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With plans to study Economics at Lancaster University, A-Level Student, Rory Donegan, recently spent a week in our Douglas office working with our Investment team. He now tells us more about his experience:

I recently undertook a week of work experience at Capital International in the Isle of Man. During the time I spent in the company’s Douglas office, I worked predominantly with the investment department, helping them to analyse the potential of some British utility holdings.  

I have just finished my A-Levels at Ballakermeen but didn’t sit any exams this year because of the pandemic. Regardless, my two years studying Politics, Economics and Business Studies in sixth form proved very useful during my week with the investment team. We spent a lot of time working through stock market data and comparing the financial records of the companies that I was asked to make a verdict on.  

The team gave me access to the Bloomberg terminals (which I was already familiar with) and an introduction to the Thompson Reuters (now Refinitiv) databases to help me with my decision-making. On day three, I was tasked with presenting my research and financial analysis to the Investment Management team who seemed to find it useful. Before coming to Capital, I didn’t have any real expectations; I was just looking for an insight into how investment management teams coordinate, even when their main responsibilities are split between commodities, funds and direct equity. It was a very interesting week, and I am grateful to Capital for allowing me to join them. On the last day, I spent time in the dealing room where I learnt how trade requests from clients are processed. This seemed to be a very fast-paced environment, and it was interesting to see how this side of the business works.  

Overall I learnt a great deal, not only about how to analyse an industry’s equity performance and compare potential holdings within the sector, but also how to present my findings and work as part of a team. The investment team were very enthusiastic about what they do and were very kind to me during my time with them.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, 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.

I recently read The Black Swan by Nassim Nicholas Taleb. The book focuses on extreme and rare outlier events (both positive and negative) and the tendency to find simplistic explanations for these events.

One of the ideas I was particularly drawn to was the concept of Medocristan and Extremistan, fictional countries distinguished by non-scalability vs. scalability. In Medocristan nothing is scalable; everything is constrained by boundaries. For example, the salary of a doctor is constrained by hours worked, and the weight and height of individuals are constrained by biological factors. This results in a place which is thin-tailed where even the most extreme outcomes will not significantly affect the mean, and all outcomes can be explained by a bell graph or a normal distribution. In Extremistan, royalties from a song, book or an individual’s wealth, for example, are not constrained by boundaries. These distributions are scalable, will be much harder to analyse and will not fit into any standard models. The increased possibility of an event occurring outside the normal distribution is much greater and one of these events could change the properties of the distribution itself. These events are what Nassim Taleb refers to as “black swan events”.

The Link between Wealth Distribution and Stock Returns

Just like in Extremistan, wealth in society has significant concentration in the right tail, where the likes of Jeff Bezos and other members of the billionaire club sit. One might conclude that a causal relationship should be found between this and individual stock returns, simply because a large proportion of the world’s wealthiest 1% or even 0.1% probably made their money through ownership of companies which they helped to create or transformed in some way.

After doing some research, it turns out the distribution in stock returns is possibly even more concentrated than wealth in society. Professor Hendrik Bessembinder wrote a paper on this phenomenon in which he highlighted that the majority of stocks do not exceed the returns of short-dated treasury bills. When first read, this statement sounds absurd. It is common knowledge that over long periods of time the stock market has outperformed treasuries and most other asset classes. However, he highlights the skewness or concentration of returns in the best performing stocks is particularly large.

Professor Bessembinder’s paper looked at the total wealth creation from the US stock market from 1926 to 2015. He found that out of the 26,000 stocks that appeared in the CRSP database*, about 86 of the top performing stocks (less than 1% of the total amount) accounted for over half of the wealth creation. He also found that just 4% of stocks (the top 1000 names) accounted for all the wealth creation.

Large returns from a few stocks essentially offset the modest and negative returns from the majority. In some ways the results are unsurprising, with only very few companies in existence for the 90 years between 1926 to 2015, and the median stock only being listed for 7 years, insufficient time to build up significant compound returns.

* The Center for Research in Security Prices is a provider of historical stock market data

Does trimming your winners make sense?

The paper also found that more than half of stocks have negative lifetime returns; leading me to believe that trimming exceptional companies might not be the best idea.

