Online gambling is a highly regulated industry worldwide, with an increasing number of regions now crafting their own laws and regulations. This is done to stay up-to-date and prevent unlicensed operators from operating within their borders.
The advantages of implementing a licensing system far outweigh those of not having one, even though most regions primarily aim to levy taxes or duties on eGaming businesses' profits. A more comprehensive regulatory framework allows for better player protection and overall well-being. The industry faces significant scrutiny in terms of player safety, responsible gambling, and ensuring the welfare of players. Notably, major operators have shifted their focus over the years. Television ads and online banners now emphasise responsible gambling tools, such as setting deposit and session limits, and advising players on the option to 'take a break' from their accounts instead of offering enhanced odds or free bets/spins. Operators are taking more steps to combat the stigma associated with online gambling and provide a friendly and secure environment for their customers.
Opening bank accounts is often a challenge for operators and businesses in this sector, mainly due to the negative perception of 'gaming' by banks, which have been hesitant to collaborate with such businesses for many years. Capital International Bank, thanks to its understanding of the sector and knowledge of the high regulatory standards across multiple regions, can make informed decisions and adopt a risk-based approach when assessing new business from this sector Whether working with startups aiming to establish themselves or well-established enterprises seeking diversification, we offer various solutions, including operational gaming accounts and segregated player funds accounts. We cannot currently accept direct player deposits or provide accounts for gaming operators in USD directly in the Bank, however we have a money market solution for USD segregated player funds in the wider Capital International Group.
At Capital International Bank, we work with a wide range of businesses operating in the eGaming sector and understand the regulatory requirements they must adhere to. Similar to our own banking requirements, regulatory reporting in the gaming industry is frequent and demands a high level of detail. Regulators heavily rely on the reports they receive from operators to maintain a crime-free industry, ensure compliance and promptly report significant events.
According to the Global Online Gambling Market Report, the online gambling market is expected to grow by $40 billion between 2020 and 2025. eGaming businesses are constantly innovating and improving their platforms to enhance the customer experience and expand their product offerings to compete for a small share of the market. Customers remain loyal to their preferred brands and platforms. Hence, operators are constantly striving to enhance their websites to ensure customer satisfaction and long-term relationships. Similar to any other industry, dissatisfaction prompts consumers to seek change and improvement. This also applies to banking. When developing our digital bank, client feedback played a central role in our project. Capital International Bank was incorporated with a focus on client-centricity and to cater to both emerging and existing industries in need of corporate banking solutions.
But why is it so difficult to open a bank account in the gaming industry? We observed that in general, the process of opening a corporate bank account can be quite protracted, labour-intensive, and occasionally exasperating for corporate clients.
We have identified several common issues that clients often encounter:
Capital International Bank has been designed to alleviate these issues. We offer quick decision-making at our headquarters in the Isle of Man - we will let you know whether you are eligible for a bank account within 24 hours and new accounts are opened within days, not weeks, avoiding the dreaded ‘slow no’ and protracted account opening process.
Our clients are then able to access our bespoke, purpose-built digital banking platform and our suite of interest-bearing solutions, including same-day access* fiduciary accounts with competitive rates of interest.
If you would like to know more, please do not hesitate to reach out at businessdevelopment@capital-iom.com
*subject to cut-off times
Disclaimer: The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit
Capital International Bank Limited is a wholly owned subsidiary of Capital International Group Limited (www.capital-iom.com) a privately owned financial services group based in the Isle of Man. Capital International Bank Limited is licensed by the Isle of Man Financial Services Authority and operates as a non-retail, restricted deposit taker under a Class 1 (2) licence. Deposits are not covered by the Isle of Man Depositors’ Compensation Scheme and terms and conditions apply. Capital International Bank is the trading name of Capital International Bank Limited. Capital International Bank Limited is also licensed by the South African Reserve Bank Prudential Authority to conduct the business of a Representative Office in South Africa.
We are excited to announce the opening of the Isle of Man's Biggest Swap Shop, taking place from the 25th to 28th August at the Strand Street Shopping Centre! This four-day pop-up event aims to revolutionise the way we think about fashion, sustainability, and charity.
In a world where the cost of living is skyrocketing, buying new clothing has become a luxury for many. We believe that everyone deserves to feel confident and happy in what they wear. Our mission is simple: to provide a low-cost and sustainable way for you to refresh your wardrobe while supporting a charitable cause.
