The fastest Bear market in history?

The US market bottomed (at least initially) on the 23rd of March 2020 following a 31.9% decline from its peak 5 weeks ago. Modern financial history only goes back about 120 years, so if we take that as our guide, the table below from William O’Neil & Co. shows that this was the quickest and most intense (-7.2% per day) bear market in history. Only 1929 (part 1 of the great depression) and 1987 come close in terms of velocity.

To read more download the full article The fastest Bear market in history

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.  He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience.  *As at 30 November 2019.

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Impact Calculators: Informative, exaggerated or mis-selling?

“Everything should be made as simple as possible, but not simpler” Albert Einstein

 You may have come across impact calculators in your search for a sustainable fund to invest in. These neat tools usually take the form of a simple text entry box on a website that turns your £/$/€ invested into a precisely quantified reduction of bad things… and increase in good things.

They usually look something like this:

So what happens when you enter the amount that you want to invest? There are usually nice infographics which accompany the “statistics” combined with an array of feel good outputs – not to mention a surprising lack of disclosure regarding the assumptions or error ranges around the calculations. For example, it might tell you that you will save thousands of tonnes of CO2 or millions of plastic bottles by investing. It might claim your investment is the equivalent of taking thousands of cars of the roads or planes out of the sky. I might suggest that your investment provides millions of litres of clean water or provides treatment for hundreds of sick people. What’s not to like?


But perhaps I’m being too cynical. Aren’t these claims broadly accurate? Surely encouraging investment in such funds should be encouraged? I mean, they might be over-reaching a bit, but the ends justifies the means in this case. Right?

No, no and no. These claims are not fact. They are unsubstantiated and unverified. In fact, they are unverifiable! They are, to a large extent, unmeasurable. The impacts that companies have on the world around us via their products and practices are complex, multi-faceted, nuanced, highly variable across sectors and range from source materials or labour through to the second and third order impact of the products in use. The inter-relationships between the companies within a portfolio can offset each other. I genuinely don’t know where to even begin to think about how to reduce that down to a few simple numbers.

“Not everything that counts can be counted. And not everything that can be counted, counts.” Albert Einstein

All of which begs many questions.

Why is this allowed?
Who is regulating it?
Who can we trust?
Oh no not again (head in hands emoji, exasperated emoji)… do we learn nothing in this industry?

Very good questions. We’re asking the same ones on a regular basis, with the same level of exasperation. This sort of behaviour sows the seeds of future consumer mistrust. It (quite rightly) leads to regulatory clamp down which restricts everyone, including the best actors. It starts small with genuinely good funds with positive impact trying to capture a bit of market share and ends with some large cynical corporation taking it to extremes. If you think I’m being alarmist about this particular slippery slope, we don’t have to look far to see how quickly the terms “greenwashing” and “rainbow-washing” have gained traction. And it’s hard to argue that our industry doesn’t have form in terms of colossal, commercially motivated F&*& ups.

From the perspective of the retail consumer and the rise of the collective consciousness regarding sustainability, positive impact is one of – if not themain reason retail investors will buy funds in the future. So the commercial motivation is clear… can we be sure that the organisational integrity is highly tuned? We should judge that on a company-by-company basis, but the general consumer perception of our industry is not good. Trust and goodwill are fragile. They take a long time to build and just one isolated scandal to destroy.

Source: PWC

To sum this rant up, I believe this is worse than the standard forms of “greenwashing” which are fairly transparent in their disregard for genuine sustainable investing. Or “rainbow-washing”, that involves randomly attaching UN SDG badges to every company in the fund to prove how wonderful it is. We have internally coined the phrase ‘woke-ulators’ for these impact calculators. This is dark humour to help us deal with the seriousness with which we take this. It’s not good. Positive impact fund managers need cut it out before it damages all of our reputations.

But perhaps this is finally coming to a head. The 2 Degrees Investing Initiative (2DII) is beginning to resist the currently loose definitions of impact and has quit the Science-Based Targets initiative (SBTi) over how companies set ambitious and meaningful GHG reduction targets. The definition of impact must be the one understood by the general public and retail investors.

See here: 2DII “Science Based Targets” for financial institutions

Yes. It’s complicated. Communicating what we do as impact managers to the public is tough. It can require patience. But no matter how commercially tempting it is and how important the end (you believe you are justifying) is, we need to resist the urge to compromise our integrity.

“Doubt is not a pleasant condition, but certainty is an absurd one.” Voltaire

For over 30 years we have ardently resisted green washing, rainbow washing and magic green buttons.… and for the last two years or so we have had to resist the “woke-ulator” too. We may have lost out on market share as a result. That’s not particularly pleasant to think about, but then the alternative is absurd.

