Redefining beliefs: What behavioural changes could occur as a result of the COVID-19 crisis?

Last week’s Soapbox discussed resilience, corporate culture and the importance of companies doing the “right thing” in the current situation. This made me think further about positive changes that may come out of these dark times.

Firstly, what behavioural changes may occur? It often takes an enforced shock to the system to make you evaluate what is actually important. My hope is that in light of the current situation we will all reconsider certain norms we have become accustomed to and whether there is a better way of doing things.

For example, take the way businesses interact, both internally and externally. This has been fundamentally challenged by working from home but thanks to online collaboration applications, many businesses in the service sector have been able to stay in touch without significant disruption.

Certainly, we should take a look at the implications for our own industry. Fund management is no angel when it comes to business travel (I myself am guilty in this regard…) and has always placed a heavy reliance on face to face contact. However, a recent article suggested clients are seeing very little downside to moving meetings online and in fact, many now prefer this medium. There will always be some interactions where face to face meetings are necessary but this period will hopefully make us reconsider what “necessary” is, and whether we can reduce time spent and emissions generated through travel to meetings that could just as effectively be held online.

There is also a more intangible, social side to this behavioural change. As Craig alluded to last week, many (but not all) companies are doing the right thing and realising that this current situation is bigger than them or their next quarterly profit. This ranges from independent local cafes providing free hot drinks to healthcare workers, to large listed companies putting principals before profit. Belgian chemical company Solvay is a great example. It is setting up a solidarity fund financed by senior executives and the company itself to provide both financial and non-financial support to employees and their dependents facing hardship as a result of the pandemic. I really hope the culture of initiatives like this lasts longer than the current crisis.

We have written in the past that fairness can be a source of competitive advantage (see here, here, and here) and this strikes me as an evolution of that belief . Being fair not only to your customers and suppliers but to society as a whole. This isn’t some anti-capitalist rallying cry, but I can’t help thinking companies that take action like this will be rewarded by employee and customer loyalty when conditions improve, thus helping their competitive position over the long term.

Lastly, perhaps the current crisis also brings about change in terms of what investors perceive to be “sustainable” companies. Traditionally, this has been very heavily skewed towards obvious things like renewable energy (and with good reason – we are facing a climate emergency), and healthcare (again, with very good reason). However, this situation has shown that companies helping us to continue to function in the crisis (i.e. be sustainable) are just as important. This can include companies involved in logistics, software that supports businesses, payment systems move online and business recovery functions. There are nuances to each case but it’s important as investors that we look beyond the “obvious” solutions to sustainability and support businesses making a tangible contribution across a range of areas. 

Linking back to my earlier point, it often takes an abrupt change to prompt realisations like this. Some of the changes will be easier to make than others and there will of course be unforeseen consequences. However, my hope is that this most troubling of times can be a catalyst for positive behavioural changes going forward, contributing to a more efficient and sustainable economy and one that acknowledges its role in wider society.

About the author

Iain Snedden is an investment specialist in the equities team. He has responsibility for representing the firm’s equity capabilities both within and out with the firm, with a particular focus on our suite of global equity products. This involves ensuring colleagues and clients are kept up to date on developments within the funds and the wider market. Iain joined us in 2015 to work in the Client Management team with responsibility for a portfolio of UK-based institutional clients. Prior to that, he worked at Baillie Gifford and held roles within the client accounting and business risk functions. Iain graduated from University of Edinburgh with a first class honours degree in Accounting and Business Studies. He has 9 years’ industry experience.  *As at 30 November 2019.

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Let’s get physical…stocks to get into shape in the New Year

New Year, new resolutions, new you… well, maybe… for the first few weeks anyway… until you are back spending the evening on the sofa gorging on Haagen-Dazs by the start of February. Gyms see a rush of interest around this time of year and it’s often hard to find a free treadmill or get a place at your favourite Pilates class. The seasonal hype inevitably fades, but we are firm believers in the fitness megatrend, which has seen gym membership and exercise participation rates increase meaningfully across the globe in recent years.

Looking at the figures, it is estimated that between 2008 and 2018 gym memberships grew by 37.1% in the US alone*. In the UK, memberships finally broke the 10 million mark last year, meaning one in seven people are currently members of a gym.** This has proved a structural tailwind for many gym operators and sporting goods companies and has provided a number of sustainable investment opportunities.

Growth of gym membership in the US (left) and 2019 statistics on UK gym membership (right)

In particular we favour low cost gyms, like Planet Fitness and Basic Fit, which make exercise accessible to those who can’t afford to pay the hefty monthly fees charged by premium health clubs.

