Performance Report: Rixon Income Fund

9 Nov 2023 - FundMonitors.com

The Rixon Income Fund rose by +0.96% in October, outperforming the RBA Cash Rate + 5% benchmark by +0.23%. Since inception in November 2022, the fund has returned +12.48% per annum, an outperformance of +3.82% relative to the benchmark...

Inflation is higher. But is it 'materially' higher? That's the big question

9 Nov 2023 - Pendal

The November 7 rates decision rests on the definition of 'materially higher' and 'low tolerance'. Pendal's head of bond strategies Tim Hext explains

9 Nov 2023 - Inflation is higher. But is it 'materially' higher? That's the big question

By: Pendal

Inflation is higher. But is it 'materially' higher?

That's the big question

Pendal

October 2023

AUSTRALIA'S latest inflation data was higher than expected.

The September quarter inflation number came out at 1.2% for both headline and underlying (trimmed mean) measures. This was above expectations of 1.1% and 1% respectively.

In terms of headline inflation, it's now fair to say the current pace is about 4% annually.

Last quarter it was 0.8%, dragged 0.2% lower by fuel prices. This quarter was 1.2%, dragged 0.2% higher by fuel.

The increase in underlying inflation would be of greater concern for the Reserve Bank.

A quarterly rate of 1.2% would not have been welcomed.

Under the hood

Looking under the hood would add to the RBA's concerns.

Market services remain stubbornly high. Housing inflation remains at over 2% a quarter, driven in part by utilities.

At least rents have now caught up with leading indicators at 8% annually.

Anyone who recently received their council rates will not be surprised by the 4.4% increase there. At least it only happens annually.

Government subsidies once again had an impact.

The government is already suppressing utility prices and now also childcare prices - though the childcare changes are permanent. Childcare costs were down 13%, subtracting 0.1% from this quarter's CPI.

Here you can see a breakdown of the ABS's latest inflation data:

What's material?

Focus now turns to the RBA's November 7 board meeting.

We have two communications recent communications to consider.

The RBA's latest minutes mentioned a "low tolerance" to upside inflation surprises.

And in her maiden governor speech, Michelle Bullock mentioned "the board will not hesitate to raise the cash rate further if there is a material revision to the outlook for inflation".

The question is - what is material?

In August the RBA forecast year-end inflation to be 4.1% and 3.9% underlying. It's early days, but Q4 is expected to be around 0.9%.

This would leave headline at 4.3% and underlying at 4.1%.

The RBA will release updated forecasts in its next monetary policy statement on Friday November 10 (though it will reference them in their rate decision beforehand).

Is 0.2% higher "material" or a breach of the "low tolerance"? That will be the big question come November 7.

Markets have 60% chance of a hike in November and a cash rate 0.35% higher by early next year.

At these levels there is no clear trade, since it will be line ball.

If pushed, I think Michelle Bullock will be keen to show her inflation fighting credentials by putting in one hike, even though she was probably hoping today's number would let her off the hook.

If the market gets close to pricing two hikes in the next few weeks we will go long duration. But until then today's reaction seems sensible and fair.

Long bond yields largely ignored Wednesday's moves. Ten-year bonds remain around 4.75%.

As always, they will rightly or wrongly be more captive to US bond moves and the latest iteration of oil prices.

Author: Tim Hext, Portfolio Manager and Head of Government Bond Strategies

Funds operated by this manager:

Pendal Focus Australian Share Fund, Pendal Global Select Fund - Class R, Pendal Horizon Sustainable Australian Share Fund, Pendal MicroCap Opportunities Fund, Pendal Sustainable Australian Fixed Interest Fund - Class R, Regnan Global Equity Impact Solutions Fund - Class R, Regnan Credit Impact Trust Fund

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

Performance Report: Altor AltFi Income Fund

8 Nov 2023 - FundMonitors.com

The Altor AltFi Income Fund rose by +0.8% in October, outperforming the RBA Cash Rate + 5% benchmark by +0.07%. Since inception in April 2018, the fund has returned +10.95% per annum, an outperformance of +4.67% relative to the benchmark...

