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, 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.

Social Transition Global Equity Fund

Fund Performance

Further to the market environment described above, more specifically in the portfolio, the largest detractor was German sportswear manufacturer Adidas, which disappointed investors with two profit warnings. The company suffered much lower sales in China and western Europe than had been expected. Announcing a €500 million cost-cutting programme, the management cited “significant cost increases resulting from the inflationary pressure across the company’s value chain as well as unfavourable currency movements”. Adidas was hit further by negative publicity relating to its tie-up with controversial rapper Kanye West.

It was also a disappointing year for PayPal. The online payments company’s share price struggled as it followed up downbeat fourth quarter earnings with a negative growth outlook, which reflect the general slowdown in e-commerce after a stellar period in 2021. The company retains a strong presence as a two-sided network spanning merchants and consumers with a key role to play in terms of furthering digital inclusion.

Shares in VF Corp, owner of apparel brands such as North Face and Timberland, slid as the company twice cut its earnings guidance as it continued to see a slowdown in customer demand, especially for their key Vans brand. Other positions that detracted included Invitae Corp and Salesforce.com. The leading contributor in 2022 was Bank Rakyat Indonesia, which grew its profits strongly across all business segments and continued to perform well in terms of asset gathering. Serving 144 million micro deposit customers and 35 million micro and ultra-micro borrowers, BRI has an important role to play in empowering marginalised sections of the population to access financial and economic tools and resources. Its commitment to responsibly reach more underserved communities as part of its Vision 2025 continues to flow through to impressive micro-loan growth rates. Indian multi-national bank ICICI also benefited from solid growth attributes, with higher interest rates helping to boost its margins amid a rising demand for loans. US biotech company Halozyme Therapeutics prospered from the success of its Enhanze drug-delivery technology. The company’s revenues beat estimates for the fourth quarter of 2021 and its management gave upbeat guidance for 2022.

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	-4.60	-4.14	1.32	8.86	20.55	-	-	-7.94
Benchmark	-4.14	-3.40	2.56	10.06	20.80	-	-	-3.64

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	-	-	-	-	-21.93%
Benchmark	-	-	-	-	-18.36%

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.

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Main portfolio changes

As the outlook for the global economy became more uncertain, we reined in our exposure to some of the more cyclical areas of our industrials holdings as we were concerned that the rising cost of capital and cost inflation could dent demand towards the end of the year and into 2023. We also maintained low relative exposure the consumer-facing sectors as inflationary pressures rose.

Additions to the fund over the year included US biopharma company Halozyme Therapeutics, which has developed an innovative drug delivery technology (Enhanze) that converts intravenous (IV) medicines into subcutaneous (subcut) formulation. This has enormous potential benefits from a patient standpoint, including more targeted delivery of drugs as well as reducing time spent in hospitals and infusion clinics (thanks to much faster administration of drugs) thus reducing overall burden on healthcare systems.

Linde was also added to the portfolio. The world’s largest industrial gas company aims to offer business critical products or services to their customers. It is a relationship business where, if managed responsibly, economies of scale and technological leadership can create financial benefits for both the product or service provider and its customers. In challenging macro-economic environments like today, companies tend to accelerate the shift from ownership to usership, supporting the growth outlook for providers that deliver genuine value to their customers.

Outlook

Monetary policymakers continue to search for the level of restrictive policy required to slow growth sufficiently to create spare capacity and ease inflation. This late-cycle dynamic can see equities outperform for longer than expected, but the turn can create material downside risk.

While technology companies are fuelling the NASDAQ and loose monetary policy is propelling Japan, the UK and China are in the doldrums. This heterogeneity is mirrored in the dispersion across sectors, with the most interest-rate sensitive market areas continuing to underperform. However, positive growth surprises and the ability of many firms to pass through input cost increases to maintain margins are powering most indices to renewed strength.

We expect to see continued progress in many countries on the way companies treat people in the form of human rights legislation and guidelines. We continue to view the investments that companies in the portfolio have made in their direct operations, contingent workforce and supply chain as key to managing operational risks and improving relationships with their customers and employees.