Investment managers will often trim holdings they feel have run or they believe are trading at higher multiples than when they originally took the position. They will usually recycle these into stocks at lower valuations and stocks which are “out of favour” with other investors.

Knowing that only very few stocks return a meaningful amount, does this approach make any sense? The idea behind this is that a stock mean reverts around a fair value and by recycling into stocks the manager deems undervalued, this should improve the performance and possibly the risk management of the portfolio.

Whilst this sounds like criticism of investment managers, I am merely pointing out that for one investment manager to be selling what they deem to be an overvalued stock, another must be buying this “overvalued” stock believing it to be “undervalued”.

I am also not against active stock pickers. In fact, for passive indexes (investment strategy that tracks a market-weighted index) to perform well, it is essential that excellent index agnostic investment managers exist. It has been shown that high active share leads to a higher variance in outcomes for investors. This is usually skewed to the downside, but newer studies have shown investment managers who have high active share and low turnover tend to perform better over long periods of time.

Source: The search for outperformance: Evaluating ‘active share’ Vanguard Research

Another study by Cremers and Pareek found that among high active share portfolios, those which have substantially different holdings from their benchmark only outperformed if they had low turnover. Investment managers who had holding periods of over two years on average outperformed by over 2% per year.

It was also concluded that funds with high turnover generally underperformed. Among patient investment managers, those with low active share or “closet indexers” underperformed even with long holding periods. The reason behind this might be explained by not only lower trading costs but by benefiting from mispriced securities, which only normalise over a long period of time. In summary, markets provide opportunities for long-term active investors.

Does the statement from Bessembinder hold true in other markets and over shorter time frames?

Bessembinder’s study was over an excessively long period of time. Most investors are unlikely to have a 90-year time horizon, but by reducing this to a more modest period, would the findings still hold true? Reducing the time horizon will in turn reduce the variance seen in the underlying equities. It’s likely that many of the top performing equities of each decade might not be able to reinvent themselves to reach the age of 90, so a slightly different approach might be needed to capture decade winners in portfolios.

To examine this, we can look at total return and the contribution to returns of the FTSE 100.  While the results weren’t as extreme as Bessembinder’s, they were still very telling of how a few equities delivered most of the market performance.

Source: FTSE100

Between 30th June 2010 and 30th June 2020, 175 equities had delivered a total return of 84% for the FTSE 100. The top 10 equities delivered over 50% of those returns, with the top 30 holdings delivering over 90% of those returns. Investors who didn’t hold the top 30 contributors and held only the other 145 equities did far worse than the market, receiving 7.81% or 0.76% annualised over the 10-year period. These stocks also underperformed Gilts* which delivered 15.75% or 1.47% annualised over 10-years.

Although the results weren’t as extreme as Bessembinder’s 90-year study, they do highlight that his original statement holds true. The majority of equities even over a 10-year period underperform Gilts. This leads me to believe that it is not only lower transaction costs which help low-turnover, high active share managers outperform but stock selection something which is backed up further by the facts around active share.  

*As a proxy for Gilt returns, I used the FTSE Actuaries UK Conventional Gilt up to 5 Years Index.

Source: FTSE100

Given only a small number of equities heavily influence returns, how do we make sure we have exposure to these equities?

It is paramount as investment managers and allocators that we try and find the minority of companies which deliver all the returns: the positive black swans. I believe these companies exhibit certain characteristics which, if sort out through analysis, gives investment managers a greater chance of owning them, allowing them to deliver abnormal returns. This, when coupled with unconstrained index agnostic global investing, should increase the chances of outperformance. The four main characteristics I believe these companies exhibit is the potential to grow revenue and earnings multiple fold over the long term, scalable business models, economic moats and exceptional management teams. These stocks should also be purchased at entry prices which significantly undervalue the long-term opportunity for their businesses.  


Bessembinder, H., 2017. Do Stocks Outperform Treasury Bills?. SSRN Electronic Journal,.

Cremers, M. and Pareek, A., 2014. Patient Capital Outperformance: The Investment Skill of High Active Share Managers Who Trade Infrequently. SSRN Electronic Journal,.

Taleb, N. and Chandler, D., 2007. The Black Swan. Prince Frederick, MD: Recorded Books.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, 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.

How long does it take to produce a vaccine?