Future Quality Insights: Focus on the knowns in an era of unknowns

8 Nov 2023 - Yarra Capital Management

The great quantitative easing experiment of the last decade set global markets on a course into unknown territory. The repercussions of this are only just starting to play out and are proving near-impossible to predict.

8 Nov 2023 - Future Quality Insights: Focus on the knowns in an era of unknowns

By: Yarra Capital Management

Future Quality Insights: Focus on the knowns in an era of unknowns

Yarra Capital Management

October 2023

The Future Quality approach to navigating uncertainty

The great quantitative easing experiment of the last decade set global markets on a course into unknown territory. The repercussions of this are only just starting to play out and are proving near-impossible to predict. Central banks contended a rise in inflation would be temporary until it proved to be persistent and sticky. At the start of this year, markets were collectively expecting the US Federal Reserve to start tapering monetary policy, but we cannot yet be certain that interest rate rises have peaked. Earlier in the year, America's banking sector was unexpectedly impaired by the impact of rapid monetary tightening, but could other sectors also be vulnerable to unforeseen shocks? And we are yet to truly see the impact that central bank actions will have on growth. The major economies have so far avoided falling into recession, but for how long?

Market dynamics reflect this sense of uncertainty. US equity returns have largely been driven by a cohort of seven mega-cap stocks during the first half of the year, a narrow leadership anomaly that is crowding out good performance in other parts of the market. And anyone on the wrong side of this trade has felt the impact of underperformance.

So how should investors be navigating this sea of uncertainty?

Known knowns

At a time when investors are facing many unknowns, it is almost impossible to accurately predict the future. Yet, despite this ambiguity, there are still knowable knowns to be found.

Previous market cycles have taught us that major shifts in the economic landscape generally lead to changes in leadership. So, we must focus on what we know to help identify those sectors and industries capable of taking up the position of market leaders in the forthcoming cycle.

Fortunately, there are several clear and indisputable trends.

The path to clean energy

An energy transition will be key to solving the major social and environmental problems caused by climate change. We know there is a need to reduce humankind's reliance on fossil fuels and create better alternatives through renewable sources of energy. Despite this knowledge, the journey is not straightforward. Paradoxically, given the time it will take to develop the necessary scale of new clean energy sources, we remain reliant on fossil fuel supplies; yet supply constraints have driven up prices, making the transition process even more costly. So, while the general sentiment is that we need to invest in renewable energy sources, continued investment in fossil fuels can be vital to enabling the energy transition.

This creates a fruitful pool of investment opportunities where individual companies offer solutions to both sides of this equation. On the one hand, some services and providers can help sustain fossil fuel production more efficiently, while still considering lower carbon outputs. On the other, technology is emerging to deliver more renewable solutions, and innovations in both hardware and software are helping reduce energy usage, waste, and the scale of emissions. Market leaders in all these areas are likely to surprise in terms of margins and profitability, and therefore present classic future growth opportunities.

Growing healthcare requirements

Healthcare presents a second long-term, structural trend. An ageing global population will only result in greater demand for healthcare while, at the same time, the sector faces increasing challenges in terms of its affordability. In our view, this demographic test will present a great hunting ground for investment ideas as healthcare companies are forced to innovate to ensure more efficient delivery of healthcare services, both in the hospital environment and through consumer-led healthcare solutions.

In the post-pandemic era, the healthcare sector has faced further volatility amid the disrupted labour market for staff, while inventories have needed to be replenished from the high demand necessitated by Covid-19. These challenges are starting to stabilise, and we are optimistic about the sector's ongoing potential due to the 3 • yarracm.com clear need for innovation in the provision of new and more efficient healthcare solutions.

The resumption of travel

Finally, travel is perhaps a less obvious trend, but it's one we believe is worth exploring. The pandemic was a huge challenge for the sector, with many people under-consuming travel services simply because they were not allowed to travel. In terms of supply, the lack of demand meant the availability of flights and the development of hotels completely dried up for a period. While many consumer activities have completely normalised, travel is very much still in the process of recovery. When you look at the core consumers of travel, demand remains robust. This is particularly true for younger generations, who are placing even greater value on 'experiences' during life after lockdown.

