Market
backdrop

Market backdrop

2022 was a highly challenging year for equity markets as growth slowed much more than anticipated. Not only did inflation fail to ease as expected but it accelerated further. In response, central banks embarked on the most rapid cycle of policy tightening in 40 years.

The supply chain problems that emerged in 2021, following the initial economic recovery from COVID-19, extended into 2022. To compound the impact of the Russian invasion of Ukraine, which led to sanctions and the removal of supply that greatly disrupted global energy markets, the global jobs market tightened considerably also. That kept upward pressure on wage growth, which moved well above its long-term average across most regions.

At the same time, core inflation remained greatly in excess of central bank targets, while headline rates reached double digits in most economies. That led all developed market central banks outside Japan to raise policy rates into restrictive territory.

In response to the dramatic move up in real rates, virtually all global asset classes saw declines in 2022. The only major market to see positive performance over the year was commodities, but even there it was largely restricted to energy and agriculture. The dramatic shift in cross-asset correlations was also accompanied by a significant increase in asset market volatility.

The profile of market returns, with energy – and in particular fossil fuel companies – outperforming by a wide margin created a notably unfavourable backdrop for sustainability-themed strategies. Moreover, as the cost of funding rose, there was a clear shift of sentiment away from the ‘growth’ stocks that typically dominate ESG portfolios into the relative safety of slow-and-steady ‘value’ sectors.

Climate Transition Global Equity Fund

Fund Performance

The negative impact of the structural lack of exposure to the energy sector was offset by profitable positioning elsewhere, notably the underweighting of consumer discretionary and the overweighting of industrials.

However, technology holdings detracted from performance as sentiment dipped towards the sector given the more uncertain earnings outlook. The largest detractor was Infineon Technologies. The automotive-focused German semiconductor company suffered in line with the broader sector following a global shortage of microchips and a slump in demand for new cars during the pandemic. Trimble, the US software, hardware and technology services company, weakened as earnings announcements were not sufficiently strong to overcome the broadly downbeat sentiment towards the sector.

Other disappointing positions included China Conch Holdings, an investment holding company that provides various solutions for energy saving and environmental protection in China, Asia-Pacific and South America. Sentiment towards Chinese companies was rattled by the continued imposition of strict COVID-19 restrictions, which put a brake on the economy.

The leading contributor to performance was Merck, which was regarded as a defensive play in uncertain times. The US pharmaceutical giant also benefited from strong earnings and a series of successful clinical drug trials. The lack of exposure to some of the larger players in the under-pressure US technology sector such as Amazon, Tesla and Meta (Facebook) also added value.

Past performance is not a reliable indicator of future performance – see next slide for full performance information.

As at 30 Sep 2023 – Performance in USD

Performance

	Cumulative (%)					Annualised (%)
	1M	3M	6M	YTD	1Y	3Y	5Y	Since inception
Fund	-4.27	-3.66	1.13	8.16	16.92	4.69	-	4.75
Benchmark	-4.10	-3.30	2.84	10.49	21.41	7.39	-	7.55

Past performance is not a guide to future performance.

Performance basis: Mid to mid, in the share class reference currency, gross of tax payable by the Fund with income reinvested. Net figures are net of ongoing charges and fees. Net and gross performance does not include the effect of any exit or entry charge. The Fund’s performance is compared against the MSCI All Countries World Index (the “Benchmark” or the “Index”).

Calendar year returns

	2018	2019	2020	2021	2022
Fund net	-	-	-	12.62%	-20.46%
Benchmark	-	-	-	19.04%	-17.96%

Share class is used for illustrative and indicative purposes and may not be available in all regions. For further information on other share classes please see the website.

Visit Fund centre

Main portfolio changes

At the start of the year, we continued to reduce our overweight in industrials in favour of financials and technology, where we saw a better risk-reward ratio. We exited our positions in wind turbine manufacturers Siemens Energy and Vestas. Whilst we remained positive on the energy transition to wind, we felt that wind turbine manufacturers are structurally disadvantaged due to excessive competition that limits pricing power. We added significantly to transition holding Microsoft due to their accelerating cloud business. We increased our weighting in solution holding Union Pacific, a US railroad operator that was gaining share from lorries and generating significant scope 3 carbon emissions reductions.

Through the mid-part of the year we responded to the more uncertain macro-economic backdrop by adding companies that had resilient earnings streams such as industrial gas manufacturer Linde and US lift manufacturer Otis. We also reduced exposure to purely cyclical companies and held a negative position towards consumer-facing companies. Towards the end of the year we increased the overweighting of industrials, largely at the expense of financials, which we moved further underweight.

Outlook

We continue to believe that our portfolio is positioned to benefit from the challenges that climate change poses and the opportunities that it may bring for businesses that are positioned in the right way. Tactically, we continue to take a conservative stance, focusing on companies that meet our climate transition mandate and that possess resilient business models. We believe our holdings will continue to generate significant free cash flow and robust returns on invested capital, which should prove defensive in a global recessionary environment.