Le Groupe financier Connor, Clark & Lunn, l’une des plus importantes sociétés indépendantes de gestion de placements au Canada, a annoncé aujourd’hui le lancement de l’ICAV OPCVM Connor, Clark & Lunn. Le Fonds OPCVM d’actions de marchés émergents Q CC&L et le Fonds OPCVM d’actions mondiales Q neutre au marché CC&L font partie des sous-fonds initiaux. Le gestionnaire de placement est Gestion de placements Connor, Clark & Lunn Ltée (Gestion de placements CC&L), une équipe de 100 professionnels de Vancouver qui gère un actif de 41,7 milliards de dollars américains dans diverses catégories d’actif.
Le Fonds OPCVM d’actions de marchés émergents Q CC&L est une stratégie à gestion active composée exclusivement de positions acheteur sur des actions qui vise une croissance du capital à long terme par rapport aux indices boursiers des marchés émergents.
Le Fonds OPCVM d’actions mondiales Q neutre au marché CC&L est une stratégie à gestion active composée de positions acheteur et vendeur sur des actions qui vise à produire des rendements présentant une faible corrélation avec les marchés boursiers mondiaux et à maximiser le rendement total à long terme.
« Nous gérons avec succès des stratégies quantitatives d’actions depuis plus de 20 ans. Le lancement de ces fonds OPCVM permet aux investisseurs européens d’avoir accès à nos stratégies relatives aux marchés émergents et neutres au marché », se réjouit Martin Gerber, président et chef des placements de Gestion de placements CC&L.
La philosophie de placement de Gestion de placements CC&L repose sur le fait que les cours des actions sont établis en fonction des paramètres fondamentaux de croissance, de valorisation et de qualité de leurs sociétés sur un horizon à long terme. Toutefois, le processus de marché qui fait en sorte que les prix reflètent ces paramètres fondamentaux de façon juste n’est pas parfait. En effet, nombreux sont les obstacles et points de friction de nature comportementale, informationnelle et structurelle qui peuvent empêcher que le cours des actions reflète ces paramètres fondamentaux. Il en découle des évaluations inexactes sur le marché qui constituent des occasions d’ajouter de la valeur. Ces occasions font l’objet d’un processus systématique par lequel chaque société est évaluée objectivement par rapport à l’ensemble de l’univers mondial de Gestion de placements CC&L, lequel est composé d’environ 16 000 titres, 160 secteurs d’activité et 49 pays développés et émergents. Ce processus quotidien a pour résultat un portefeuille optimal qui investit constamment et objectivement dans les sociétés qui procureront les meilleurs rendements possibles tout en limitant rigoureusement le risque.
« C’est grâce à son équipe chevronnée et à son approche rigoureuse en matière de placements que Gestion de placements CC&L peut étendre avec succès sa gamme de produits en Europe », indique Warren Stoddart, cochef de la direction du Groupe financier Connor, Clark & Lunn.
L’ICAV OPCVM Connor, Clark & Lunn est un instrument irlandais de gestion collective d’actifs qui est constitué sous la forme d’un
fonds à compartiments avec responsabilité distincte entre les sous-fonds et géré par Carne Global Fund Managers (Ireland) Limited. HSBC Global Fund Services agit à titre d’administrateur, de registraire, de dépositaire et d’agent de transfert, et Matheson agit à titre de conseiller juridique en ce qui a trait aux lois irlandaises.
Si vous souhaitez en savoir plus sur les sous-fonds, cliquez ici pour consulter les prospectus, les suppléments et les renseignements clés à l’intention des investisseurs.
À propos de Gestion de placements Connor, Clark & Lunn Ltée
Gestion de placements Connor, Clark & Lunn Ltée (Gestion de placements CC&L) est l’une des plus importantes sociétés de gestion de placements indépendantes au Canada (elle appartient à ses associés) et gère un actif de plus de 41,7 milliards de dollars américains. Fondée en 1982, elle propose une gamme diversifiée de solutions de placements traditionnels (actions, titres à revenu fixe et placements équilibrés) et non traditionnels (stratégies neutres au marché, à alpha portable et à rendement absolu). Gestion de placements CC&L est membre du Groupe financier Connor, Clark & Lunn Ltée.
À propos du Groupe financier Connor, Clark & Lunn Ltée.