Other soapboxes on closely related topics can be found below:
Positive (second-order) impacts
The carbon footprint of your investment
Supply Chains: Materially materialising
Everything is awesome
Why it can be good to look bad

 

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.  He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience.  *As at 30 November 2019.

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The dirty myth about clean vehicles

“There is at least one truth to every myth. And it takes one truth to create a lie. Lies can be created from truths, but truths cannot be created from lies.” Suzy Kassem

Can it be true that electric vehicles have higher emissions than their internal combustion engine equivalents? Let me put your mind at rest, the answer is no!

The source of nearly all such claims is an article by Buchal et al. and like any good meme it appeals to controversy, conflict and confusion and has been spread far and wide across conventional and social media. However, as much as I want to toss this into the dustbin of non-peer reviewed conspiracy theories, I feel the need to make my case because as a driver, investor and advocate of electric vehicles (EVs), such claims cast doubt on their significant environmental benefits and could slow adoption.

Why are Buchal et al. wrong?
There are many unrealistic assumptions in the Buchal et al. calculations. Primarily, they have used out of date information and suppressed evidence, appealing to a status quo bias in the reader. In contrast, peer reviewed expert researchers such as Hoekstra et. al. have come up with very different conclusions:

The past never changes
There are three technology trends that are developing quickly and each of these continue to reduce the costs and improve the emissions profile of EVs vs internal combustion engines (ICE). These trends are renewable energy, battery technology and EV powertrain efficiency. The year-on-year compounding improvements of these trends means the emissions footprint of EVs are not just better than ICE today, but will continue to improve. In contrast, Buchal et al. use old power generation data from Germany – a country historically highly dependent on coal – and then assume no improvement. Furthermore, Buchal et al. also use best-case-scenario emissions assumptions for diesel. It’s like the VW emissions scandal never happened!

Ignoring inconvenient truths
Roughly five percent of oil emissions occur before it is burned to power a vehicle (i.e. from well to pump). Yet despite the battery supply chain and fuel sources being the focus of EV emissions footprint, oil supply chain emissions are often ignored when calculating the ICE footprint. Buchal et al. also assumed that the total lifetime millage of an EV battery was half that of an ICE, something that is no longer credible given the range and charging cycles demonstrated by Tesla. Furthermore, the average 300k km assumption for diesels is very aggressive as explained here. Whilst both have improved over time, the more immature technology is improving at a much faster rate. Perhaps having only 20 moving parts in the drive-chain is a benefit too?

“Buchal et al. assume the battery becomes the new bottleneck and will be scrapped after 150k km while a diesel would last 300k km. But current batteries are estimated to last at least 1,500 to 3,000 cycles before they lose 20% of capacity, giving an electric car with 450 km of range a battery lifetime of 450k to 1,350k km.” Auke Hoekstra, Eindhoven University of Technology

Blind to the virtuous cycle
Battery material extraction and transportation are the most emission-intensive parts of an EV lifecycle. But why should we assume all batteries are made from 100% newly extracted material? They can be recycled! And what about extending a batteries lifecycle in functions such as home-energy storage? Furthermore, the supply chain is relatively nascent and will become less emissions-intensive over time as cumulative production efficiencies come through. A study by the Swedish Environmental Research Institute (which Buchal et al. used in their assumptions) initially claimed a high emissions footprint for LiOn battery production. This was disputed by many researchers and has recently been updated. The new emissions estimates have been meaningfully reduced.

“That emissions are lower now is mainly due to the fact that battery factories have been scaled up and are running at full capacity, which makes them more efficient per unit produced. We have also taken into account the possibility of using electricity that is virtually fossil-free in several of the production stages” Erik Emilsson, IVL Researcher

Summary
The tale of the long tailpipe belongs on the bookshelf alongside Pinocchio. Using conservative assumptions Hoekstra et al. estimated that EV’s produce approximately 60% less emissions than diesels today. Furthermore, EVs have the potential to be 96% cleaner than diesels in a 100% renewable energy world. I will leave the last word to Hoekstra:

“One could imagine a future in which not only the cars themselves but the entire automotive supply chain runs on renewable electricity. Batteries could run mining equipment that retrieves the ore from which batteries, solar panels, and windmills are made. Solar and wind produce hydrogen that (in combination with batteries) makes the production of steel and aluminium almost zero emission, which in turn makes the manufacturing of batteries, cars, solar panels, and wind turbines almost zero emission. Car batteries also absorb excessive solar and wind, stabilize the grid, and reduce the amount of stationary batteries that are needed. It is not an exaggeration to say that in such a scenario, the GHG emissions of batteries could be further reduced by a factor of ten or more.” Auke Hoekstra, Eindhoven University of Technology

 P.S – If you have also been confronted by the unlikely assertion that EV street level emissions are higher than ICE because of increased brake and tyre dust (yes I know… it’s desperate) Jon has already dealt with that meme in a previous soapbox, called A Perfectionist Fallacy