10 to 15 years is the average development time for any new vaccine. Inoculation against COVID-19 could however be possible as early as January 2021, just one year after the initial outbreak.

There is a set process of research and testing that any vaccine must go through before it is approved for use on the general population. The initial research and development stage is often the easier part; it’s getting through the painstaking three-phased clinical trials that proves difficult. With each phase usually taking around two years to complete, the race to release a Coronavirus vaccine has seen companies progress at record speeds, passing through multiple phases in the space of a few months.

Who’s in the running?

Currently, there are 6 vaccines in the third and final stage of testing, including one from the UK (AstraZeneca); three vaccines from China (two from Sinopharm and one from Sinovac Biotech); and two from the US (Pfizer and Moderna).

The common belief seems to be that whichever company ends up winning the vaccine race will see profits soar overnight, with investors making their way to Monaco on their mega-yachts. The race, however, is unlikely to conclude in this way and investors should act with caution.

Backing a winner

All the wishful thinking in the world won’t change the fact that vaccine development is difficult, and failure highly likely.

A pharmaceutical firm may think they have found the answer, but the numerous stages of rigorous testing that follow could send research teams back to the drawing board at any point.

Not even the experts know who to back. There are too many variables and unpredictable aspects which make investment at this stage risky. It might seem like there’s a clear front-runner, but even the odds-on favourite can fall at the final hurdle, by which point a firm will have spent millions on research but have absolutely nothing to show for it. This type of scenario could prove very damaging to a contender’s share price, with investors seeing a sharp drop in value.

Vaccines are expensive and not necessarily profitable

The costs associated with developing and mass-producing a vaccine are huge, and recouping those costs can be difficult. Investors shouldn’t expect an immediate win if their vaccine of choice is the first approved. It will take a while to recover the cost of development, and manufacturing capacity may prove problematic. It may also happen that the race is won, but a second, more effective and much cheaper vaccine is approved soon after, resulting in only short-lived glory for the first vaccine over the line.

Another possibility is that no profit is made by vaccine developers. In a deal with Europe’s Inclusive Vaccine Alliance, AstraZeneca, for example, have committed to delivering 400 million doses at no profit, with other companies making similar promises.

Inflated and fluctuating prices

Currently sitting amongst investment app Robinhood’s 100 most-traded stocks are Moderna Therapeutics (NASDAQ:MRNA) and Inovio Pharmaceuticals (NASDAQ:INO.

While the two American firms have proven popular with investors, neither have any approved products on the market and their inconsistent financial track records are certainly nothing to write home about. Earnings for both firms have in fact diminished over time with Moderna’s trailing 12-month revenues down by over 40% for the past three years and Inovio’s down by over 90%.

Speculation seems to be driving price movements at the moment. American firm Novavax for example has never before managed to develop an effective vaccine, yet their share price has seen a 3,161% increase since January this year. Similarly, after reports of side-effects during a clinical trial, Moderna’s share price fell by almost 11% in just one day.

To invest on a whim or a slight glimmer of hope is a huge gamble, yet investors seem to be ignoring prior financial performance and paying astronomical prices that may not properly reflect a company’s true worth.

The pharmaceutical businesses that remain in the running sit both simultaneously on the precipice of innovation and failure, with only time telling who will win the vaccine race.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, 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.

noun: bootcamp

  • a military training camp for new recruits, with very harsh discipline.
  • a prison for young offenders, run on military lines.
  • a short, intensive, and rigorous course of training.

Neither ‘harsh’ nor ‘militaristic’ (we hope), our recent software development bootcamps mark a major step towards instilling a new legendary technology culture at Capital.

Innovation is essential, not just to our business but any business. Those who fail to innovate have a management culture that is happy to kick the can down the road and forego the opportunity to unlock future efficiencies because they perceive the short-term disruption as too inconvenient. For technology companies, this kind of ‘better the devil you know’ approach guarantees one thing: failure.

How to encourage innovation

Accepting that ‘thinking outside the box’ is key to innovation, how do you foster this within a delivery team?

With plans to open the Isle of Man’s first ever digital bank, the stakes are high and deadlines tight for our tech teams, but our innovation culture demands that we do things differently.