US gym group, Planet Fitness, is a disruptive low-price gym, offering prices starting at around $10 – much lower than its competitors. Even its premium ‘Black Card’ membership comes in at a very reasonable $23 per month. The group is targeting the 80% of Americans that don’t go to the gym, particularly focussing on increasing the number of female members and attracting those low in confidence. The gyms offer “No Judgement Zones” and “No Gymtimidation” – a marketing message that has been highly effective in overcoming the old image of meatheads throwing dumbbells around!

Basic Fit offers a low-priced gym format across the Netherlands, Belgium, France and Spain, with market share just below 10%. The company is run by founder and former tennis player Rene Moos and expects to grow strongly in France and Spain in particular, where gym penetration rates are much lower than the UK. Both Basic Fit and Planet Fitness are also benefitting from lower rents by opportunistically taking space made vacant by the perennial struggles of traditional bricks and mortar retail.

All these new gyms need equipment, which has helped Technogym’s business expand as well. Like seemingly all successful businesses these days (think Amazon, for example), Technogym started life in someone’s garage and grew under the passion and drive of a visionary leader. Today the company, which manufactures a full range of fitness equipment, has an enduring global brand and attractive opportunities to continue to grow in markets including the US and China. The company has also recently launched its own direct-to-consumer offerings with live streaming of fitness classes from their studios in London and Milan – much like Peloton, but without the spectacular pre-Christmas advertising own goal. We see a big opportunity for them to grow their business and generate a more highly-valued subscription-based revenue stream.

These examples demonstrate the power of tapping into the fitness trend and the companies involved not only have the potential to be excellent investments but also provide clear benefits to society by helping keep people healthy and reduce the costs and burdens on healthcare systems further down the road.

Have a great weekend (at the gym).

Some of the companies listed above are held in the Kames Global Sustainable Equity Fund as well as other Kames Fund portfolios.

* Source: IHRSA: https://www.ihrsa.org/about/media-center/press-releases/ihrsa-report-worldwide-health-club-membership-now-183m-strong/
** Source: Leisure DB: https://www.leisuredb.com/2019-fitness-press-release

 

About the author

Iain Snedden is an investment specialist in the equities team. He has responsibility for representing the firm’s equity capabilities both within and out with the firm, with a particular focus on our suite of global equity products. This involves ensuring colleagues and clients are kept up to date on developments within the funds and the wider market. Iain joined us in 2015 to work in the Client Management team with responsibility for a portfolio of UK-based institutional clients. Prior to that, he worked at Baillie Gifford and held roles within the client accounting and business risk functions. Iain graduated from University of Edinburgh with a first class honours degree in Accounting and Business Studies. He has 9 years’ industry experience*. *As at 30 November 2019.

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Low and Dry

2018 brought a bumper summer for Europe – almost wall-to-wall sunshine, toasty temperatures and barely any rain. Great for relaxing in a beer garden and watching the World Cup and, you would think, for those choosing to holiday close to home (more on that later). However, while you were sipping those G&Ts and topping up your tan (or, if you are Scottish like me, cowering in the shade until the evening when it was safe to come out) there were less obvious (and less positive) consequences of the heatwave.

Take, for example, the Rhineland – Germany’s industrial heartland and home to many of Europe’s largest industrial producers. The river Rhine is the lifeblood of the area and a major logistical artery, underlined by the fact that over half of the containers that travel inland from the giant hubs at Rotterdam and Antwerp do so by barge.

However, this all depends on there being enough water in the river, which by the end of one of the driest summers recorded in Germany, there wasn’t. Water levels fell below those needed to run barges at full capacity and by late November, the situation had reached critical levels where even empty barges were unable to travel on some sections.

To put things into perspective, a standard sized barge has the capacity of about 160 lorries, so with water transport drastically reduced, is all of this supposed to be carried by road and rail? Supply chains simply don’t have that much slack and as a result, many major companies with production facilities in the area suffered.

BASF’s Ludwigshafen site, located on the Rhine, is the world’s largest integrated chemicals complex. Around a third of its material transport needs are met by barges, and as a result of low water levels, it had to reduce production to 60% of capacity. What’s more, facilities like this can’t just be ramped back to normal at the drop of a hat – it takes weeks! Add to this the increased costs of finding alternative sources of transport and the cost quickly mounts up – estimates are for an impact of around EUR200 million for BASF.

BASF is not alone, the likes of Covestro and Solvay announced significant impacts on their ability to receive shipments of raw materials. But it’s not just big chemicals companies… Commuters faced challenges topping up their tanks as supplies of petrol couldn’t get through to garages.