Sources
Hoekstra: The underestimated Potential of Battery Electric Vehicles to Reduce Emissions
Solar PV additions vs IEA predictions: https://twitter.com/AukeHoekstra
IVL study: https://www.ivl.se/english/startpage/top-menu/pressroom/press-releases/press-releases—arkiv/2019-12-04-new-report-on-climate-impact-of-electric-car-batteries.html
Top 6 EV Trash Talk Errors: https://innovationorigins.com/tomorrow-is-why-german-automobile-club-study-is-the-anti-electric-lobby-at-its-finest/
Video: How Does an EV work?
Stanford Study: https://news.stanford.edu/2018/08/30/measuring-crude-oils-carbon-footprint/
Clean Energy Wire: https://www.cleanenergywire.org/factsheets/germanys-energy-consumption-and-power-mix-charts

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.  He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience.  *As at 30 November 2019.

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2025 Lookback

When I wrote my 2019 investment outlook, we were in the middle of a “market correction” as it is now retrospectively known. Volatility was extreme and global recession fears dominated the market narrative. I didn’t know which direction the market was going (I still don’t), so I focused instead on disruptive technological trends and the sorts of companies we would be looking to invest in. I called it “inevitable intersections” and you can read what I wrote, then, here. [Note: there are no predictions about the market levels and no mention of interest rates, Donald Trump or Brexit]. 

This year I’ve decided to copy one of my favourite comedians, David Mitchell. Rather than writing an “outlook”, I have instead imagined myself in 2025, looking back at the important things that have happened over the last five years. It’s a “lookback”. The benefit of this is that it focuses minds on the important long-term issues and helps us break free from the status quo bias we are all anchored to.

2025 Sustainable Investment Lookback

Clean & Autonomous Transport
Here we are in 2025 and I still don’t have a car that can drive me from my home to work whilst I snooze in the passenger seat. It’s all very well Tesla* delivering an Electric Car that has 600 miles of range and can do 0-60 in 2.5 seconds for £45,000, but it’s supposed to be fully autonomous by now! Most of my neighbours and work colleagues think the same thing about their Tesla’s. On the plus side – thanks in no small part to Tesla – it looks like the worst climate change scenarios might be averted as oil demand peaked in 2022-23 and is now declining despite robust economic global growth. It’s amazing to see how the global car industry has been disrupted. There are only two genuine “old world” competitors to Tesla in the electric vehicle market (VW and Hyundai) and they are seeing all the growth. 36% of new car sales are electric today and annual demand for new combustion engine cars is less than half what it was just 7 years ago, so it doesn’t look good for most of the traditional car makers at this point.

Healthcare Innovation
Artificial Intelligence was certainly hyped up a few years back, but it’s interesting to see machine-learning being used in a variety of industries, particularly the healthcare sector. The US healthcare system is still over-priced, but some technology that is emerging there is inspiring (from an outcomes and cost saving perspective). Diagnostics is one such area where machine learning has enabled early identification of diseases. This has improved outcomes, reduced hospital admissions and taken cost out of the system. AI-enhanced breast cancer scans and nasal swabs for testing lung cancer are two clear examples.  It’s also great to see these new peptide-based drugs hitting the market and addressing unmet needs in a variety of illnesses. In genomics, research has proliferated and compounded, increasing our understanding of diseases like Cancer and Alzheimer’s.

Clean Electricity
We now have over 100 countries in the world mandating solar panels on all new built houses. Desert states are rapidly leveraging their position in this transition by becoming renewable energy exporters. The relatively simple task of covering their unused land in solar panels and building grid infrastructure around it is so economically compelling now it would be daft not to.** Combine that with 100 new 10-12MW wind turbines that are being built globally per day and we actually have a shot at being fossil fuel free within a decade or so.

The Sustainable Consumer
Sometimes it’s difficult to point to exactly how and when a cultural change occurs but a change certainly came in the early 2020s regarding the perception of human consumption and waste. I think Sir David Attenborough – still going strong at 98 – had something to do with it. However it happened, there has been a step change in how consumers perceive their consumption in terms of both its origin and disposal. Start-ups leveraging a variety of old and new technologies emerged to resolve this friction and large corporations were forced by these disruptors to re-design the environmental and social impact of their entire supply chains.  There’s a lot of work to do but glossy CSR reports produced by outsourced marketing agencies are now a thing of the past. Stakeholder monitoring and oversight of corporates has been taken to a new level. Integrated circular economies are becoming the standard of best practice. Digitally printed garments, which reduce resource use and pollution, compostable plastics, better recycling systems, a reduction in intensively farmed animal protein and less trees being cut down are some of the positive outcomes we’ve seen.