Le Groupe financier Connor, Clark & Lunn Ltée (Groupe financier CC&L) est une société de gestion de placements regroupant plusieurs sociétés, qui offre un large éventail de produits et de services de gestion de placements aux investisseurs institutionnels, aux particuliers fortunés et aux conseillers. Cette structure nous procure une envergure et une expertise considérables qui nous permettent d’assumer des fonctions administratives qui ne sont pas liées aux placements tout en laissant nos gestionnaires de placement se concentrer sur ce qu’ils font le mieux grâce à la centralisation des activités liées aux opérations et à la distribution. Possédant des bureaux un peu partout au Canada, de même qu’à Chicago et à Londres, les sociétés affiliées au Groupe financier CC&L gèrent des actifs totalisant plus de 70 milliards de dollars américains. Pour obtenir de plus amples renseignements, veuillez consulter le site www.cclgroup.com.
Personne-ressource
Carlos Stelin Directeur, Ventes institutionnelles (Europe) Connor, Clark & Lunn UK +44 (20) 3535-8107 [email protected]
Governments around the world are incurring record deficits to sustain their economies during the COVID-19 pandemic. These deficits are expected to persist, as revenue will be needed to rebuild infrastructure and support an aging population.
Benjamin Franklin, the inventor, philosopher, politician, and one of the founding fathers of the United States, famously said: “In this world, nothing can be said to be certain, except death and taxes.” Yet, in 2018, a record year for corporate profits levels, 91 Fortune 500 companies paid no federal income tax; among them, companies such as Amazon, Netflix, Chevron, GM, and Delta. Even more, their tax rate was -5%, meaning they got a tax refund. The 379 profitable Fortune 500 members paid an effective federal tax rate of 11.3%, almost half of the 21% tax rate established in the 2017 tax revamp. That represented a missing $73.9 billion worth of tax revenue for the federal government. As a result, in 2019, the Organisation for Economic Co-operation and Development (OECD) formally established base erosion and profit shifting (BEPS).
The digital economy giants have been very apt at using BEPS. Looking at cash taxes paid globally by FAANG stocks in 2019/2020, according to Global Alpha’s estimates, Facebook paid 12.75%, Apple 14.4%, Amazon 7%, Netflix 7.3%, and Google 11.9%. As an example of BEPS, Google declared $23 billion in revenues in Bermuda in 2017. Until 2015, Amazon was able to declare all its European revenues in Luxembourg.
The significant tax drag caused by these large multinationals was a major issue in negotiations over tax reforms at the OECD, since they were largely US corporations. The stalemate brought many local governments, such as Australia, the United Kingdom (UK), and France, to impose a local tax based on revenues earned in their respective country. That brought retaliation from the US by taxing imports from these countries.
This graph shows that in the 1970s, the largest corporation paid slightly higher tax rates than smaller ones. By the early 80s, the situation reversed, and the unfair advantage of larger companies has amplified since.
Why should we care? The tax system encourages businesses to consolidate and grow bigger. With a risk, they may abuse their market dominant position. The discussion until recently was concentrating on anti-trust measures. Companies like Amazon, Google and Facebook are currently being investigated by various government entities using anti-trust laws. As the case against Microsoft in 2001 demonstrated, it is hard to win a case against multinationals as current anti-trust regulations focus on the price paid by consumers. Anti-trust cases are overly complex and may take years before reaching a conclusion. Studies show that a minimum corporate tax would be a more effective way to ensure fairness and stable government revenues.
In the last few weeks, US President Joe Biden and his secretary of the Treasury, Janet Yellen, former Federal Reserve chairwoman, have proposed an ambitious plan to arrive at a global framework on taxation, which would stop the race to the bottom and allow countries to fund their needed services to their population.
The Biden tax plan includes the following proposed business tax changes:
Increase the corporate income tax rate, from 21 to 28 percent.
Create a minimum tax of at least 15% on corporations with book profits of $100 million or higher.
Double the tax rate on global income earned by subsidiaries of U.S. firms, from 10.5 percent to 21 percent.
Immediately, countries around the world, like France, Canada, Germany, Japan and many others, welcomed the idea. President Biden went further in supporting the idea of a local tax based on local revenues. There is a high likelihood that OECD negotiations may finally reach a new global tax accord by the end of this summer.
What would be the impact on stock markets?
First, we think the large cap US benchmarks would be most negatively affected, as they incorporate most of the large digital companies, which as explained above, have been the biggest users of BEPS. The S&P500 sells at a record price-to-sale ratio and at an extremely high 24x 2021 earnings. Increasing the tax on these earnings by 25% would mean a ratio above 30 times, which is unprecedented. That compares with a ratio of 17 times for the MSCI EAFE index (ex: North America).