Further, a new travel cohort is emerging from developing countries where rising gross domestic product (GDP) per capita means more people will be able to afford to travel in the future. This reflects the same growth trajectory that developed nations have already experienced in recent decades. In our view, there will be many direct beneficiaries of this significant return to global travel, from booking companies to manufacturers of luggage and travel accessories.

Chart 1: Is there a China travel boom pending?

Addressing the known unknowns

While the investment case for established trends is relatively straightforward, it can often be harder to assess when or if an emerging trend will become a longterm investible opportunity.

AI presents an interesting example of this conundrum. While research in this area can be traced back to the 1950s, it has only recently become a commercial opportunity in the eyes of many investors. The market has quickly latched on to this development, and excitement over its potential has seen the limited number of direct AI players re-rate significantly - hence the dominance of the technology mega-caps so far this year.

Although we have few doubts that the AI theme is both real and profound, there are still many unanswerable questions. The profits and cashflows from AI are yet to materialise, so it's hard to be certain that they will be strong enough to justify current valuations. The adoption of AI is likely to have a meaningful impact across multiple industries - just as the internet did in the early 2000s - but it is difficult to identify who the eventual winners and losers of this disruption will be. There will also be geopolitical implications - the need for specific policy and regulation is already being widely debated.

While we can see the investment potential of having exposure to AI, it needs to be done in a way that's consistent with our Future Quality philosophy of focusing on the knowns rather than blindly following the hype. A raft of companies are benefitting from the rising tide of AI, but only hardware companies are currently seeing any tangible uplift in cash flow and profitability - which is what we are looking for. As more companies look to harness AI's potential, we expect to see strong long-term demand for the complex high-end semiconductors that underpin this technology. For example, Synopsys - a leader in design technology and services for the semiconductor market - could benefit strongly as companies' demand for exceptionally complicated design services grows. Similarly, Hoya is a leading supplier and manufacturer of high-tech components used by semiconductor manufacturers and should be a beneficiary of increased demand.

Future Quality in the Year of AI

While it's impossible to know the ultimate direction of travel, we do know that we are in the midst of a regime change to a world of slower growth that will endure bouts of persistently higher inflation. It is also a time of significant technological transformation that not only encompasses AI but will drive the energy transition and provide new healthcare solutions.

History tells us that during such inflection points, companies delivering high growth and sustained high returns of basic capital - classic Future Quality companies - earn the right to be market leaders and that these companies may come from different areas of the market to the leaders of the previous cycle.

As investors, we believe it's essential to stick to what we know, particularly during times of unpredictable change. Our investment approach is focused on identifying and investing solely in Future Quality companies, those with superior long-term returns on investment that have been shown to deliver better performance over time.

In our view, it is these Future Quality companies, especially in sectors aligned with secure, long-term trends, that will be the market leaders of tomorrow.

Funds operated by this manager:

Yarra Australian Equities Fund, Yarra Emerging Leaders Fund, Yarra Enhanced Income Fund, Yarra Income Plus Fund

The Rise of Meta: AI, Innovation, and Sustainable Growth

7 Nov 2023 - Insync Fund Managers

Meta's resurgence can be attributed to its focus on cost optimization and a robust rebound in advertising revenues.

7 Nov 2023 - The Rise of Meta: AI, Innovation, and Sustainable Growth

By: Insync Fund Managers

The Rise of Meta: AI, Innovation, and Sustainable Growth

Insync Fund Managers

October 2023

Meta's resurgence can be attributed to its focus on cost optimization and a robust rebound in advertising revenues. Profiting from the burgeoning wave of AI, Meta also ventured into the development of its 'expansive language model', bolstering its ability to drive innovative applications. Notably, its AI prowess paved the way for novel advertising solutions tailored to the needs of businesses which we believe will deliver sustainable earnings growth for many years.

The potential of an even more profound transformation from the deployment of AI-powered agents within WhatsApp, Messenger, and Instagram looms large. Their capacity to substantially enhance the search and shopping functionalities of these massive platforms promises a paradigm shift in both user experiences and business interactions. Meta's journey from hardship to revival imparts valuable insights into dispelling the 'crowded trade' theory. Firstly, adaptability is paramount in our now dynamic world. Companies that can pivot and innovate fast, thrive. Secondly, an enduring long-term vision is a potent asset. Founder-led firms driven by unique insight often excel beyond their peers. Moreover, investors must remember that markets are not always efficient and so deliver exploitable opportunities.