Charity of choice
Proceeds from the Swap Shop will go towards supporting The Huruma Orphanage in Tanzania. The Huruma Orphanage was set up in 2012 and looks after children between the ages of 4 and 17. Most have been orphaned following the death of one or both parents, often as a result of aids or other life-threatening illness. The orphanage takes in these children and provides basic education, vocational training and a safe place to live. They also help the children to integrate back into society and to find work when they are old enough to do so. By participating in this unique event, you not only enhance your style but also contribute to the well-being and education of children in need.
How does it work?
The concept behind the Swap Shop is easy and inclusive. You can either bring your pre-loved clothes to exchange with others or simply browse and make a donation. For those who prefer to shop, each clothing rail will display a suggested donation amount, and we kindly ask you to contribute at least the displayed amount to support the orphanage.
If you wish to swap your clothes, bring the items you'd like to donate to the Swap Shop, and we'll reward you with two tokens (equivalent to £2) for each piece, up to a maximum of 14 tokens. These tokens can then be used to acquire new clothes from the shop. For some items, you may only need to add a small contribution to make it yours!
Want to swap or donate?
We welcome various clothing items for women, men and children, jewellery, accessories, shoes, and swimwear in good condition. Please ensure that the items you donate are clean and in a condition that you would wear yourself. Unfortunately, we cannot accept damaged, faded, or bad smelling clothing, and for hygiene reasons, we are unable to accept underwear.
Get an extra token!
To make this event a resounding success, we need your help in spreading the word. If you share your Swap Shop experience on social media using the hashtag #swapshopiom, we'll reward you with an extra token to use in-store. Simply speak to one of our staff members in-store to claim your token.
Please note that we will not be offering refunds and so monetary reimbursements are not possible, as all funds generated from the Swap Shop go directly to supporting The Huruma Orphanage. All surplus clothing remaining after the Swap Shop event will be donated and distributed among various charities across the Isle of Man.
Join us from the 25th to 28th August at the Strand Street Shopping Centre for a shopping experience that benefits both your style and the lives of others. Together, let's make a positive impact on the communities further afield.
Disclaimer: The views, thoughts and opinions expressed within this article / videos are those of the authors / speakers and not those of any company within the Capital International (CIG) and as such are neither given nor endorsed by CIG. Information in this article / video does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
Despite being a member of FATF since 2003, South Africa (“SA”) has failed to achieve the required level of compliance with international anti-money laundering standards. The Grey Listing is an international indicator that SA is no longer regarded as a safe investment destination.
8 conditions have been narrowed down by FATF and are yet to be met. Accordingly, laws need to be tightened, mainly regarding money laundering, terrorist financing and corruption. The global watchdog was seemingly unimpressed with the current take on anti-terrorism, but so called “state capture” 1 has been indicated to be the final nail in the coffin. Subsequently FATF has especially requested assistance with extradition.
Although in the past few months leading up to the Grey Listing, SA has managed to pass some legislation regarding the above, the implementation and enforcement herein remains seriously lacking in SA. SA is not off to a convincing start with the Gupta’s extradition from Dubai failing whilst corrupt government officials remain within office.
The longer the Grey Listing status remains attached to SA, the more detrimental for the country’s reputation, currency, and capital borrowing cost.
The Finance Minister, Enoch Godongwana remains optimistic that we can look forward to removal within 2024. Experts are however not convinced. Until then SA can expect additional Due Diligence, transaction delays and higher costs as the new norm.
The Grey Listing factor is seen as the main contributor in the FSCA’s decision to step up on FIC Inspections. Accordingly additional pressure is now placed on accountable institutions to improve their compliance measures and to strengthen their efforts in combatting financial rime. The Regulator expects greater attention being given towards sanctions, domestic and foreign politically exposed persons, prominent influential persons and internal FIC training FIC.
Equally government is expected to step up to the challenge and to work alongside the Financial Services Industry (amongst others) to protect the integrity of SA’s Financial Industry and assist in reducing the global harm caused by financial crime.
In April 2023 SA has introduced the shared state forensic capability within FIC which will see specialised resources in forensic accounting, financial analysis and related services working together to support the work of law enforcement and other competent authorities in their pursuit of high priority criminal matters. Beneficial ownership have also been identified as a new focus along with FIC declaring more entities as accountable institutions.
