Fund (Unhedged), MFG Core Infrastructure Fund, Magellan Core ESG Fund

Important Information: 

Important Information: This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 ('Magellan') and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation.  This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement ('PDS') and Target Market Determination ('TMD') and consider obtaining professional investment advice tailored to your specific circumstances before making a decision about whether to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to a Magellan financial product may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au.

Past performance is not necessarily indicative of future results and no person guarantees the future performance of any financial product or service, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. This material may contain 'forward-looking statements'. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements.

This material may include data, research and other information from third party sources. Magellan makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material.  Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. No representation or warranty is made with respect to the accuracy or completeness of any of the information contained in this material. Magellan will not be responsible or liable for any losses arising from your use or reliance upon any part of the information contained in this material.

Any third party trademarks contained herein are the property of their respective owners and Magellan claims no ownership in, nor any affiliation with, such trademarks.   Any third party trademarks that appear in this material are used for information purposes and only to identify the company names or brands of their respective owners. No affiliation, sponsorship or endorsement should be inferred from the use of these trademarks. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Magellan.

Chris Gosselin, CEO of Australian Fund Monitors, speaks to Nichols Chaplin, Director and Portfolio Manager at Seed Funds Management. Nicholas shares insights on APRA's plan to phase out additional tier one bonds, which could destabilise the banking sector and impact retail investors.

The Seed Funds Management Hybrid Income Fund has a track record of 9 years and has outperformed the Solactive Australian Hybrid Securities (Net) benchmark since inception in October 2015, providing investors with an annualised return of 6.39% compared with the benchmark's return of 4.86% over the same period.

Funds operated by this manager: Seed Funds Management Hybrid Income Fund

Chris Gosselin, CEO of FundMonitors.com, speaks with Benjamin Harrison, Chief Investment Officer at Altor Capital. 

The Altor AltFi Income Fund has a track record of 6 years and 5 months and has outperformed the RBA Cash Rate + 5% benchmark since inception in April 2018, providing investors with an annualised return of 11.68% compared with the benchmark's return of 6.67% over the same period.

Funds operated by this manager: Altor AltFi Income Fund, Altor Emerging Growth Fund

Global Webcast: Reflecting on a volatile month

& 2Q24 results season

Alphinity Investment Management 

August 2024

Elfreda Jonker and Jonas Palmqvist reflect on what has been happening in markets over the previous month and review key themes from the second quarter of 2024.

Funds operated by this manager:

Alphinity Australian Share Fund, Alphinity Concentrated Australian Share Fund, Alphinity Global Equity Fund, Alphinity Global Sustainable Equity Fund, Alphinity Sustainable Share Fund

Paul Sanger, Head of Sequoia Direct, speaks to Nicholas Chaplin, Director and Portfolio Manager at Seed Funds Management. 

Nicholas Chaplin, Director & Portfolio Manager of Seed Funds Management, critiqued APRA's proposal to phase out Additional Tier 1 (AT1) bonds, highlighting concerns about the potential risks to banking stability and retail investors. He discussed the current challenges with AT1 instruments in the Australian market, the transition timeline, and the differing impacts on large and small banks. Nicholas also explored alternative solutions and gauged the market's reaction to the proposed changes.

The Seed Funds Management Hybrid Income Fund  has a track record of 8 years and 11 months and has outperformed the Solactive Australian Hybrid Securities (Net) benchmark since inception in October 2015, providing investors with an annualised return of 6.37% compared with the benchmark's return of 4.79% over the same period.

Funds operated by this manager: Seed Funds Management Hybrid Income Fund

Chris Gosselin, CEO of Australian Fund Monitors, speaks to Nicholas Chaplin, Director and Portfolio Manager at Seed Funds Management. 

The Seed Funds Management Hybrid Income Fund   has a track record of 8 years and 10 months and has outperformed the Solactive Australian Hybrid Securities (Net) benchmark since inception in October 2015, providing investors with a return of 8.41% over the past 12 months and an annualised return of 6.4% since inception compared with the benchmark's return of 4.84% over the same period.

Funds operated by this manager: Seed Funds Management Hybrid Income Fund

Chris Gosselin, CEO of Australian Fund Monitors, speaks to Nichols Chaplin, Director and Portfolio Manager at Seed Funds Management. Topics covered include: interest rates and inflation; US markets; volatility in equity markets; and bonds and hybrids.

Funds operated by this manager: Seed Funds Management Hybrid Income Fund

Chris Gosselin, CEO of FundMonitors.com, speaks with David Franklyn, Executive Director & Head of Funds Management at Argonaut.

The Argonaut Natural Resources Fund has a track record of 4 years and 6 months. The fund has outperformed the S&P/ASX 300 Resources TR benchmark since inception in January 2020, providing investors with an annualised return of 27.27% compared with the benchmark's return of 8.73% over the same period.

Funds operated by this manager: Argonaut Natural Resources Fund, Argonaut Global Gold Fund

Chris Gosselin, CEO of FundMonitors.com, speaks with Richard Brennan, Strategy Ambassador at East Coast Capital Management.

The ECCM Systematic Trend Fund has a track record of 4 years and 4 months. The fund has outperformed the Barclay Hedge Global Macro benchmark since inception in January 2020, providing investors with an annualised return of 17.34% compared with the benchmark's return of 7.75% over the same period.

Funds operated by this manager: ECCM Systematic Trend Fund

Chris Gosselin, CEO of FundMonitors.com, interviews Dan Nicolaides on how Digital Asset Funds Management uses crypto market volatility for stable returns and risk management.