Funds operated by this manager:

Insync Global Capital Aware Fund, Insync Global Quality Equity Fund

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

New Funds on Fundmonitors.com

6 Nov 2023 - FundMonitors.com

Here are some of the latest additions to our database. Follow the links to view each fund's profile, where you'll have access to their offer documents, monthly reports, historical returns, performance analytics, rankings, research,...

6 Nov 2023 - New Funds on Fundmonitors.com

By: FundMonitors.com

New Funds on FundMonitors.com

Below are some of the funds we've recently added to our database. Follow the links to view each fund's profile, where you'll have access to their offer documents, monthly reports, historical returns, performance analytics, rankings, research, platform availability, and news & insights.

Plato Global Alpha Fund

Inception date:	September 2021	Minimum initial investment:	AU$15,000
Strategy:	Equity Long/Short	Distributions:	6 Monthly
Geographic mandate:	Global	Management fee:	0.99%
Investor type:	Retail	Performance fee:	15.00%

View Profile

Regal Resources Royalties Fund

Inception date:	August 2019	Minimum initial investment:	AU$100K
Strategy:	Equity Long/Short	Distributions:	6 Monthly
Geographic mandate:	Australia/Global	Management fee:	1.25%
Investor type:	Wholesale	Performance fee:	20.00%

View Profile

Riparian Water Fund

Inception date:	December 2019	Minimum initial investment:	AU$50,000
Strategy:	Agriculture	Distributions:	Annually
Geographic mandate:	Australia	Management fee:	1.50%
Investor type:	Wholesale	Performance fee:	15.00%

View Profile

Perpetual ESG Australian Share Fund

Inception date:	April 2002	Minimum initial investment:	AU$25,000
Strategy:	Equity Long	Distributions:	6 Monthly
Geographic mandate:	Australia/Global	Management fee:	1.18%
Investor type:	Wholesale & Retail	Performance fee:	Nil

View Profile

Munro Climate Change Leaders Fund

Inception date:	October 2021	Minimum initial investment:	AU$10,000
Strategy:	Equity Long	Distributions:	Annually
Geographic mandate:	Global	Management fee:	0.90%
Investor type:	Wholesale & Retail	Performance fee:	Nil

View Profile

IML Sustainable Future Fund

Inception date:	December 2022	Minimum initial investment:	AU$50,000
Strategy:	Equity Long	Distributions:	6 Monthly
Geographic mandate:	Australia/NZ	Management fee:	0.99%
Investor type:	Wholesale & Retail	Performance fee:	Nil

View Profile

Betashares Active Australian Hybrids Fund

Inception date:	November 2017	Minimum initial investment:	AU$0
Strategy:	Fixed Income	Distributions:	Monthly
Geographic mandate:	Australia	Management fee:	0.45%
Investor type:	Retail	Performance fee:	15.50%

View Profile

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Hedge Clippings | 03 November 2023

3 Nov 2023 - FundMonitors.com

While most punters will focus on the result of the Melbourne Cup just after 3 pm next Tuesday, homeowners with a mortgage will be more interested in the outcome of the RBA's November board meeting, due half an hour earlier at 2:30.

3 Nov 2023 - Hedge Clippings | 03 November 2023

By: FundMonitors.com

Hedge Clippings | 03 November 2023

While most punters will focus on the result of the Melbourne Cup just after 3 pm next Tuesday, homeowners with a mortgage will be more interested in the outcome of the RBA's November board meeting, due half an hour earlier at 2:30. Given most Australians' obsession with the Cup, it's unlikely many will wait until after the RBA's announcement to decide if they should have a bet or not, but given all four of the big banks are tipping a rate rise, they can probably make their decision beforehand. In addition, the queues at the TAB make a last minute bet difficult to place anyway.

It will be too late for Michele Bullock and her board colleagues to take on board, but it will be interesting to see if the number or value of wagers drop in the face of a general tightening of belts in mortgage land.