Instead of pressing harder on the management of deadlines, we decided to call a halt to ‘business as usual’ for a full 2-week sprint which included a series of ‘bootcamp’ events. These short, intensive, and rigorous sessions forced everyone involved with the delivery, including third party partners, to take time to reflect on and consider new ways of working which will be tested in the second half of the year.

Our bootcamp sessions covered a mix of topics from across the delivery lifecycle and were designed to get people to take stock of where we are and challenge how we can improve moving forward. The sessions covered:

  • Change Requests: Reviewing all upcoming project change requests.
  • Tech Scoping: Predetermining the work involved in a project and the associated timescales.
  • Dev Stack 101: Developing our applications (docker fundamentals, databases, files, VPN, API services).
  • Debugging 101: Finding and resolving bugs in the frontend, backend, logs and tools.
  • Workflow Deep Dive: Discussing the value of workflows, workflow designs, navigation and storage.
  • Lessons Learned: Opportunity to feedback on what is and isn’t working.
  • What’s Left to Do: Reassessment workshop and tech debt discussion.
  • Release Roadmap: Setting out priorities & proposed “Plan of Attack”.
  • Voice of the Customer: How we will utilise customer feedback to continually improve our customer experience?
  • Testing strategy: Reviewing test types (exploratory, edge-cases), automation, unit testing and how to improve our coding.

The sessions proved to be an extremely worthwhile exercise for us but what are the key benefits of this way of working?

Avoiding Technical Debt

As with all forms of innovation, the critical thing is to embrace the fact that there is a cost to breaking away from normal behaviours. Companies that take the easy route, and churn out quick-fix code that isn’t scalable, risk building up ‘technical debt’. This terminology refers to the inevitable consequences these companies will face further down the line for their shortcuts and makeshift solutions. The cost of rectifying a botch job in the future is inevitably greater than if the job was done properly in the first place. Our desire to get things right first time, based as much as possible on frameworks that promote reuse and thereby minimise technical debt, was one of the key drivers behind our bootcamps.

A Chance to Speak up

Problems were raised in an open culture without blame. This has helped us to identify solutions that will unlock efficiencies, reduce project risks and ultimately improve product quality. It’s amazing that ‘the devil you know’ isn’t even seen as being a problem until you deliberately force people to rethink how they function and give them time to experiment.

Building Stronger Teams

Relieved of their usual day to day responsibilities, our teams had the time to work closely with our technology partners to dissect, discuss and work through issues together. The bootcamps left us feeling united. We came away energised and our process improvements have already started to be rolled out. This positive action has helped build confidence with business stakeholders, reassuring them that, despite the break, the ultimate bank launch date has not been put at risk.

How to Run a Bootcamp

  • Plan on there being a disruption to business as usual and communicate this to business stakeholders.
  • Prepare for a negative impact on future sprints as changes are implemented.
  • Get as many outside or independent perspectives as possible and be inclusive with whom you invite.
  • Give presenters adequate time to prepare.
  • Follow meeting best practises and be respectful of people’s time by publishing an agenda and sticking to it.
  • Record the sessions as these provide a valuable resource.
  • Document and share the list of recommendations.
  • Reinforce that there are no stupid questions and every idea is welcome.
  • Be quick to implement the easy improvements, showing stakeholders just how worthwhile a bootcamp can be.
  • Make it fun - use it as an opportunity for people to get to know each other outside of the usual work routines.

There’s no quick fix to creating great development organisations. For leaders, the only advice is to be committed to doing things differently and, no matter how high the stakes, accept that there has to be short-term pain to deliver long-term gain. Breaking teams out of their daily grind to reflect on the lessons learnt is a ‘must have’ at the end of every release, but doing this on a larger scale with more stakeholders present is a valuable exercise.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, 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.

The end of July saw the simultaneous release of results from four of the US’s tech titans.

Facebook, Apple, Amazon and Alphabet (formerly known as Google) all came out on Thursday with what were – in the context of the massive contraction in the US and world economy – spectacular second quarter figures, leading the Financial Times’s Lex column in which they were referred to as the ‘Fearsome Foursome.’

It is most unusual for the four to report on the same day. Usually, they would be spread across the week, but all of them were forced to appear before a US Congressional hearing the day before and needed to prepare for that.

The hearing was to address concerns that they’ve become too dominant in their respective industries. The hearing struck some blows, but whether it amounts to anything that will lead to structural break-ups looks unlikely at this stage.

