Higher education, higher quality accommodation

Recent figures from the Office of National Statistics showed demand for UK goods and services continues to grow, with exports rising to £637bn in the year to August. A rise of 5.5% compared to the same time last year. One industry leading that charge is Higher Education. The UK is the second most popular location, behind the United States, for international students. We have some world class higher education institutions in the UK, which offer highly desirable courses to international students.  Of the more than 1.8 million full time student population in this country, 23% are from abroad. It is a key export sector for the UK economy. That’s not to say there isn’t strong demand from within the UK as well. Overall, demand for applications continues to outstrip available course places. On average over the last 6 years, demand for course places has outstripped available supply by over 35%. We expect demand for places to remain strong over the longer term with demographic trends implying a significant growth in the student age population from 2022 onwards.

Full time student applications continue to outstrip available places

Sources: UCAS, HESA, Unite estimates

Place of study for 4.5 million international students

Source: HESA,UNESCO, QS World University Rankings, NUS, Education at a Glance 2016, OECD

Providing good quality, affordable accommodation to students is vital to the ongoing success of the Higher Education sector. UK universities frequently cite their guarantee of accommodation to first year and international students as a key competitive point of differentiation. Moreover, students are increasingly opting for purpose built accommodation, which offers dedicated facilities like study rooms, high speed Wi-Fi, and 24/7 customer care. This has the benefit of freeing up the existing stock of housing for more general needs. However, financial constraints on many universities mean that they are building very little new accommodation themselves, preferring to spend their money on upgrading campus facilities like lecture halls, libraries, and laboratories.  The gap has been filled by the independent providers of student housing like Unite, who are the biggest in the UK with just under 50,000 beds. They let out accommodation both directly to individual students, but increasingly through “nomination” agreements with various universities. These agreements see the universities guarantee Unite, to a greater or lesser extent, that they will fill the rooms in their properties. For the universities this allows them to continue to attract students, and for Unite it provides a highly visible and recurring income stream, usually linked to the level of inflation.

Unite and Liberty Living, a privately held provider of student accommodation in UK with over 20,000 beds, are prime examples of companies which help provide long-term, sustainable solutions in an important industry, whilst also potentially offering attractive returns for investors.

About the author

Iain Buckle is an investment manager in the Fixed Income team with responsibility for credit analysis, particularly securitised and structured finance assets. Iain is the co-manager of several funds with a primary focus on sterling credit mandates. His funds include pooled and segregated mandates and included in our ethical bond franchise. As an experienced investment manager Iain is responsible for overseeing the institutional pooled and buy-and-hold portfolios managed across the team. Iain joined us in 2000 from Baillie Gifford where he was a fixed income analyst, and has 21 years’ industry experience (as at 30 September 2018). He studied Economics at Heriot Watt University.

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If you believe in nothing, you fall for everything

I have some sympathy with Mike Ashley’s recent comments about how certain shareholders have treated Sports Direct.

“Sorry, what!?” I hear you say.

Bear with me, I’ll try to explain….

Loyal soapbox readers will recall we referenced Sports Direct in one of our first Soapboxes. Our comments included, A maverick CEO, who blurs his own activities with those of the company and ‘alternative retailers do not offer the same forecast EPS growth but compensate by better cash generation, less aggressive strategies and greater respect between shareholders and managers’.

It wasn’t suitable for Kames, but a number of other (active) institutional investors obviously felt the risk reward trade-off was favourable – especially if their ‘engagement’ efforts could lead to improvements in corporate governance. Good luck with that. Yes, the chairman has recently been replaced, but does anybody honestly think that Sports Direct’s governance is really changing? Engagement can be effective, especially when you are a relatively large shareholder and the company in question is receptive. But let’s be honest, engagement can also be a convenient excuse to hold something that’s a wee bit awkward to explain from an ESG perspective.

Love him or loath him, at least Mike Ashley doesn’t pretend to be something he isn’t.

And from an investment perspective, an entrepreneurial spirit is to be encouraged. However, you also have to have certain corporate governance backstops because companies (and omnipotent CEOs) occasionally try to push things through that our experience tells us don’t work (or aren’t in the interests of minority shareholders). These are the things we are never willing to support. As with most cases, “if you believe in nothing, you fall for everything” (ironically taken from the album ‘How you sell to soulless people who sold their soul’ by Public Enemy).