Ultimately until such a time that more arrests and prosecutions are made, the Grey Listing status in SA will remain.
1.Systemic political corruption in which private interests significantly influence a state's decision-making processes to their own advantage.
What is CIG doing?
Over the past 18 months CIG has been working through the potential impact of SA being placed on the Grey List. This work has focused upon mapping out the potential impact for our clients and our business activities, mitigation strategies and aligning our approach, that may be deployed, where circumstances permit, to reduce the impact upon our client base. Kindly note that management and mitigation of risk factors, whether jurisdictional or otherwise, will be approached on a case-by-case basis.
What if CIG can’t mitigate the Risk?
It remain sour goal to cause as little disruption for our clients and intermediaries as possible. Our appetite towards our SA clients and intermediaries is unchanged and we will endeavor to mitigate the jurisdictional risk associated with SA to the best of our ability. However, risk mitigation cannot be guaranteed in all cases. In those cases where higher risk factors are deemed to be persuasive, we will seek to undertake Enhanced Due Diligence (EDD).
What does EDD entail?
EDD goes further than obtaining basic due diligence, in cases that are deemed to present a higher residual risk, owing to persuasive higher risk factors that cannot be mitigated. EDD may involve:
• Going further to verify customer related information, by obtaining and assessing information from a wider variety of sources.
• Taking additional reasonable measures to establish (and verify, as necessary) source of wealth and source of funds of the customer and beneficial owner.
• Undertaking further research, in order to understand the background of a customer and their business.
• Gaining additional information from the customer regarding the purpose and nature of the business relationship.
Disclaimer: The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
Welcome to the Quarterly Investment Review for Q2 2023.
Our Investment team have put together a range of resources to update you on what has happened in markets across the second quarter of 2023. Here you will find:
The graph below shows global equity performance across the quarter and plots world events along the performance line to indicate their impact on markets.
Hear from our team of investment specialists as they each explore an investment theme or the performance of an individual asset:
Global equities achieved moderate gains in Sterling terms during the second quarter with US & Japanese equities outperforming and China & Hong Kong underperforming. Year-to-date US equity market returns have been driven by just seven companies, namely Apple, Microsoft, Alphabet (Google), Amazon, Nvidia, Tesla and Meta (Facebook). The prospects for artificial intelligence have been a key driver in the performance of these stocks. Exclude them and US equity market returns have been flat.
Global bonds returned -3.9% as central banks maintained course in their attempts to quash inflation. This was particularly acute in the UK where the Bank of England surprised in June with a larger 0.50% interest rate hike in June. While headline inflation has rolled over, core inflation, which better highlights the impact of wages and the services sector, is proving sticky in the US & Europe while still high and rising in the UK. Sterling bonds have performed poorly as a result and the added pressure on the UK economy has held back the equity market. The silver lining is that Sterling has begun to strengthen and that could assist in bringing down inflation.
The impact of higher rates is yet to ease a tight labour market with US unemployment reaching its joint lowest since 1969 and UK wages on the rise. That could be about to change with signs of weakness in property markets as house prices are now falling across the UK, Europe and the US. As the cost of servicing mortgage debt increases, consumers are forced to tighten their belts and the UK is now expected to tip into a shallow recession, despite the IMF’s upgraded growth forecast in May.
The US regional banking crisis has simmered down with First Republic sold to JP Morgan and the FDIC to impose higher fees on the largest US banks to cover the cost of uninsured depositors. The US debt ceiling was raised and government spending curbed by the Fiscal Responsibility Act of 2023, ending a short period of volatility for short-dated US dollar lending.
China’s economy rebounded with a positive surprise of 4.5% GDP growth in the first quarter, but this was largely driven by domestic consumption and PMIs have since highlighted that Chinese manufacturing has shifted from expansion to contraction. This has cast doubt over the scope of the recovery as the country emerges from its zero-covid policy and the People’s Bank of China has now embarked on another monetary easing cycle in response. Manufacturing also remains a weak spot in Europe with the divergence between service and manufacturing PMIs at its widest in over a decade and Germany has tipped into recession as a result.
There were signs of political instability In Russia, as an important military mercenary group marched towards Moscow to remove the commanders blamed for botching the war in Ukraine. While political instability could ultimately be a route out of the conflict, it also increases the potential for tail risk events.