Smaller companies, as discussed, pay a much higher tax rate. The impact of revised tax rates will be much smaller. The MSCI EAFE small-cap index sells at 17.9 times 2021 earnings. In addition, the MSCI World small-cap index, which includes the US and Canada, sells at 18.8 times 2021 earnings. The impact should be less for smaller companies, which should drive outperformance. Another aspect that we should mention is the increased importance of ESG in investment decisions.
The environmental impact and carbon footprint of companies is now an important topic for investors. We believe that aggressive tax planning and avoidance may very soon become another important factor that investors may look at.
The consensus has swung from pessimism about prospects for corporate profits in 2020 to likely excessive optimism now. Analysts, in particular, may underappreciate the contribution to recent profits resilience of government subsidies, withdrawal of which may offset much of the benefit of economic normalisation.
Posts here last year suggested that global profits would mirror V-shaped rebounds in retail sales and industrial output. S&P 500 aggregate operating earnings are likely to have risen above their pre-pandemic peak in Q1 2021, based on results to date and analyst estimates, according to S&P. Analyst forecasts imply growth of 29% between Q1 and Q4 2022 – see first chart.
Chart 1
S&P 500 operating earnings are equivalent to about 60% of corporate post-tax economic* profits in the national accounts and the two series follow a similar path. An attribution analysis, however, is available for the national accounts measure, allowing the recent contribution of higher subsidies and reduced taxes on production to be separated out.
As of Q4 2020, national accounts profits were 2.4% below their pre-pandemic peak in Q4 2019. If subsidies / production taxes had remained unchanged, the shortfall would have been 19.8%. Put differently, the rise in subsidies accounted for 17.8% of the level of profits in Q4 2020.
This direct contribution of government to profits will normalise as the economy reopens and emergency programmes are withdrawn. Assuming that the rise in subsidies since Q4 2019 is reversed, “underlying” profits – excluding the recent additional support – would need to grow by 21.7% from their Q4 2020 level to maintain overall stability. The consensus forecast of a 29% increase in S&P 500 operating earnings between Q1 2021 and Q4 2022, therefore, could require underlying growth of more than 50%.
Data later this week will show that GDP almost regained its pre-pandemic level in Q1 2021 and the FOMC’s median projection implies a further increase of more than 8% by Q4 2022. Adding in inflation at 2-3% pa suggests nominal GDP growth of about 13% – unlikely to support profits expansion of 50%.
Profit margins, indeed, could be squeezed by rising labour costs. The view here has been that the labour market would return to pre-pandemic levels of tightness by late 2021, resulting in upward pressure on wage growth. Labour market responses in the April Conference Board consumer survey support the view that conditions are normalising rapidly – second chart.
Chart 2
National accounts data for other G7 countries are less detailed / timely than for the US but government subsidies are likely to have provided similar or larger-scale support for profits. In the UK, the economy-wide gross operating surplus** would have been 13.0% lower in Q4 2020 without additional government subsidies / lower production taxes – third chart. The extra support amounted to 5.0% of GDP in Q4, double the equivalent in the US, reflecting the “generosity” of the UK’s furlough scheme.
Chart 3
*”Economic” = including inventory valuation and capital consumption adjustments. **This is not comparable with the US national accounts profits measure – it is gross of depreciation, interest and income taxes and includes non-corporate business income.
When it comes to vaccination campaigns, the United States (US), United Kingdom (UK), and Israel continue to lead the way. Following the vaccination of some of the most vulnerable populations, the rate of hospitalizations are decreasing. Efficient vaccination campaigns in the US and UK have increased confidence that economic activity will continue to grow in the coming months. Many indications show strong pent-up demand from both consumers and corporates starting to increase.
In other parts of the world where vaccinations are taking longer, reopening will be slightly delayed. Despite the slow start in Europe, governments are intensifying their campaigns as the supply of vaccines increases. This should enable the economy to reopen and activity to rebound. As restrictions ease, we continue to expect the economy to recover rapidly beyond Q2.
There are some interesting data points that suggest a stronger economic activity as restrictions ease:
Resilience: Similar to what we experienced in the second COVID-19 wave, economies are showing signs of resilience in this third COVID wave.
Business optimism: Strong survey data for the industrial sector suggests that businesses are more optimistic.[1] This could lead to better business activity for Q2. We noticed some businesses commenting on better than expected business trends. After huge cost cutting efforts during 2020, businesses are gradually returning to capex and IT spending.