The FT summed it up well when it said the outcome was ‘growing political and regulatory pressure for action, but a shaky legal foundation on which to seriously challenge Big Tech’s dominance.’

Perhaps the most damaging revelation was an internal communication that revealed how Facebook’s Mark Zuckerberg saw acquisitions as an effective way to neutralise potential competitors.

Surely Instagram could have emerged as an alternative platform to Facebook, if Facebook had not bought it – and managed the different age groups between the platforms rather than having them dispersed across rivals.

But this email was one of 1.3 million, and there wasn’t a great deal else in terms of evidence of collusion or anti-competitive practice. As the FT concluded, ‘Big Tech probably doesn’t have too much to fear.’

Are these monopolistic businesses? Do they stifle innovation that would otherwise emerge from new entrants? Or, are they brilliant businesses whose consumers still love them, and which have displaced often second-rate competitors that produce poorer quality products at higher prices.

In truth, there has been ongoing discussion along these lines for several years, but no consensus on what to do has yet emerged.

But the exceptional financial results in difficult circumstances, when many others are struggling, suggest that there may be something in the criticisms.

The arguments are finely balanced. The Democrats may put the heat on further if Joe Biden gets elected, but at the same time there is a case for saying, ‘These are great US companies producing great results – what’s not to like?’

The ‘Fearsome Foursome’, of course, are more commonly referred to as the ‘FAANGs’ (using the term coined by CNBC’s Jim Cramer in 2013, based on the initials of the constituents when Alphabet was still known as Google).

The fifth member of the team, Netflix, reported its Q2 figures two weeks before – and disappointed after guiding to lower subscriber numbers in the third quarter. But Netflix too has benefited from lockdown and produced good investment returns in the year to date as people have subscribed to online entertainment whilst being cooped up at home.

The way this select band of stocks has kept performing over the past decade has been amazing.

During the 1950s, stock market returns were focused around a relatively small group of stocks which became known as the ‘Nifty Fifty’ – many of them still around, including Procter & Gamble, Pepsi, Pfizer, Eli Lilly, Coca Cola, IBM, Wal-Mart and Disney.

But the FAANGs are even more select. What should we call them? The ‘Nifty Five’? Or should that be the ‘Famous Five’?

The one stock that has often been linked with the FAANGs and shown similar returns, but never formally included with them, is Microsoft.

Perhaps that was because it would have disrupted the potency of the acronym ‘FAANG’, although Microsoft was a bit later in demonstrating supernormal stock market returns. ‘MFAANG’, or ‘FAMANG’ doesn’t have quite the same ring to it.

Microsoft reported good figures for Q2, without quite blowing away expectations in the way the ‘Fearsome Foursome’ did.

But perhaps there is good reason for Microsoft not to be part of the FAANG gang, on the basis it is not so much a genuine disrupter and more of an ‘enabler’ – benefiting many other companies, including rivals, in terms of improving productivity, rather than just brushing them aside in the way that the FAANGs have done.

The FAANG gang may have elbowed many existing companies and competitors aside in their rise to prominence and may represent a high water mark in terms of their stock market performance, but it would still be brave, or even dangerous, to bet against them at this stage.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, 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.

My wife, Kate, bought me a 1,000 piece Where’s Wally jigsaw puzzle from Amazon in March to keep us occupied during the height of the lockdown. We poured the pieces onto the counter unit in our kitchen and would spend 5 or 10 minutes here and there after lunch or with a glass of wine in the evening, following the minute details of the picture on the box to identify the patterns, find the corners and the edges and over the course of a couple of weeks, we finally put the final pieces in their rightful places to complete the picture.

When you look at successful people, they have a formula for success. Can you copy the best chefs in the world? What would it take? You need the right ingredients, you need the right quantities, you need the right equipment and you need the recipe to guide the way. Is that all it takes? Inevitably not. The best chefs in the world also bring experience and expertise. You can paint by numbers to mimic the greatest artists, but those great artists didn’t have something to copy when they first picked up a paint brush and started what would ultimately become a masterpiece.