Capital markets have had to climb a wall of worry this year but with a few key risks behind us we can refocus on the key dynamic: core inflation remains above target in developed economies, central banks are therefore continuing to tighten, thus bonds are underperforming equities. Sentiment has been largely driven by expectations of a pivot from the Federal Reserve, but Jerome Powell has been cautious to signal such an event to avoid creating a bubble as the economy heads towards potential recession.
We have been increasing the amount of fixed income assets in portfolios as they now provide a much more attractive yield, but we are reluctant to give up too much equity which better protects capital through inflationary cycles as has proven to be the case thus far. If the global economy manages a soft landing, the pandemic legacy may be behind us.
Disclaimer: The views, thoughts and opinions expressed within this article / videos are those of the authors / speakers and not those of any company within the Capital International (CIG) and as such are neither given nor endorsed by CIG. Information in this article / video does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
Seven years have now passed since the momentous referendum which heralded the UK's departure from the European Union.
Time enough, if opinion polls are to be believed, for an intensifying sense of buyers' remorse. Indeed after a series of false dawns - from an overwhelming desire to 'get Brexit done (at virtually any cost)' in response to an initial three years of political stalemate, to the current seven year itch of discontent - since 2016 the issue has never been far from the forefront of our political discourse. More recently it has been the proverbial elephant in the room - political leaders have dared not speak openly to the voters about it, lest they are accused of wishing to open up an issue that was supposed to have been settled.
For the Conservatives any admission from the leadership that recovery from economic stagnation requires an engaged, working relationship with the EU risks infuriating the Ultras and accusations of betrayal. Meanwhile Labour walks a tightrope between pacifying its unrepentant Remain graduate activist base and avoiding any action that dissuades Red Wall Brexit supporters from returning to the fold, having voted Leave in 2016 and then backing Boris Johnson's Tories in 2019. Even the Liberal Democrats remember all too well the outcome of the last election when having positioned themselves as the Party of Rejoining the EU in order to appeal exclusively (or so they hoped) to the 48% who had voted Remain they ended up losing ground from an already very low base.
Even amidst their current travails, the Scottish Nationalists know in their hearts that an unaltered Brexit decision is a crucial part of their case for independence. Sixty-two percent of Scots voted Remain so the fact that they were bounced into Brexit by the votes of the English (and Welsh) plays to a sense of grievance that is a mainstay of the SNP's appeal. This will only be enhanced by a sense that the recent adaptation of the Northern Ireland protocol has given that part of the UK its own "very special position" within the EU custom union and single market set-up.
In short the universally expedient position across the political spectrum is to claim that the Brexit question is now settled. Instead the clarion call on matters European seems to be "Let's move on...."
Slowly, however, over these years it has dawned on the general public that the form of Brexit we have finally ended up with has sacrificed our economic welfare at the altar of sovereignty and the notional freedoms to strike trade deals. In the meantime our borders seem as elusive to effective control as ever they were when we were members of the EU.
Always much overplayed during our half-century membership of what began as a common market and developed into the EU was the persistent irritation expressed by UK businesses, large and small, at the imposition of ever more 'European regulation'. In truth most of this blizzard of new rules of compliance came about as a direct consequence of the creation of a single market and customs union (of which the UK was both a leading advocate and beneficiary) by definition requiring regulatory alignment. This harmonisation worked in UK exporters' interests as it allowed British goods to flow unimpeded across the single market.
The consequences of leaving the customs union and single market have been as harsh as they were inevitable. Any business exporting to the EU (and naturally this has been especially onerous for small enterprises lacking the administrative capacity to deal with the increased regulatory burden) has experienced a marked increase in the level of paperwork and bureaucracy. Accordingly small, relatively insignificant derogation from EU rules makes little sense. Better either to maintain total equivalence (and accept that outside the EU we have become a rule-taking supplicant) or seek the benefits, and take the potential risks to reputation, that arise from root and branch deregulation.
Even the current government recognises that the rather obsessive idea that as a matter of urgency we need to purge the UK statute book of all remaining EU legislation would cause damage to international minded UK businesses. lnward investment will scarcely be enhanced at the prospect of replacing EU standards with British ones, not least as it will likely impose an obligation on companies trading across Europe to comply with two parallel sets of rules.
This reflects one of the unspoken truths about Brexit - namely, the inherent imbalance in power between the UK and the neighbouring 27-nation bloc, still making up a single market of almost 500 million people.