As we mentioned last week, Hedge Clippings is not convinced there will be a rise of 0.25%, in spite of the RBA increasing their forecast for inflation in the December quarter to 4.5%. They're still of the view that inflation will fall to 3.3% by the end of 2024, and further to 2.9% by the end of 2025, back (just) within their target range of 2-3%. The quarterly inflation figure of 5.4% released by the ABS last week showed a continuing downward trend from last December's peak of 7.8%, in spite of an uptick in September's monthly figure to 5.6%. The reason behind our lack of conviction lies in the price of oil, and volatility of the price of petrol at the pump, with automotive fuel jumping 7.2% in the September quarter, as outlined in this piece from the Conversation.

Had the price of fuel stayed constant (we wish!) over the quarter, September's quarterly inflation would have been 5.1% rather than 5.4%. And given the necessity for many Australians of filling up at the pump, and the flow-on effects via transport costs contributing to the supply chain, fuel's impact on discretionary spending is likely to dampen consumer demand across the board.

While we may be out of step with the expectations of the big four banks, there's no doubt rates are going to stay higher for longer - as they are in the US, with the Federal Reserve keeping rates on hold this week. We're certainly better off than the UK, where inflation is still stubbornly high at 6.7%, having hit a 41 year peak of 11.1% in October 2022.

However, things can't be all bad in the Old Dart, as evidenced by this snippet we came across this week: "The latest figures from the Department for the Environment and Rural Affairs (Defra) show that grapes currently account for 36% of England's soft fruit crop. In England and Wales, vine planting has increased 74% to 4,300 hectares in the last five years, and is expected to rise to a total of 7,600 hectares by 2032 - yielding a potential 24.7 million bottles of wine annually."

So no more jumping in the car, nipping across the channel, and filling the boot up with cases of French plonk. However, a trip down the A3 or M4 doesn't quite have the same allure.

Changing tack:

For those interested in trend following and systematic trading, Hedge Clippings has been offered a strictly limited number of spaces to a presentation and launch of the "Aussie Turtles" systematic trend following investment style, where a panel including Jerry Parker from Chesapeake Capital, one of the original Turtle Traders will speak to the "Turtles Experiment" which aimed to determine whether trading is a skill that can be learned, or requires innate talent.

The event is sponsored by East Coast Capital Management, and being held in Double Bay in Sydney on Thursday, 16 November 2023, from 6.00pm to 8.30pm, and will include refreshments. As above, space is strictly limited. For further details, please register your interest to attend here.

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Airlie Quarterly Update

2 Nov 2023 - Airlie Funds Management

Emma Fisher, Portfolio Manager, chats to Airlie's Analysts Joe Wright and Jack McNally about their recent US trip and findings from their discussions with companies, Aristocrat, QBE and SANTOS which are holdings in the Airlie Australian Share Fund.

2 Nov 2023 - Airlie Quarterly Update

By: Airlie Funds Management

Airlie Quarterly Update

Airlie Funds Management

October 2023

Emma Fisher, Portfolio Manager, chats to Airlie's Analysts Joe Wright and Jack McNally about their recent US trip and findings from their discussions with companies, Aristocrat, QBE and SANTOS which are holdings in the Airlie Australian Share Fund.

Funds operated by this manager:

Airlie Australian Share Fund

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

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

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

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

Doing good, feeling good: How investors can benefit from the resources sector's...

1 Nov 2023 - Janus Henderson Investors

Portfolio Manager Tal Lomnitzer discusses why investors may want to adopt a 'blended approach' that mixes investments in responsible resources with other low-carbon equity investments.

1 Nov 2023 - Doing good, feeling good: How investors can benefit from the resources sector's key role in decarbon

By: Janus Henderson Investors

Doing good, feeling good: How investors can

benefit from the resources sector's key role in decarbon

Janus Henderson Investors

October 2023

The energy transition needed to address climate change will require significant investment in new resources capacity to ensure the efficient rollout of low-carbon technologies. Investors can benefit by acknowledging the key role that the natural resources sector is set to play over the coming decades.

Creating a lower-carbon world will require a significant overhaul of the global energy system. From replacing internal combustion engines with electric alternatives to generating renewable power from solar and wind energy, the steps countries need to take to meet the United Nations Sustainable Development Scenarios to limit global warming to below 2°C as set out in the 2015 Paris Agreement will touch on nearly every aspect of our daily lives.