Our approach to reviewing the corporate governance of the companies in which we invest therefore tries to marry evidence of formal corporate governance policies (committees, independence etc.) alongside behaviours (how shareholder friendly is the company?) and always with an eye on ownership. Ideally, we want the right governance framework and evidence of demonstrable shareholder friendly practices, but we are experienced enough to recognise that the two don’t always go hand in hand. Owner/founder managers are good (they know their businesses intricately), providing their egos are kept in check!

I’m off to spend some House of Fraser vouchers…

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It’s Complex and under-appreciated!

In 2020, new regulations come in to force from the International Maritime Organisation (IMO 2020) aiming to dramatically reduce sulphur emissions in shipping. Specifically, fuel sulphur content will have to reduce from a maximum of 3.5% currently, to just 0.5% by 1st January 2020.

To conform to these new requirements ships can either switch to more expensive low sulphur fuel oil available only from complex refineries, or retrofit ’scrubbers’ to ‘clean’ the fuel whilst on board. Retrofitting scrubbers is costly and, in addition, involves dry dock expenses and lost revenue from ships being out of the water.

Implications are significant for shipping, refining and shipbuilding companies. Simplistically, container shippers’ near term fuel costs may increase considerably and for refiners, where the industry is not yet ready to produce enough compliant fuel, spreads will likely widen for complex product. For shipbuilders, scrappage rates of older vessels should increase, bringing some return of demand for new boats and ultimately, in the longer term, a better demand/supply balance overall.

Conversations with shipping industry experts also highlight two important points:

Firstly, compliance with IMO 2020 is expected to be rigorously enforced with very significant fines. The need and benefits of enforcement are pretty clear -HSBC estimate that one container vessel consuming 80 tons a day of dirty fuel oil (HSFO) emits the equivalent in sulphur oxides (SOx) of 46 million light-duty vehicles running on Euro VI diesel engines.

Secondly, whilst IMO 2020 comes into force in just 17 months, only some 5% of the global fleet have been estimated to currently have scrubbers fitted. Global dry dock capacity would be hard pressed to materially improve that number in time, even were it not for the current stand-off between ship owners and operators as to exactly whose responsibility (i.e. cost) fitting a scrubber is!

In India, Reliance Industries is a well-placed conglomerate to benefit from this theme given it is arguably the largest complex refiner in Asia. Refining is a meaningful activity for this diversified group as it accounts for circa 60% of total sales and operating income. Elsewhere in its telecom and digital businesses, recent results showed Jio finally gaining critical mass in mobile telco subscribers and its retail business growing very strongly in a market where the penetration of organized retail is still very low.

Opinions and views from the Equities team at Kames Capital are not an investment recommendation, research or advice and should not be considered as such. Content discussing investment strategies and stocks is derived from and solely relates to the investment management activities of Kames Capital.

About the author

Euan Weir is an investment manager in the Equities team with responsibility for Asia. He joined us in 2015 from HSBC, where he was a Director of Asian Research Sales. Prior to that, Euan was Head of Asian Research Marketing at Merrill Lynch in Hong Kong and was an analyst at Merrill Lynch, Smith New Court and Crosby Securities. Euan studied Land Economy at Aberdeen University and has 26 years’ industry experience*.

*As at 30 June 2018.

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A change of climate in the boardroom

From 12 foot deep snow drifts in spring to melting roads and wildfires in summer, extreme weather is becoming the new normal. At what point does the unexpected become the expected?

While the theory of global warming has been around for many years, making a direct link between individual extreme weather events and climate change has been difficult. Climate researchers, however, are now explicitly stating that some weather events could never have occurred without the warming influence of human-induced greenhouse gas emissions.

Companies and investors are taking notice. In 2017, 15% of S&P 500 companies publicly disclosed an effect on earnings from weather-related events. 4% of them quantified that effect, resulting in an average materiality on earnings of 6%.

Over the past decade the terms “climate” and “weather” were among the most frequently used words in the transcripts of the quarterly earnings calls of S&P 500 companies, beating “oil,” “the dollar,” “recession,” and even “Trump”.