It was - perhaps still is - fashionable to dismiss the EU as being an institution in decline. Indeed to many the central premise of Brexit was that Europe was falling apart and that our exit would either precipitate its final collapse or enable us to escape whilst we still had the chance. This has also turned out to be a fallacy - along with the assertion that the act of leaving would signal the end of hostilities with the EU. A quick glance at the Swiss experience should have dispelled that myth. As we have seen over small boat migration, the Northern Ireland protocol and euro-denominated City trading, 'leaving' the EU has simply meant starting a whole new set of disputes and arguments with our closest economic neighbours.
Yet the British public was assured that the real prize of Brexit would be our ability to strike trade deals on our own terms with economic powers further afield, especially in Asia and the Pacific. For sure we have swiftly been able to cut and paste trade agreements that had already been recently finalised when we were at the EU table with countries such as Japan, South Korea and Vietnam - although ominously in the former case there were delays when Japanese trade associations sought to exploit the opportunity to re-negotiate clauses to their own benefit.
The US have repeatedly made it clear that they have no current interest in commencing what would be tortuously long negotiations. Presumably they will only do so when it suits them to drive a hard bargain with the UK in order to use this as a precedent for a US-EU deal.
Meanwhile the agricultural aspects of the rapidly negotiated UK-Australian trade deal were disowned not only by the UK farming lobby but by the hardline Eurosceptic former Secretary of State for the Environment - needless to say, only after he had left office. It is welcome that we have secured Dialogue Partner status with ASEAN and the CPTPP, but this is more a post-Brexit diplomatic and geopolitical triumph than any significant boost to trade.
Another misapprehension was that the UK would be able to retain all the benefits of the single market because high-end EU businesses would lobby to retain access to UK consumers. I remember well an almost comical conversation I had with one of Mrs May's three Brexit secretaries who sought ever more bombastically to insist that Mercedes and BMW simply would not allow the German government to risk cutting off the British market for their cars in our Brexit negotiations. Predictably what actually transpired was that the UK customers of these up-market global brands have been forced to grin and bear the imposition of tariffs after we left the EU.
But how does this all play out? Is a UK return to the EU on the cards?
In truth, despite all the problems outlined above I still regard this outcome as highly unlikely. After all as EU members we already had a bespoke deal that was tailored to our interests. The UK's substantial budgetary rebate, amply reflecting our relatively small and industrialised agricultural sector, was entrenched along with opt outs on the single currency, the Schengen common visa arrangements and elements of social legislation. Undoubtedly the starting point of any attempt to rejoin the EU would be sacrificing these special arrangements - in short the UK public would be offered a considerably worse deal than the terms on which we left.
Rather more important - would the EU really want us back? As members we were never fully committed or engaged (having stepped aside from the continental co-operation that led to the Treaty of Rome in 1957, we only joined sixteen years later in the second wave of membership). Thereafter we increasingly became semi-detached. Unless and until there is cross-party agreement in the UK in favour of rejoining the EU, it is highly unlikely that it would even commence discussions.
Lest we forget the UK was also comprehensively out-manoeuvred in the exit negotiations. As we now know those UK politicians who promoted Vote Leave had no plan or strategy from the outset - nor arguably ever since - as to what Britain really wanted from those tortuous discussions. By contrast the EU played a blinder - its negotiators were determined above all that Brexit should not serve as a precedent. Any other EU nation contemplating withdrawal had to be left in no doubt that walking away from the club would leave it worse off. So it has proved for the UK - all the more ironic since we were always rather skilled at negotiating our own best interests when we were members (as that list of historic opt-outs amply attests).
One other great paradox of recent years has come to light more recently with the Windsor Framework that made the hastily and poorly negotiated Northern Ireland protocol more fit for purpose. Suddenly it is apparent that the EU Commission had much more discretion to accept our wishes than we had been led to believe after Article 50 was invoked. Their insistence that the rigmarole of getting permission from all 27 Member states was a roadblock to progress turned out to have been simply a ploy - when it suited them, the EU was able to use plenty of discretion to act quickly and decisively. Previously under PMs May and Johnson the EU had shown little inclination to make life easier for a UK government especially whilst it pursued a campaign of public hostility in the media. However, under new leadership, at a time when the UK's NATO support over Ukraine was at the forefront of continental priorities, decisive and rapid progress was made.