The energy transition offers significant opportunities for investors to benefit from decarbonisation over the coming decades. While many have focused on investing in firms with higher Environmental, Social and Governance (ESG) ratings and lower carbon profiles in many cases little thought has been given so far to the vast quantities of critical enabling raw materials required to build the low carbon economy such as copper, lithium, cobalt, nickel and steel and rare earths. The green energy transition relies on sourcing enough of these fundamental building blocks because without these materials, there can be no low-carbon future.

Sustainable resource demand set to surge

The scale of the upcoming resources challenge was made apparent in a recent report by the International Energy Agency (IEA) on the level of resources needed to support critical decarbonisation initiatives. The global energy body estimated that countries will have to source over three and half times the total demand from the same end markets in 2020, every year by 2040 to keep track with decarbonisation targets.

Figure 1: Transition-linked mineral demand and forecast to meet climate pledges

Source: International Energy Agency, as at May 2021. Note: Includes copper, major battery metals (lithium, nickel, cobalt, manganese and graphite), chromium, molybdenum, platinum group metals, zinc, rare earth elements and others, but does not include steel and aluminium. There is no guarantee that past trends will continue, or forecasts will be realised. The views are subject to change without notice.

The IEA expects the demand linked to electric vehicles (EVs) and battery storage to be the most resource-hungry market. Forecasts show the total yearly demand rising from less than half a million tons in 2020 to over 12.6 million in 2040. This is made up of a wide mix of materials, many of which already face supply constraints. In fact, the forecasted 3.3 million tons of additional yearly nickel demand for this market alone exceeds the current 2.8 million tons of nickel produced annually, underscoring the pressing need for investment in new capacity.

Investment in transition-enabling resources is lagging

There is a pressing need to ramp up supply to meet the demand associated with decarbonisation. However, global resources firms have yet to materially lift investments in new capacity after a decade of underinvestment that followed the peak spending in 2011 induced by the China-led demand for resources boom. Figure 2 shows that analysts are forecasting near-term real investments in new capacity across the sector to run at about half the pace seen in the 20 years that preceded the peak of China's hunger for resources.

Figure 2: Real global mining capex (bn USD) per unit of mine production (indexed to 1990)

Source: Jefferies, August 2023. There is no guarantee that past trends will continue, or forecasts will be realised.

Many equity investors ignoring the role or resources in the climate transition

For their part, many equity investors are also unprepared when it comes to investing in resources ahead of the low-carbon transition. The ongoing drive to lower the carbon profile of portfolios - with low carbon-tilted indices or Paris-aligned benchmarks - means many equity portfolios are now underweight the resources sector at a time when the sector's capital needs are set to surge to meet the demands of the low-carbon economy. Indeed, Figure 3 shows that that a Paris-aligned version of the MSCI World Index has significantly less resources exposure than passive index tracking, with investors following the former strategy committing to having no energy investments and about half the materials exposure.

Figure 3: Resources weight by investment strategy (%)

Source: MSCI, September 2023.

Being underweight the resources sector may have made sense previously given these stocks lagged the wider market during the low-growth decade that followed the Global Financial Crisis. However, this position needs to change if investors want to benefit from this key enabler of the low-carbon transition.

A holistic approach to delivering a climate transition investment portfolio

We think investors may want to consider adopting a more holistic approach to decarbonisation. This can be done by looking at the wider picture of how this can be achieved through the products and services offered by the companies they invest in, rather than purely focusing on the categorisation of 'low-carbon'. It is essential to acknowledge the critical role materials play in facilitating a low-carbon economy. Currently, the 'scope' lens applied to gauge the carbon profile of investments puts resources at a disadvantage in the eyes of carbon-conscious investors due to the relatively high carbon intensity of the sector. Measures to acknowledge the role a company's products and practices play in avoiding emissions (Scope 4 emissions) are starting to gain traction. A greater adoption of these metrics will help highlight the key contribution resources firms play in decarbonisation efforts.