Some recreational and sports goods have become more popular in this pandemic as leisure options narrowed. Bicycle sales are enjoying phenomenal demand. Suppliers have indicated that stock levels in the supply chain are much too low and that the return to a more normal inventory level would already lead to a high double-digit market growth. RV manufacturers and RV rental marketplaces is another segment that cannot keep up with demand. Thanks to a tight supply chain, strong demand and low inventories, this segment should enjoy good order visibility for 2021 and beyond.
Regarding travel, US domestic and international flights are at the highest levels since the end of March 2020. Europe, which relies more on intercontinental traffic, has not improved much yet, but there are positive signs starting to emerge. The European Commission presented a proposal to create a digital Green Certificate to facilitate the safe free movement of citizens within the EU. Another example is Iceland, which will open its borders this week to visitors who have received the vaccine without the need for testing or quarantine. Australia and New Zealand will also have a similar arrangement starting next week.
Restaurant bookings are soaring in some parts of the US, but also in the UK, as outdoor bars and restaurants opened earlier this week.[2] With a reduced supply of pubs and restaurants, the ones that operate should enjoy strong consumer traffic. Apparently, outdoor tables booked out several weeks in advance after the UK government announced its reopening framework this winter.
These observations and data points are no surprise, as people look forward to leisure activities and travel after months of restrictions. The important variables now are how fast populations are being vaccinated and how efficient vaccines are in terms of preventing a person from carrying or passing on the virus.
[1] Bloomberg – EMEA WEEK AHEAD: ECB to Hold, Russia Hike, U.K. Jobs
[2] https://www.opentable.com/state-of-industry
Global six-month real narrow money growth appears to have edged lower in March, continuing a downtrend since last summer. This suggests that an expected relapse in global industrial momentum will extend through late Q3 / early Q4.
The global manufacturing PMI new orders index reached a new recovery high in March, consistent with a surge in six-month real narrow money growth into July / August 2020, allowing for the historical average 6-7 month lead time. More recent national surveys hint that March will mark a top – see chart 1.
Chart 1
The March real money growth estimate is based on information for the US, China, Japan, India and Brazil, together accounting for 70% of the G7 plus E7 aggregate tracked here. The US component is estimated from weekly data on currency in circulation and commercial bank deposits – official March money numbers are released next week and the Fed no longer provides weekly updates.
Global six-month real narrow money growth appears to have eased further to its lowest level since February 2020, reflecting stable nominal growth and another rise in six-month CPI inflation – charts 2 and 3.
Chart 2
Chart 3
Chart 4 shows the early reporting countries individually. US six-month real narrow money growth is estimated to have edged lower despite disbursement of $318 bn of stimulus payments to households – these were made in the second half of the month and may have a larger impact in April (the money numbers are month averages).
Chart 4
Six-month growth also eased slightly further in Japan and China, with a small rise in India. Brazil moved into contraction although this needs to be placed in the context of an extraordinary surge last summer – 12-month growth is still strong.
Markets could be starting to offer corroboration of the scenario of a global manufacturing PMI new orders peak and pull-back, with Treasury yields stalling and equity market cyclical sectors no longer outperforming – chart 5.
Chart 5
Will global six-month real narrow money growth recover? Six-month CPI inflation is likely to rise slightly further in April / May but could fall back in H2 as commodity prices move sideways or correct.
Fiscal stimulus is acting to push up US nominal money growth but there may be an offsetting drag across the G7 from recent bond yield rises – chart 6.
Chart 6
A revival in Chinese narrow money growth probably requires a PBoC policy shift. The view here has been that policy was overtightened in H2 2020 and the economy would slow in H1 2021. This scenario appears to be playing out, with Q1 GDP disappointing and industrial output falling in March. Core CPI inflation (i.e. ex. food and energy) is at 0.3% and a surge in PPI inflation reflects input cost rises that are squeezing downstream margins. The PBoC has allowed three-month SHIBOR to drift back to its January low, consistent with a switch to an easing bias – chart 7.
Chart 7
This year has started on strong footing for global mergers and acquisitions (M&A). According to Refinitiv, global M&A hit a new record of $1.3 trillion as of March 31st, 2021.[1] What is driving this boom? On the news we have seen many big deals take shape, from GE divesting its business to Canadian Pacific expanding its footprint. But behind the headlines, something else is accelerating M&A activities, especially in the Unites States (US). We are talking about SPAC, which alone represent about 25% of the total deal volume in the US.
