Technology is clearly one of the megatrends reshaping global markets. How do you think about tech within your portfolio?
Rob HinchliffE: We don’t normally think of the strategy in terms of sector weights, because there’s often a false precision to that idea. Companies that fall ostensibly within a given sector can in fact be very different. So talking about technology, per se, isn’t a good indicator for us. Technology, the digital transition, better use of data, productivity improvements, machine vision – all have a very significant role within the PineBridge Global Focus fund, but companies are benefitting from these changes across all sectors. We are invested in companies that are developing differentiating technology and benefitting from the use of that technology across the whole of our portfolio.
Global Focus Equity is not a tech fund. It’s not a growth or a cyclical fund. It’s a style-neutral, all-cap fund. A lot of funds that call themselves ‘core’ have shown over recent months that they are really growth funds, and their performance has really been impacted by that.
Tech is an interesting one because it’s reshaping almost every industry. The GICS sectors are imprecise and heterogenous: even some of the internet platforms sit in the consumer discretionary or communications sectors. This can lead to a false precision of measuring real exposures, and that’s what has been uncovered in many cases in the dramatic market rotation that we’ve seen since the start of 2022.
The level of precision we have in terms of portfolio construction enables us to carefully manage risk exposure. It’s about understanding our exposure to semiconductors or popular technology stocks relative to the benchmark. Are we over or underweight these big weightings in the benchmark that tend to trade together? That’s how we’ve been able to generate alpha consistently at a similar level of total risk as the benchmark. And that’s how during the last couple of years, amid the craziness of the pandemic and all the different market cycles that were jammed into 24 months, we haven’t been whipsawed by the market because our portfolio looks similar to the benchmark.
How is digital transformation affecting the companies in your portfolio?
I think there are such powerful implications for companies and industries, and it’s all about improving productivity. It’s leading to more efficient factories, more responsive supply chains, and better return on assets. We invest in companies that are the suppliers of these digital tools, and in companies that are benefitting from the use of these tools. The main takeaway is that these are not limited to a particular sector or geography, and they can be across all of our LCR categories too. Companies are using data better than ever to target their customers or selling digital advertising to companies in ways that they never thought possible, and thus opening up new revenue and profit streams.
I think the big differentiator is management. The tools and abilities are there, but not all companies are the same in terms of being able to apply those digital tools or process changes in the same way. So, for those on the right side of the process, it’s one of the ways in which companies are protecting their gross margins for the long term, and it’s one of the ways in which companies actually build sustainable competitive advantages – by becoming more and more efficient through the digital transformation. There are companies that are not embracing it enough, that are lagging behind some of their peers – and these are some of the areas where we expect proper research and active analysis to pay off over the next five to seven years. Our view is that this will become much more of an alpha market because the difference between companies will become much bigger and wider.
“Going forward, there will be much more focus on verification of net-zero targets. And this is going to be another area where active investors with the right frameworks can have an advantage”
Can you give examples of companies that appear to be taking advantage of this theme?
Walmart is one of the world’s largest retailers. Now the company is using knowledge of its customer base to start a new revenue source, which is to sell advertising. Vendors are buying their ads because they have such a great way to directly target Walmart customers. Advertising on TV or just blanketing the internet with ads just doesn’t give the same return. As such, Walmart is looking to be a top seller of digital advertising over the next few years. Google and Facebook are huge in this market, but Walmart is moving quickly up the ranks.
A direct play on digital adoption is Nvidia, a company that has transformed itself. It used to be one of the suppliers of microchips in gaming applications but has transformed into a company that feeds directly into high-speed computing. The digital transformation is feeding directly into explosive growth in cloud technologies, and Nvidia is a direct play on that because they have the R&D and the fastest computing capabilities of any company in the world. Their chips don’t just go into data centres, but also into the supercomputers. Their sheer knowhow, developed via extensive R&D, gives them tremendous pricing power, creating huge barriers to entry for any competitor.
How will the drive towards net zero be an alpha opportunity for investors like you?
The drive to net zero will require estimated spending of US$9.2tn per year – that’s US$257tn by 2050.4 We think the real number is likely to be considerably higher. In our view, that investment has to be spent on electrification, strengthening the grid, renewable energy, and other areas. We are already finding the potential beneficiaries of that investment spend: there are many companies extremely well-positioned to help with the transition to net zero.
One thing we are very focused on as an investment tool is assessing not just Scope 1 and Scope 2 but also Scope 3 carbon emissions. For an active manager like PineBridge, we believe it makes sense to seek out those companies that are making commitments on Scope 3 because they are likely to see more capital allocated their way.
Another point is that a lot of companies are giving net-zero plans and commitments, but very few have had these verified. Where companies have approached organisations like SBTi, the Science Based Targets initiative, for verification, a very small percentage actually pass.5 In other words, very few have truly convincing plans in place to achieve those targets. I believe going forward there will be much more focus on verification of net-zero targets. And this is going to be another area where active investors with the right investment frameworks and the ability to undertake due diligence – rather than slavishly following a vendor-driven ESG report – can have an advantage. Others might find that companies do not necessarily perform as expected.
4 Source: McKinsey Global Institute, ‘What will it cost to get to net zero’. Dated 28 January 2022
5 Source: Science Based Targets, as of July 2022.
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