Rethinking resources also doesn't have to tie investors to firms with poor ESG profiles. The sector overall has made great strides in improving its sustainability characteristics - both in terms of how new resources are mined and produced, and also with firms playing a leading role in the circular economy. There's no running away from the fact that even sustainable resources companies will have higher carbon intensities than those of low-carbon indices. However, investors can still achieve a significant reduction in the carbon profile of a portfolio relative to the overall market by taking a blended approach that mixes investments in responsible resources with other low-carbon equity investments. For example, a 90% MSCI Paris-aligned portfolio with 10% responsible resources could offer a reduction of more than 70% in carbon emissions compared to the MSCI World Index with the added benefit of potentially more attractive returns and diversification benefits from the allocation to responsible resources.*

Closing thoughts

The unprecedented challenge posed by decarbonisation requires significant investments to enable the roll out of low-carbon solutions required to meet global climate pledges. These investments also need to filter through to supply chain participants to ensure the availability of these technologies at the required scale. The post-COVID economic reopening has shown how even a few bottlenecks can quickly hobble entire industries.

Capital flows need to flow through to the fundamental building blocks that will make the energy transition a reality. Finding a way to properly account for the role companies play in enabling low-carbon technologies should put the resources sector in a better light.

In the meantime, investors should look beyond the near-term carbon profile of their investments and consider whether those investments are 'doing good' by enabling a low-carbon future. Acceptance of a slightly higher carbon profile with the potential for better returns could be a better outcome for investors than simply investing in a low-carbon portfolio that makes them feel good today.

IMPORTANT INFORMATION

Sustainable or Environmental, Social and Governance (ESG) investing considers factors beyond traditional financial analysis. This may limit available investments and cause performance and exposures to differ from, and potentially be more concentrated in certain areas than the broader market.

Natural resources industries can be significantly affected by changes in natural resource supply and demand, energy and commodity prices, political and economic developments, environmental incidents, energy conservation and exploration projects.

Author: Tal Lomnitzer, CFA, Senior Investment Manager

Funds operated by this manager:

Janus Henderson Australian Fixed Interest Fund, Janus Henderson Australian Fixed Interest Fund - Institutional, Janus Henderson Cash Fund - Institutional, Janus Henderson Conservative Fixed Interest Fund, Janus Henderson Conservative Fixed Interest Fund - Institutional, Janus Henderson Diversified Credit Fund, Janus Henderson Global Equity Income Fund, Janus Henderson Global Multi-Strategy Fund, Janus Henderson Global Natural Resources Fund, Janus Henderson Tactical Income Fund

This information is issued by Janus Henderson Investors (Australia) Institutional Funds Management Limited ABN 16 165 119 531, AFSL 444266 (Janus Henderson). The funds referred to within are issued by Janus Henderson Investors (Australia) Funds Management Limited ABN 43 164 177 244, AFSL 444268. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Past performance is not indicative of future performance. Prospective investors should not rely on this information and should make their own enquiries and evaluations they consider to be appropriate to determine the suitability of any investment (including regarding their investment objectives, financial situation, and particular needs) and should seek all necessary financial, legal, tax and investment advice. This information is not intended to be nor should it be construed as advice. This information is not a recommendation to sell or purchase any investment. This information does not purport to be a comprehensive statement or description of any markets or securities referred to within. Any references to individual securities do not constitute a securities recommendation. This information does not form part of any contract for the sale or purchase of any investment. Any investment application will be made solely on the basis of the information contained in the relevant fund's PDS (including all relevant covering documents), which may contain investment restrictions. This information is intended as a summary only and (if applicable) potential investors must read the relevant fund's PDS before investing available at www.janushenderson.com/australia. Target Market Determinations for funds issued by Janus Henderson Investors (Australia) Funds Management Limited are available here: www.janushenderson.com/TMD. Whilst Janus Henderson believe that the information is correct at the date of this document, no warranty or representation is given to this effect and no responsibility can be accepted by Janus Henderson to any end users for any action taken on the basis of this information. All opinions and estimates in this information are subject to change without notice and are the views of the author at the time of publication. Janus Henderson is not under any obligation to update this information to the extent that it is or becomes out of date or incorrect.

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A holistic approach to delivering a climate transition investment portfolio

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