The first quarter of this year was also one of the busiest for IPOs, of which, once again, SPACs took the limelight. There were 296 SPACs raising $87 billion, a 20-fold increase over the same period last year.
First, a sponsor raises capital and incurs the cost of an IPO in a new shell company. To make the deal attractive to investors, the units are usually priced at $10 each and provide a warrant to buy more shares. The sponsor then has 12 to 24 months to find the target. If no target is found, or if the investors decide to vote “no” on the deal, the holders can redeem their investments.
We have seen this movie before
SPACs are in their third decade of existence. In the early 1990s, they were marketed as vehicles that helped small companies go public, while offering outsized favourable terms to their sponsors. In the late 90s, SPACs took a back seat. After all, why would a company do a reverse merger when you could easily raise money during the tech bubble? SPACs enjoyed a renaissance in late 2002, peaking at 66 IPOs just before the great financial crisis. They reappeared in early 2016, and have been going strong ever since. According to SPAC Analytics, in 2020, SPACs were 55% of IPOs, compared to 4% in 2013. So far this year, SPACs represent 79% of total IPOs.
SPACs versus a traditional IPO
SPACs are a pure genius way of going public. Since there is no identified target, a sponsor’s prospectus has no information about the business or the strategy. On the other hand, an IPO roadshow raises a lot of questions and invites a lot of scrutiny from investors.
In an IPO, there is no guarantee on the final valuation of the company. With a SPAC, the IPO has been done, and you have negotiated the valuation of your company with the sponsor. Plus the due diligence required for a merger is much less than SEC requirements for a regular IPO.
Cost could be another key factor. An IPO can cost anywhere between one to seven percent in fees for investment banks. With a SPAC, the underwriter may charge about five to six percent. However, there are other fees associated with the merger, which can end up being almost 20-25 percent of the total money the sponsor may raise.
Why are SPACs so popular?
A recent Wall Street Journal article counted 61 sports-related SPACs formed this year alone, compared to just five in 2019.[2] Athletes from Serena Williams, Stephen Curry, Naomi Osaka, Tony Hawk, Colin Kaepernick, and even Shaquille O’Neal, have shown interest in SPACs.
Everyone loves money, especially free money. SPAC founders and sponsors generally get about 20% of the shares of the SPAC as a fee for raising capital, finding the target, and, of course, giving it their brand name. Hedge Funds like it because they can use leverage to buy SPACs and also get preferential access to SPAC deals at the $10 share price. Everyone else has to wait and likely pay a higher price.
Most investors don’t read the annual reports of the companies they own, so they miss out on the fine print in the SPAC prospectus. For example, many are unaware of the lock-up period, which can be anywhere from six months to a year. Once the lock-up period is over, the floodgates open and add pressure to the stock price.
The clock is ticking?
SPACs don’t have time on their side because there is a limited window to close a deal. Targets are well aware of this restriction. They also know that a SPAC is required to spend at least 80% of its assets on a single deal. So the target always has the advantage. SPACs are paying a median price-to-sales ratio of 12.9, compared to 4.1 paid by other companies, according to 451 Research.[3]
SPAC-mania has been going on for a few years now, which means there is a lot of capital chasing deals, combined with ticking clock syndrome, which signals an inevitable decline in deal quality. We could easily see the SPAC bubble go bust once again.
How have SPACs performed historically?
A team of researchers analyzed completed mergers from January 2019 and June 2020, and found that SPACs lost 12% within the first six months, and dropped 35% on average after the first year. Bain & Co looked at 121 SPAC mergers from 2016 to 2020 and concluded that “more than 60% have lagged the S&P 500 since their merger dates, and 50% are trading down post-merger”. The other 40% are trading below the $10 IPO price.
At Global Alpha, we do not invest in SPACs. Our focus is on finding high-quality companies with defensible business models and strong balance sheets that should outperform the small-cap benchmark.
‘Utility: the state of being useful, profitable or beneficial’
Ask any respectable scientist or engineer how they achieved distinction, and they will likely tell you that they stood on the shoulders of giants. Such is the nature of their fields – you build upon the work of your predecessors. However, it would be a mistake to think that this is the only approach to development. Sometimes the best solutions come from scrapping the previous script, redefining the problem and standing on your own two feet.