Small wonder so few of the UK's diplomatic corps have any appetite to go back the the negotiating table with their EU counterparts. Brexit will not be reversed any time soon.
Disclaimer: The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
I would like to take this opportunity to congratulate the massive achievements of our Parish walkers this past weekend. For those who are not familiar with the event, The Parish Walk is a race that covers an 85 mile course around the parishes of the Isle of Man. Competitors can stop at any of the parishes along the way with many aiming for Rushen (19 miles) or Peel (32 miles). Those striving to complete the entire 85 mile course must do so in under 24 hours. It's a real test of both physical fitness and mental determination.
The Parish Walk is loved by the local community; most people on the Island know at least one person who is either participating or supporting a walker.
With over 1000 walkers setting off from the start line on Saturday, this year's event proved particularly challenging due to the heat; there are usually around 20 gold medal finishers (finishing under 18 hours) but this year there were only 11.
This year, our Finance Director and two time Parish Walk winner, Paul Atherton, was going for a hat-trick and although he came second, we are so proud of his stellar performance. Adey Callister was going for his gold medal and was looking strong until the dreadful heat got hold of him – remarkably he still finished under 20 hours. In my view the true heroes are those walkers who finish between 20 and 24 hours and the superheroes are the ones who finish in the last hour. I witnessed first hand again the grit, determination and resilience of men and women who had to endure incredible pain and exhaustion, yet refused to give up. This is the spirit of the Parish Walk.
I also want to celebrate the achievements of our team members who did not complete the entire walk. It is an injustice to say: “I just made it to Peel or to ….”. It is remarkable to reach Peel, which is 6 miles further than a marathon and hardest part of the entire route.
Here are the achievements of our colleagues:
Herman, my wife and I supported two competitors, James and Monika Basson, who travelled to the Island from South Africa just for the Parish Walk. James made it to Peel and Monika pushed on in a truly remarkable iron woman fashion to be the 19th women’s finisher in 21 hours 53 minutes. Our “super scientific” race food regiment of salt sticks, cola and chicken stock soup did the trick during the last 7 hours of her walk.
I would like to thank all our colleagues and family members who supported our walkers and other walkers. Support and community participation are part of the spirit of the Parish Walk and what makes it such a unique event. A particular thanks goes to June Cannell, who expertly organised the Capital International Group support station on the road to the Sloc.
Disclaimer: The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
The last 12 months to April have been good for Capital’s equity selection, with our holdings outperforming their benchmarks: our UK stocks rose 13.3% versus 7.3% for the FTSE All Share index total return index. At the same time our US outperformed modestly in a more difficult market, returning -1.6% versus -1.9% for the S&P500 total return index.
We discuss below how our stock and sector choices have added value, but it’s worth also dwelling on how our investment philosophy has fed into this.
While we acknowledge that beating the index is difficult, and that passive investments like index trackers or iShares have many attractions, not least due to their low cost delivery of ‘Beta’ or market risk-related returns, we believe that active management can add value in certain circumstances.
First of all, it requires perceptive stock selection (finding companies that will outperform the benchmark), as well as avoiding companies that are likely to do poorly, or underperform the benchmark. But it also requires a high level of ‘active risk’, or difference in portfolio positioning to the benchmark position – this is tantamount to conviction investing. If one believes in a stock then clearly one should hold a higher weighting in it than in the benchmark. Alongside active share, we believe that low turnover is also important, or not buying and selling too frequently. If the stock has a competitive advantage then it should do well over a sustained period of time, so there is no need to sell too early in order to move onto the next thing, as the next thing may not be as good. This is tantamount to the ‘Buffet method’: not over-diversifying, having high conviction positions, and not trading stocks (selling them in the hope of buying them back at lower prices).
Starting with our UK stocks the first quarter of 2022 was tough, and in the early part of the year our holdings underperformed by some 3% after being hit hard by the Russian invasion of Ukraine. We had a big holding in gold miner Polymetal, which fell sharply despite not actually being sanctioned. We also had holdings in other stocks with exposure to Russia, like Mondi, the paper and packaging company. But from April 2022 onwards performance improved.