And so it brings me to the new digital corporate bank that is in the final stages of development, CIB Limited. However challenging it was to complete the 1,000 piece jigsaw, I had the benefit of all of the necessary ingredients (the pieces) as well as the photo on the box to serve as the recipe. When we started our journey to set up a new digital bank early in 2017, not only were we missing most of the pieces, but those pieces didn’t come neatly packaged in a box with a picture on the front showing us what it should look like in the end.

Over the course of the past three years, we’ve been guided by a vision to create a new digital bank to serve qualifying high net-worth individuals and corporate clients that have been woefully under-served by some of the incumbent banks in the offshore markets. Whilst the vision has always shone clearly, the road to get there has at times taken us into darkness and unfamiliar and challenging territory. However, what has never been in question is the absolute determination to achieve our vision. We’ve had set-back after set-back, challenges that we could never have imagined, but also some fortuitous moments of good luck, particularly when I consider the group of people that we’ve assembled to help us achieve this vision. Whatever the challenge, my team have always found a way, and never have they ever doubted that we would complete what we set out to achieve when we started the journey in 2017.

All being well, we’re about 6 months away from being able to transition the clients in our Treasury business that qualify under our Class 1(2) licence and wish to move to our new bank. Following that transition during the first half of 2021, we aim to be in a position to open the doors of the bank to new clients.

The final pieces of the bank’s jigsaw puzzle are nearly in place. We’re now in the testing phase, and once the Isle of Man FSA has given us the green light to start taking deposits, we will proudly open the door to the island’s first new bank in over 30 years and its first ever digital-only bank. That moment will not be the end of the journey but the start. Just as Apple deliver continuous product enhancements to their devices via IOS updates, CIB will add new products, services and features in the months and years following the launch. These are exciting times for all at Capital International Group and I am grateful to all the people that have helped on this epic journey.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, 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.

What happened with Boohoo?

Shareholders have been saying ‘Boohoo’ after the Sunday Times alleged that the company’s products were effectively being sourced from a modern slavery factory in Leicester.

That is a trite statement, but it does succinctly highlight an issue of importance to the company, the fashion industry in the UK, and more widely to the new range of ‘ESG’ funds, which have emerged in recent years to invest monies on an ethical basis.

Cunningly, the Sunday Times introduced an undercover reporter into a factory allegedly supplying Boohoo. He was paid £3.50 per hour, which is half the legal minimum wage in Britain.

It also emerged from the Sunday Times report that employees in the Leicester factories were working in cramped conditions, breaking social distancing guidelines, and helping to spread COVID-19 in the city.

Boohoo has said that the supplier was trading under the name of a previous compliant supplier and has launched an independent investigation into its supply chain. But this hasn’t yet helped to resolve the issue.

Standard Life Aberdeen (SLA), the investment company, last week ditched their shares in Boohoo, saying that Boohoo’s response to the allegations was ‘inadequate in scope, timeliness and gravity.’

This is a significant move from one of the UK’s biggest managers. Other shareholders have said they are placing faith in management, pending its review of supply lines.

What is ESG?

ESG, or Environmental, Social, and Governance funds are supposed to put ethical considerations above purely financial ones.

‘Environmental’ denotes concern for the environment and sustainability; ‘Social’ deals with the treatment of workforce; and ‘Governance’ covers matters like how the Board operates, Audit and Remuneration Committees, and other areas of corporate responsibility.

ESG and the Fashion Industry

The Financial Times said in a leader column last week that, ‘It should not have taken a global pandemic to force ESG funds to get wise to the perils of fast fashion.’

Fast fashion is surely the inverse of sustainability, with its insistence on cheapness, faddishness, fast delivery, ‘throwaway-ability’ and the use of social media.

The FT has shown foresight over fast fashion, with an investigation into Leicester factories not paying the minimum wage back in May 2018 (just as it showed with Wirecard, the German payments operator that collapsed after a fraud a few weeks ago – but that’s another matter).

That article focused on a Boohoo dress being retailed for £6, which one UK supplier said he couldn’t produce for less than £6.45. It also quoted the CEO of retailer Esprit as saying, ‘I’d rather manufacture in Bangladesh than Leicester because they’re far further advanced’ in terms of issues of labour protection.

The FT’s exposé followed a Channel 4 investigation into Leicester factories not paying minimum wage in 2010 and 2017, and a University of Leicester study that found two thirds of the city’s garment staff were not receiving the minimum wage.