As ever, there are winners and losers at a company level. While British wines were once laughed at, they are set for a vintage year in 2018. But not all companies are raising a glass:

  • Stora Enso, the Scandinavian paper company, reported lower than expected profits this month, warning that forest fires in Scandinavia will cause raw material disruptions as a result of the tight Nordic timber supply
  • Ryanair reported that recent bookings have been impacted by warm Northern European weather. Why go to Tenerife when you can go to the Lake District?
  • Rank Group issued a profit warning in April, blaming poor weather for reduced visits at its Mecca bingo halls
  • Greggs issued a profit warning at its AGM in May, following the period of extreme cold weather in the UK. We expect the recent spell of hot weather in the UK to get a mention in their next announcement

Disclosing the impact of extreme weather in company announcements is one thing, but many companies are also taking action around climate change. Industries such as logistics and transportation rely on weather and climate data to stay on schedule and reduce risks. UPS even has its own meteorology department, which helps it to prepare for major weather events. Do more companies need to adapt to keep things moving?

We expect more companies to be discussing climate change at the highest level. For sustainable investors, that should be warmly welcomed.

About the author

Georgina Laird is a sustainable investment analyst. She is responsible for analysing and monitoring environmental, social and governance factors within the Global Sustainable Equity Strategy. Georgina joined us in 2015 from Russell Investments where she was an index analyst. She joined Kames as a performance analyst before moving to the ESG Research team in 2016. Georgina has a BSc in Mathematics from Heriot-Watt University in Edinburgh. She has the IMC professional qualification and has 6 years’ industry experience (as at 30 June 2018).

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ESG Screens – Why it can be good to look bad

I recently attended the Fund Forum in Berlin. For the first time, there was a focused ESG track at the conference and I was a speaker on a panel debate. A common plea from attendees was the need for a ‘standardised’ approach to ESG across the industry. The desire for this stems from an understandable and genuine worry that fund managers might ‘green wash’ funds (i.e. saying they’re sustainable when they’re not) to raise assets under management. Unfortunately, it appears ESG rating agencies are becoming the default ‘standardising’ solution used by fund buyers to assess how ‘green’ a fund is.  We believe this has negative unintended consequences.

ESG screens ≠ Sustainability

ESG screens are normally deployed at the beginning of a process and exclude stocks (if you’re a fund manager) or funds (if you’re a fund buyer) which look bad on this basis. In our view, this is a poor answer to the wrong question (i.e. ‘standardisation’ is a flawed ambition and ESG scores do not equal sustainability). I’m not saying ESG screening tools are worthless; we use them during our bottom-up process to highlight stock specific ESG risks that require further analysis. But our reason for analysing or indeed investing in a stock is never singularly determined by a rating agencies ESG score. There are many reasons for this including, but not limited to, materiality (one size does not fit all), no consideration of product impact, market cap and regional bias, incomplete data and that screens are an inherently backward looking solution. As such many of the companies we invest in have poor or no ESG rating agency scores.

I appreciate that it would be easier if all fund managers defined sustainability exactly the same way, but fund managers have never done things exactly the same way and if they did, their respective alpha would disappear. Fund managers all have different investment processes and track records which must be assessed and analysed. It is the same with sustainability and the key – as with any fund manager assessment – is not whether the approach is ‘standardised’, but whether it has integrity. There will always be charlatans taking advantage of the latest trend and this is the inevitable downside of the current popularity of Sustainability.

We don’t believe in magic green buttons. We believe the best solution – as with sustainable stock picking – is qualitative bottom up analysis.

Examples of inconsistent ESG scoring vs. Kames Capital view following a bottom up sustainability analysis.

Company Region Sector MSCI ESG Sustainalytics
(100 = best)
Exclusion lists ISS
(1 = best)
Kames Sustain
Mohawk US Consumer A 38 9 Leader
Ansys US Tech BBB 43 8 Leader
Insulet US Healthcare BB 10 6 Improver
Everbridge US Tech 30 8 Improver
Skechers US Consumer B 10 Laggard
British American Tobacco UK Consumer A 70 Nordic 1 Excluded
Airbus Europe Industrials BBB 77 Nordic & SEB 3 Excluded


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