This was assisted in part by takeovers of two key holdings: Homeserve and Aveva. Homeserve had suffered over the previous 18 months on concerns about its core UK business (which installs and repairs boilers) and had missed profit guidance on several occasions. However, we felt that the market had overlooked its international operations, in particular its US business, and added to the position. The shares touched nearly £6 in March 2022, but two months later in May Brookfield, the Canadian renewables group, stepped in and offered £12 cash for the company. It was one of our biggest holdings and our biggest ‘active’ position.
Our main IT holding in the UK was Aveva, the industrial software company, which had fallen from £45 in 2021 to nearly £20 by mid-2022 in the fallout from rising interest rates over the course of the year. The company had also reduced profit guidance. However, in September 2022 the main shareholder, French industrial giant Schneider Electric, agreed to acquire the 40% of the company it did not already own at a significant premium. We had built up our holding before the announcement.
Our 6% outperformance in UK equities can be attributed between two different effects: allocation effects (which involved overweighting sectors that were going to do well like Financials and underweighting sectors like Real Estate) added 2%, while selection effects (by which we mean stock picking) added about 4%.
In Communication Services we added 1% of value by selling Vodafone and instead focusing on BT, WPP and ITV, backed up with some opportune buying. In Industrials, meanwhile, we added nearly 2% of value – partly from Homeserve, but also from a big position in Bae Systems, a major beneficiary of the renewed international hostilities that have resulted from the Ukraine war. This sector has also benefited in the first four months of 2023 from our position in Rolls Royce, which upgraded full year guidance in February. Our Utilities exposure added 0.8% of outperformance – mainly from a big core position in Centrica, which doubled during last year’s energy squeeze. Financials also benefited from selection/outperformance effects from ABRDN, Barclays, HSBC and Standard Chartered, while Staples benefited from our holdings in Tesco, Marks & Spencer and BAT Industries.
The S&P500 is a hard index to beat but we were pleased that our high active share versus the benchmark worked out there too, albeit outperformance was more modest. In the US outperformance came from allocation effects (overweighting the energy sector and underweighting the Real Estate sector). Meanwhile, we managed positive selection contributions from our holdings in the Consumer Discretionary sector (big relative positions in Lennar and MacDonalds), while good calls on Merck, Amgen, Johnson & Johnson and Stryker enabled outperformance in the Healthcare sector. Our US Industrials also fared well, with Boeing, Eaton and Fedex all doing well, albeit Fedex had struggled in the second and third quarters of 2022.
In Europe, we matched benchmark returns, with asset allocation effects (overweighting the area) offsetting stock selection. Our big individual winners were Deutsche Telekom in Communication Services, and BMW, LVMH and small cap Novem (which makes interior fittings for car) in Consumer Discretionary. In Financials our preferred bank, ING, outperformed strongly, as did Schneider, Siemens and ABB in Industrials, while SAP performed strongly in Information Tech. Losers were our healthcare stocks and our sticking with oil and gas producer Equinor, which performed strongly up until September 2022 but which has lost ground since as gas prices have fallen.
Hopefully this gives an illustration of our effectiveness in adding value through active management of stock selection.
What next? We are hoping for a few more winners over the rest of 2023, and are prepared to place big bets. In the UK, we are hoping for more from Marks & Spencer, which has turned itself round after almost two decades of decline, and from Smith & Nephew, which should benefit as waiting times for replacement operations start reducing. In Europe we expect more from ASML, the maker of highly advanced chip making equipment which is benefiting from an enhanced capital spending cycle. We also hope that Kering, which has underperformed in luxury over the past two years, can recover some lost performance versus its competitors, and are looking for improved margins at Akzo Nobel.
In the US, we hope that Intel can benefit from an upturn later in the year in spending on computer chips as inventories finally reduce. We also hope that the company (which has also been struggling for some time) can tap into AI trends and show progress in moving to lower ‘nodes’. We are also sticking with a big position in Apple, which we see benefiting from the iPhone 15, and in Microsoft, which despite strong performance over the past ten years, still has many things going for it.
Disclaimer: The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
For nearly three decades, Capital International has sought to make money work better and to generate strong investment returns for our clients that are sustainable over time. These objectives are manifest in our investment philosophy and process that we call Sustainable alpha.
This investment philosophy and process has evolved over the years based on our experience of what actually works, both in the good times and through economic downturns and financial crises. This is a process and approach that has demonstrably delivered strong investment returns consistently over time.