Putting this together with the fact that Boohoo sourced a third of its product from the UK (which means Leicester), these latest allegations should not have come as a surprise.

All this comes after controversy at Boohoo’s AGM in June, where a proposed bonus scheme was put forward that could pay senior management £150m dependent on future share price performance.

Behind the ESG Badge

At Capital International, when researching stocks, we assess and score companies for their ESG characteristics as part of our selection process. It is now common for most fund managers to use ESG metrics to shape investment decisions. It is likely that Boohoo would have scored poorly under most ESG metrics, so this begs the question of how this stock has found its way into ESG badged or focussed funds.

The irony of ESG funds is that they don’t just put consciences at ease, but have actually performed better than standard, or non-ethical, funds in recent years.

Part of this may be due to a ‘self-fulfilling prophecy’, whereby huge amounts of money flow into a select group of ESG accredited stocks. This drives their share price up, while at the same time money flows out of ‘non-ethical’ investments, like oil, tobacco and mining stocks, driving their share prices down.

Wirecard too was held in many ‘ESG’ portfolios.

It is clear that funds badging themselves as ESG need to demonstrate that their selection process is rigorous, with no potential for criticism that they are merely masquerading under the ‘ESG banner’.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, 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.

How has property performed?

Equities have bounced back following the March sell off over COVID concerns, but there is one ‘risk asset’ that has not performed particularly well since then.

Property, as well as the real estate investment trust sector, has been a relatively poor performer over the last three months, with many stocks demonstrating a meagre rebound at best, and at worst still bumping along the bottom.

The UK REIT sector has bounced by 15% since mid-March, but this has lagged the broader market by 7%, and this underperformance is replicated throughout the world.

This is not surprising, given newly emerged concerns about office use; the difficulty of applying social distancing in retail stores, restaurants, hotels and leisure sites; and the fact that many tenants have stopped paying the rent, given all the cashflow constraints they currently face, in a Dario Foesque attitude of ‘Can’t Pay, Won’t Pay’.

This is alongside the headwinds to the retail sector presented by the growth of online shipping, which have been a concern for the past ten years or more.

Government Support for Tenants

The real killer for the property companies on this occasion is that the UK government has effectively ganged up against them on the side of the tenants, preventing any evictions for non-payment in the quarter to June, and recently extending this to September.

With companies and their employees suffering, and the government eager to cut them as much slack as possible, the buck – it seems – now stops with the ‘rentier’ class. This is perhaps not surprising, given landlords have traditionally been blamed for many things throughout history.

The government recently issued a voluntary code of practice for property, which asks tenants to ‘continue to pay their rent in full if they are in a position to do so’ while others should ‘pay what they can’. But this is fairly opaque, and there is little, in effect, that a property owner can do if they believe their tenant can pay the rent but is taking advantage of the current environment.

Landlords are losing out  

UK retailers paid only 14% of the rent due in late June for the third quarter, while property tenants as a whole, including office and other industrial premises, paid just 18% of rents, according to commercial property management platform, Re-Leased. This represents a record low in rent collection.

As a result, landlords are waiting for more than £2bn in rent for Q3. This will likely creep up a little over the next few months, and some of it has been deferred. Due to the scale of the crisis, the British Property Federation believes that only a quarter of the rent roll may eventually arrive.

The 18% collection was worse than the 25% seen in March just after the virus had broken out in the UK.  

The payment of rent – formerly strictly enforceable and regarded as a highly visible and certain cashflow – is now beginning to look optional, rather than essential.

One casualty of this has been Intu Properties, owner of 17 shopping centres up and down the UK, and the biggest retail property owner in the country, which went into administration at the end of June. Quite who is going to buy all their centres, assuming they come back onto the market, remains unclear.

Generally, the winners have been companies involved in the provision of health centres (PHP Property) and social housing (Civitas, Triple Point), where the rent roll is effectively guaranteed. Those involved in logistics and online warehousing (London Metric, Tritax Bigbox, Warehouse REIT) also haven’t lost out.

The generalist REITs, and the big blue-chip names like Land Securities and British Land, have suffered due to too much retail and office exposure.

Their fortunes from here are very much tied to what happens with COVID and the broader economy.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, 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.