Take the modern banking system as an example. While it has been tweaked and nudged into the digital age, the system is still – at its core – an iteration of a centuries old industry. If you look closely enough, not a lot has changed from the principles set out in the 15th century (and still employed to this day) by the Banca Monte dei Paschi di Siena. It is a rather extraordinary idea when you think about it, and one that stokes an interesting discussion internally when we ask ourselves what if we had the luxury of redesigning the system from scratch? Would we arrive at the same modern day setup? Would we see a need for a network of bank branches, for instance? Would utility bills and signatures be our preferred means of identity authorization?
In our view, it is a resounding no. But such is the consequence of an iterative process and a series of shortsighted ‘quick fixes’ that seldom appear shortsighted at the time (e.g. replacing cheques with debit cards); they assume a very different perspective when we take a step back. If we deconstruct ‘banking’ into the core utility on which it was designed – the store of wealth and the transfer of money – then it becomes apparent that the major providers of utility in most markets are no longer the banks. The value proposition is shifting from ‘where is the safest place to store my money’ to also include ‘what is the most seamless and cost effective way to transfer and manage my money’. The once dominant financial institutions are seeing their power eroded by technologically enabled disrupters, leveraging off mobile solutions, data and APIs.
Somewhat surprisingly, one of the best examples of this trend can be found in Kenya. It is rare that the markets in which we invest harbor a best in class operator – particularly in disruptive sectors, and in a global context – but mobile network operator, Safaricom, is one exception. Through their mobile money network, M-PESA, they have almost single handedly brought more than 30 million Kenyans into the digital payments age, in what has been one of the world’s greatest advances in financial inclusion1.
M-PESA, as the name suggests (M = ‘mobile’; PESA = ‘money’ in Swahili) was one of the earliest mobile money products in an industry that has since ballooned to include more than 1 billion people globally, of which more than 50% are located in Sub-Saharan Africa2. The idea is simple – a digital wallet that is linked to a mobile phone. There are no banks involved. No account numbers. No etching your name onto the back of a card. An individual’s e-wallet links directly to their SIM, meaning a phone number is all that is needed to send and receive money.
If you lived in Kenya in 2005 there was a 70% chance you didn’t have a bank account3. Today, as an adult in Kenya, there is almost 100% chance that you have an M-PESA account and have transferred money digitally to somebody else in Kenya. In 2019, the total value of transactions that ran through M-PESA was almost 15% higher than Kenya’s entire $96 billion GDP. That is a whopping 8 billion unique transactions, or more than 150 transactions per person. For context, in the same year Germany recorded less than 60 cashless transactions per person4. Money enters and exists the M-PESA ecosystem through a network of ‘agents’, which mainly comprises authorized dealers, but also includes retailers such as petrol stations, supermarkets and registered SMEs. There are over 200,000 of these agents – that is more than every bank branch, ATM, currency exchange and microfinance institution in Kenya combined5.
Source: World Bank; Vergent Asset Management LLP
Note that Safaricom changed the definition of M-PESA users in 2013 from ‘Total Number of Users’ to ‘Users that have used M-PESA at least once in the last 30 days’. Under the former definition, there are over 30m M-PESA users today.
The early signs of M-PESA’s infiltration – and to some extent, redefinition – of the banking system are clear. Consider M-Shwari, an application built on M-PESA through which consumers can apply for up to KES 50,000 (roughly USD $450) in short-term loans. When M-Shwari launched in November 2012, approximately 700,000 Kenyans had an outstanding personal loan. Just three months later, M-Shwari had signed up a staggering 2.9 million customers, which rose to 5 million by the end of the year and almost 10 million a year later6. For the bank that underwrites the loans – NCBA Bank – just under 50% of all loans disbursed in 2019 were through M-Shwari 7.
KCB Bank has enjoyed similar success. Just one year after launching KCB M-PESA, an almost identical short-term loan product, their customer base had more than doubled to 9 million people. That is one of the largest banks in East Africa, having taken 115 years to amass its first 4 million customers, taking just 12 months to add 5 million more8. It is quite remarkable to witness even the most established, multi-centurial banks such as KCB sliding down the value chain of their own industry.
As fundamental investors, we assess the strength of our companies through an array of qualitative and quantitative methods. Sometimes, however, it can be just as useful analysis to employ a far simpler framework. History has consistently proven (across both capitalist and socialist systems) the old adage that money is power. Less discussed, albeit a slight subtlety, is the opposite. Power is money – the idea that those with influence and control can lever their advantage in order to benefit financially. For some companies, we can gauge this power quantitatively by analyzing the take rate – the percentage commission charged per transaction. There are a number of factors that go into the take rate, but generally those with a stronger grip on their respective industries are able to demand a higher rate.