From our investment research and forecasting, we observe that the companies that tend to deliver superior long-term returns for our clients exhibit two consistent characteristics.
Firstly, they create tremendous customer value, often using innovation and technology to transform the markets they operate in. This is what we describe as the thrust forces driving the business forward. We of course also look at external factors: Are its products or services sufficiently in demand? Does it have a competitive advantage? Is the market it operates in growing? Fundamentally we seek strong, growing businesses, but that alone is not enough.
Secondly, in order to maintain a world class performance over time, a great company, just like a great athlete, must keep in shape. To achieve this, a company must seek to consistently minimise the resources it consumes such as energy, raw materials and operating costs. We see these as the drag forces that can pull a company downward.
In our view, it is only by consistently reducing these drag forces whilst increasing the thrust forces, that a company can propel itself to success and generate returns not just for today, but sustainable returns for the future.
History is littered with yesterday’s growth stocks that ignored drag forces. Led by overpaid executives that believed their own press, recklessly spent other people’s money and took for granted their temporary dominance in a particular market. All too quickly they became bloated, spendthrift, behind the curve or just plain lazy.
The best executives, and indeed the best investors, live by the ancient Persian adage; ‘this, too, shall pass’. Knowing that the things that drive your success today are temporary and that markets are constantly changing, generates awareness of trends, a focus on productivity growth and financial prudence, as well as encouraging innovation to embrace the opportunities that change offers.
It should be no surprise that good management, strong governance, healthy motivated staff, a strong value proposition and increasing productive efficiency are fundamental characteristics of the high performing businesses that deliver strong investment returns.
These characteristics are also, of course, the very definition of sustainability and strong environmental, social and governance practices. Profitability and sustainability are not mutually exclusive concepts and the companies that will perform best over the long term are those that are committed to operating sustainably, constantly striving to improve efficiency and driving positive change.
We also need to be honest. We cannot simply flick a switch and divest from all sectors that fail to immediately meet arbitrary sustainability criteria. Right now, without fossil fuels, we cannot heat the millions of homes through harsh winters. Without industrial farming, we cannot feed the world’s 8 billion people.
It is a false choice to think we can or should disinvest from crucial industries on which our prosperity depends. This will actually create poverty, exploitation and suffering. Or, worse, lead to nationalism and even conflict. The exact opposite of the outcome we seek.
Instead, we need to encourage and champion iterative change, a process that’s incredibly powerful and overwhelmingly positive. Embracing innovations and technologies that create the sustainable solutions of tomorrow while constantly improving efficiency, reducing resource intensity and driving up productivity.
Hard working people and successful businesses are not the enemy of prosperity, they are the source of them. The reverse is also true. Businesses that fulfil these human needs, respond to change and innovate to create renewed value and increased productivity are the drivers of human prosperity. These are the successful businesses of tomorrow and these are the businesses that will deliver the best returns to investors.
Interestingly, when targeting sustainable investment returns, it’s the direction of travel for a business that is critical, not necessarily the starting point. Some of the best opportunities can be found in historically ‘dirty’ companies that have strong natural demand and are committed to the journey of developing better innovative, sustainable solutions and increasing efficiency.
So whilst our aim is to invest in assets that deliver sustainable profitability, it is not about virtue investing or green washing. We do not take an exclusionary approach to asset selection. To the contrary, we believe that all sectors are required for prosperity; a company doesn’t have to be perfect in terms of sustainability today but what we are looking for is clear evidence of and a commitment to progress.
This investment approach targets returns that are sustainable, not only for our clients, but also for society and the environment too.
It’s the ultimate win-win scenario.
In essence, Sustainable alpha is about identifying companies that can consistently increase the value they create, whilst reducing the resources they consume.
Quite simply companies capable of creating more from less – a perfect recipe for profitability.
Click to find out more about our investment philosophy.
Disclaimer: The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
Regulated investment activities are carried out on behalf of Capital International Group by its licensed member companies. Capital International Limited and Capital Financial Markets Limited are licensed by the Isle of Man Financial Services Authority. Capital International Limited is a member of the London Stock Exchange. CILSA Investments (PTY) Ltd (FSP No. 44894) and CILSA Solutions (PTY) Ltd (FSP No. 6650), t/a Capital International SA are licensed by the Financial Sector Conduct Authority in South Africa. All subsidiary companies across both jurisdictions are represented under the Capital International Group brand.
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