Even holidaymakers weren’t safe from the good weather! Buses had to replace boats on several stages of popular river cruise routes along the Rhine and the Danube, leaving tourists unimpressed as their leisurely cruise with a luxury cabin quickly turned into a cramped and bumpy coach ride.    

So there we have it, as a result of human actions, weather is getting more extreme and climate change continues to impact the way we live and the way companies operate. This may be a minor concern when you’re enjoying the summer sun and I suspect it previously wasn’t much of a worry for large industrial companies either. But when the impact starts becoming more tangible and can be measured in millions of pounds of lost profits, then I’m sure companies will very quickly start to care and take action. Until they do, they will be left high and dry by taking natural resources for granted and assuming they will always be able to use them on the same terms as before. 

About the author

Iain Snedden is an investment specialist in the equities team. He has responsibility for representing the firm’s equity capabilities both within and out with the firm, with a particular focus on our suite of global equity products. This involves ensuring colleagues and clients are kept up to date on developments within the funds and the wider market. Iain joined us in 2015 to work in the Client Management team with responsibility for a portfolio of UK-based institutional clients. Prior to that, he worked at Baillie Gifford and held roles within the client accounting and business risk functions. Iain graduated from University of Edinburgh with a first class honours degree in Accounting and Business Studies. He has 8 years’ industry experience (as at 30 November 2018).

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Subsidised Confusion

I recently attended a conference in Germany on ESG investing and its potential to have a positive impact on the world. Various issues were discussed and whilst there was agreement on some themes, there was divergence on others. This is unsurprising given the diverse approaches that can be taken to sustainable investing and is in keeping with the point that we often emphasise, that the devil really is in the detail.

So what were the talking points?

Why pay a premium for sustainable products when you could just buy a cheaper one?

One delegate insisted consumers wouldn’t pay a premium for a product just because it was sustainable. I fundamentally disagree with this from a philosophical perspective and evidence suggests that consumers are increasingly conscious of the product impact of the things they buy – especially millennials, who not only want to buy sustainable products but want to buy them from sustainable companies. 

I’m confused, is this sustainable or not?

There was an acknowledgement that sustainable investing can confuse clients… A number of managers then proceeded to give confusing presentations with tenuous stats, like ‘investing in a sustainable fund is 27 times more effective for the environment than cycling to work’ or ‘our portfolio prevented X number of sick days from work’. 

How on earth are clients meant to judge the effectiveness of sustainable investments when they are bombarded with stats like this? Whilst transparency and reporting on material factors is undoubtedly positive, it’s vital to keep these realistic and understandable. We look at the individual merits of each company to judge whether it is making a positive contribution. We might not always be able to measure that in lives saved or tonnes of CO2 emissions avoided, especially since these benefits can be indirect and further up or down the supply chain but by thinking about it holistically like this, we can be sure that each company we invest in is doing things the right way. 

Maybe what we need is more red tape

The idea of more regulation for sustainable funds was floated. There was little support for this other than a high level framework which respects the diversity of the sector.

The European Commission has taken an interest and has suggested that more specific disclosure requirements for sustainable investments are needed, stating “the overall sustainability-related impact of financial products should be reported regularly”. I am cautious on this for the reasons stated in the above section. I am all for transparency and reporting relevant data but setting specified metrics for such a nuanced subject has its dangers.

Throw money at it?

One suggestion was to subsidise sustainable investment funds to encourage people to invest in them… No, no, no. I disagree with this on a number of levels. For a start, it would result in ‘greenwashing’ where funds make a token, tick box effort to appear sustainable to qualify for the subsidy. Having more high quality managers investing sustainably would be a positive – as long as they do this in a genuine way and for the right reasons.

So, lots to take away and mull over. Debate is healthy and the fact that everybody has their own way of thinking about sustainability is part of the beauty of it. For our part, we will continue to focus on the detail and the nuances and share our insights and statistics where possible… Just don’t expect us to tell you that investing in a sustainable fund will save 14,521,325 trees, which will benefit from the 20,942,768 gallons of water saved and which you will be able to appreciate due to being ill in bed 17 fewer days per year.

About the author

Iain Snedden is an investment specialist in the equities team. He has responsibility for representing the firm’s equity capabilities both within and out with the firm, with a particular focus on our suite of global equity products. This involves ensuring colleagues and clients are kept up to date on developments within the funds and the wider market. Iain joined us in 2015 to work in the Client Management team with responsibility for a portfolio of UK-based institutional clients. Prior to that, he worked at Baillie Gifford and held roles within the client accounting and business risk functions. Iain graduated from University of Edinburgh with a first class honours degree in Accounting and Business Studies. He has 8 years’ industry experience (as at 30 November 2018).

 

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