In this context, it is worth remembering that fundamentally, M-PESA is nothing more than a digital distributor. Consumers pay a small fee in return for the ability to distribute money to any other M-PESA user in Kenya. For financial products such as M-Shwari and KCB M-PESA, the underwriting banks pay for the privilege of distributing their products through M-PESA. The chart below compares the take rate that M-PESA earns on these financial products with some of the largest physical and digital distributors in the world. It is a surprising data point, but one which undeniably evidences the power that M-PESA holds over the Kenyan banking sector.
Source: Vergent Asset Management LLP
T-Mall includes fees for paying through AliPay. e-Bay is the blended rate for the US and international businesses. Kenya Banking Sector is calculated as the average yield for the last three years, adjusted for provisions for bad loans. Jiebei is an unsecured, consumer loan product. The rate given is on an annualized basis. Amazon is inclusive of 3P commissions, logistics fees and advertising fees.
What M-PESA has done for the financial development of Kenya has been nothing short of extraordinary. And what is most exciting is that we see this as just the start, the prelude to what is shaping up to be the most profound chapter of M-PESA’s story so far. As Ol’ Blue Eyes, Frank Sinatra, would say – “the best is yet to come”. M-PESA 2.0 will grow into its role as the core financial ecosystem in Kenya, and the global poster child for how technology and connectivity can expose the frailties of the modern banking system. We expect it will become much more than a convenient way to transfer money. Consumers will be able to pay for almost any good or service, settle bills and seamlessly send money from abroad; the government will collect taxes and pay public sector employees; banks will use it as their preferred channel to distribute credit, insurance and other financial products. Put another way, we believe M-PESA is on track to become the core provider of financial utility in Kenya.
We hasten to add that the next leg of M-PESA’s journey will not be all blue skies and rainbows. There will of course be storms ahead, as regulators and policy makers play catch up, and as the retail banking sector fights to stay relevant. Nevertheless, we are confident that M-PESA has what it takes to navigate these challenges successfully. Safaricom is, and has always been, our biggest bet. A company that from a small corner of Africa is spearheading one of the most powerful digital revolutions on the planet.
Vergent Asset Management April 8, 2021
1. Source: Safaricom, company accounts 2. Understanding why mobile money has been so disproportionately successful in Africa could be the subject of another paper entirely, and we will refrain from doing it an injustice by skimming over the details here. For the curious reader, we highlight what we think have been the three key ingredients: i) markets that have low banking penetration; ii) economies that are heavily reliant on cash; iii) populations that exhibit high rural density. 3. Source: GSMA Report, 2015 4. Source: Deutsche Bundesbank data 5. Source: CBK data 6. Source: FSD Kenya 7. Source: NCBA company accounts; Safaricom company accounts 8. Source: KCB company accounts
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This week, Global Alpha is taking a look at one of the more remarkable consequences of the COVID-19 pandemic – the impact on the pet industry. Pets4Homes, the United Kingdom’s (UK) leading free pet classifieds and information site, produced a report on the UK pet trade. At the peak of the first lockdown last May, demand for puppies more than doubled. This is unsurprising given that 94% of pet owners said having the companion animal helped their mental health. Further, 86% said owning a pet improved their mental health, and 84% said having a pet made them less lonely. It is likely that prospective owners wanted to experience the benefits of owning a pet as well.
There were 420 prospective buyers for each puppy offered for sale in the Pets4Homes classifieds, and the average price of puppies for sale in 2020 was £1,875, an increase of 131% from the prior year. And we thought the residential housing market was hot! The demand for cats and kittens also rose during the pandemic, but the average price increased a more moderate 42% from 2019. However, this price dynamic also resulted in more unsavory aspects – the rise of online scams and thefts. Dog thefts increased 170% in the UK compared to 2019.
The supply and demand disconnect has eased somewhat since the peak in May 2020. Increased activity from breeders has helped the supply side of the equation, while gradually easing lockdowns and increased pet ownership has helped slow demand. COVID-19 has undoubtedly given a positive tailwind to a market that was already undergoing structural growth. In 2020, the population of cats and dogs reach 21 million, an increase of 1.4 million from 2017, which in turn increased the estimated market size to £7 billion. The trend of humanizing pets can be seen in the increase in average spending. Dog owners, for example, spend £80 a month on medical treatment, food and insurance. Also, 59% of dogs have some form of insurance, while cats sit slightly lower at 41%.