Summary: It could be worse
All said and done, we’ve made good progress this decade. Significant geopolitical uncertainty around the globe and the odd inflation scare haven’t managed to derail the important technological and societal trends that are driving us towards a more sustainable future.  Sure, we could still mess it all up, but the stock market seems to be pricing in a future where companies that are having a net positive impact will be the ones that continue to grow. The world is complex with many grey areas that require diligent analysis in order to get the right answer, but the sustainable wheat is being separated from the unsustainable chaff when attributing value to a share. It’s particularly interesting to see many of the unsustainable companies that were stalwarts of the twentieth century consumer and industrial complex slipping into obscurity and financial irrelevance.

** In 2025, scientific consensus that human emissions are causing climate change is 99.99999999999999%. One person on Twitter still believes in the “alternative facts”.

*Companies mentioned are held in some of the sustainable and ethical funds at Kames Capital.

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.  He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience.

*As at 30 November 2019.

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The Silent Disruption: Why traditional car makers and customers will get an Electric Shock! Part III

Part III: Practice makes perfect

In part I and II of my series on the disruptive shift to electric vehicles (EVs), I explained why it is normal for car buyers and traditional internal combustion engine (ICE) car makers to be surprised by it. As I explained, it is mostly about the relative rate of improvement on the key performance vectors (including the all-important affordability factor). But a key consideration when investing is understanding not just if, but when an inflection in demand will happen. So why now? A key factor in my conviction (combined with Christensen’s framework explained in Part I and II) is Wright’s Law. Formulated in 1936 by Theodore P. Wright, it states that progress increases with experience — specifically:

“Each percent increase in cumulative production in each industry results in a fixed percentage improvement in production efficiency.”

This law has successfully explained the cost curve of over 60 products from solar panels to cars, including the Model T Ford. In car production it has translated to 15% improvement for every doubling of cumulative production. Crucially, small numbers double much faster than large ones. Wright’s Law still applies to mature technologies, it just takes longer. What’s fascinating (to me anyway) is that the Tesla Model 3 is already following the path of the Model T Ford. By Q2 2019 Tesla had cumulatively produced 275k Model 3’s and will produce about 600k by the end of 2020. Based on Wright’s Law this should result in a 23% improvement in production efficiency. Translated to finance speak, this means higher gross margins and lower capex per unit of production.


Source: Ark Investment Management LLC, 2019

Tesla has produced more EVs than any other company. Unlike its incumbent competitors who have largely outsourced their innovation to suppliers, Tesla is a vertically integrated technology company. It designs and builds its own electric motors and batteries. It is adding production and battery capacity at a faster rate than any other company (with 44GWh they have almost 50% global EV battery capacity). It has been refining its own drive chain management software for years and it owns the largest and fastest charging network in the world. Does this company remind you of any others?


Source: Bloomberg survey October 2019 (5000 owners)

Range and recharge speeds are probably the two performance vectors on which EVs still lag ICE. However, with range there has long been what Christensen calls “performance oversupply”. Most car journeys are < 50 miles long and now you can refuel while parked, which means the necessity for rapid refuelling falls. Furthermore, Tesla recently announced a 3% range increase for the S and X and a 5% increase for the 3. These were deployed via an over the air software update. And for those who regularly drive further than 300 miles, the most recent generation of Tesla superchargers can deliver up to 75 miles of range in 5 minutes. Teslas are the only cars on the market today that continually add improved features to the car over the air for free. The car improves while on the road.


Source: Tesla Q3 2019 Shareholder presentation and researchgate.com.

Tesla are growing units of production and reducing cost per unit of production faster than anyone else, in a market that will grow faster than most expect. Quality is improving every month and the energy and creativity evident in product development meaningfully differentiates it in the design stakes. The recent #CyberTruck (pickup truck) is the most obvious example. Does any other automaker have the courage, creativity or technical ability to replicate it? What this all translates to – in my opinion – is a combination of underappreciated competitive advantage, underappreciated addressable market and an underappreciated inflection in demand.

“They can have it in any colour they want, as long as it’s black.” Henry Ford

In summary, I believe the winner in the transition to electric vehicles will be the company that has the clearest vision of the future, the least historical baggage (in terms of mindset, bureaucracy and source of revenue) and is innovating fastest. That company will never be perfect but at least we can have confidence that they are motivated to improve and move as quickly as possible in the right direction. The recent unveil of the Tesla Cybertruck is – to me – indicative of all of this. Bold and courageous, built from first principles, technically superior to any ICE pickup truck on the market at the same price… but with windows that need work before they can reliably be claimed to be bullet proof. Remember nothing is perfect to begin with!

“We can fix it in post” Elon Musk


Source: Tesla

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.  He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience (as at 30 April 2019).

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