CVS Group (CVSG:LN), a core holding in the Global Alpha portfolios, is a leading vertically integrated vet services provider in the UK. As well as a large UK presence, CVS Group also operates practices in the Republic of Ireland and the Netherlands. The integrated nature of the business allows CVS group to provide services throughout the life cycle of a pet. The typical life expectancy of a dog is 12 years, while for a cat the life expectancy is between 14 and 17 years. This translates into a lifetime cost of pet ownership for a dog of £16,800, while for a cat, it is estimated at £8,800[1]. CVS Group offers first opinion practices, laboratory tests, specialist referral interventions, online food sales via Animed Direct, and compassionate end of life care and cremation services.
Consolidation of UK veterinary practices has been a significant feature of the market, yet the market is still fragmented. CVS Group is the second largest player by number of premises with over 450 in the UK. IVC Evidensia, a private company is Europe’s largest veterinary care provider, operating over 800 premises in the UK. CVS Group has completed eight acquisitions thus far in the financial year, which ends in June. The focus continues to be on small animals and the company states that the pipeline of acquisition opportunities is strengthening. With a strong balance sheet, CVS Group possesses the funds to continue this strategy.
In a recent trading update, CVS Group continued to exhibit strong growth, driven by the core practices business, but also supplemented by very high growth from the online Animed Direct division. Vacancy rates for veterinary surgeons, the largest determinant of profitability, remain stable, meaning excellent growth at this level also. Around 40% of active small animal customers (430,000 customers), are signed up to the Healthy Pet Club. This service offers discounted products and services for a monthly fee.
To conclude, a rising number of pets, the continued humanization of companion animals and the increased value placed on their care, advancements in treatment and resulting in an extended average life, make the long-term dynamics of the pet market very appealing and Global Alpha continues to see CVS Group as well positioned to benefit.
[1] Pet Care – A Dog is For Life Charles Hall (Peel Hunt), March 22, 2021
Markets overview
Equity markets reached new highs this quarter as virus cases declined and market signals suggest that the global economic recovery remains strong (despite lockdowns). Support for the recovery has come in the form of monetary and fiscal stimulus and in March the US passed another significant fiscal package. This quarter the S&P/TSX Composite Index was up 8.1% and the MSCI World ex Canada (C$) advanced 3.5%. Stronger performance from the Canadian market reflects a higher weighting to cyclical sectors like energy, financials and industrials which have benefited from an acceleration in global growth expectations. Within equity markets value and small-cap stocks have outperformed which is a rotation away from areas that performed well for most of 2020.
Stocks led by economically sensitive segments
*Energy, financial and industrial sector average return less the average return of the remaining sectors. **Returns are relative to the growth and large-cap benchmarks, respectively, using corresponding MSCI World benchmarks. Quarterly return ending March 31, 2021. Source: MSCI, Refinitiv
Bond yields rise
Source: Refinitiv
Stronger economic growth and accommodative policy led to a selloff in bonds and a spike in yields across maturities. The result of increased yields was a negative return for the FTSE Canada Universe Bond Index of -5.0%, the worst quarterly performance since the first quarter of 1994. Government and provincial bonds were most affected while declines in corporate were more muted.
Our thoughts
We believe the global economy and corporate earnings will continue to recover as more businesses gradually resume normal operations and government stimulus provides continued support. Portfolios are positioned to benefit from this improving outlook. As such, our asset mix positioning remains overweight equities. However, strong performance from equities relative to bonds led us to rebalance this quarter to maintain our desired exposure. Within equities we have an overweight to small-cap stocks and maintain an allocation to value stocks. This quarter we also increased our emerging markets position. Within bonds, allocations to short bonds and high yield have protected portfolios in a period of rising yields. This asset mix positioning has served us well this quarter and remains attractive in the current environment.
Our portfolio management teams have selectively positioned portfolios to more cyclical assets that are expected to benefit from continued improvements in the economy. Our equity teams have taken gains in some businesses that have benefited from COVID-19 and bought companies that can outperform in a more positive investment environment. This includes companies within the financial sector as well as the travel and leisure industry. Within bond portfolios we are overweight credit, inflation-protected debt and have lower sensitivity in the portfolio to changes in yield. Although our overall positioning in portfolios reflects a positive outlook we remained well diversified.
From the desk of Jeff Guise, Managing Director, Chief Investment Officer, CC&L Private Capital.
This post is for information only and is not intended as investment advice. The views expressed are those of the author at the time of publication and are subject to change at any time.
