Snowball CIO Insights | Q2 2023
Sean Farrell, CIO, Snowball
Fri 1 September 2023
Investing in the building blocks of a balanced and sustainable economy
With every passing day, it seems the importance for investors of addressing social and environmental challenges is being highlighted even more strongly.
2023 has continued a pattern of extreme weather events and record-breaking temperatures (described as “the new normal” by the World Meteorological Organization) that demonstrates the significant costs and risks these pose for communities, ecosystems and investors – from crop failures and commodity price increases, to interrupted shipping and supply chains, claims against utilities and insurers for wildfires, and stranded fixed assets.
At the same time, cost-of-living pressures are squeezing segments of the population who were already disadvantaged. Buttle UK’s “State of Child Poverty 2023” report describes an alarming rise in children living in destitution with permanently compromised life chances, even in a wealthy country like the UK. Traditional providers of support cannot cope and governments have little “fiscal space” to increase funding – but the consequence of leaving these mental health and other social problems unaddressed is even larger problems and greater cost in the future.
As the effects of environmental degradation and social problems left unaddressed become increasingly acute, and begin to threaten the viability and valuations of more and more traditional assets, we believe Snowball’s portfolio is well positioned to mitigate such risks and contribute to solutions, through investing in the building blocks of a more balanced and sustainable economy.
Further, we believe our diversified portfolio approach should also help to mitigate the impact of shorter-term market and macroeconomic volatility on investors, with defensive exposure to a mix of inflation-protected or ”real-returning” assets, including some with government-backed revenue streams not dependent on the economic outlook.
The Snowball fund
The fund’s net return for the quarter to June 2023 was -0.5%, and was +0.4% for the 12 months to June 2023, which encompassed a period of significant turmoil for financial markets. Returns were ahead of the ARC Cautious PCI comparator index over both the quarter and the year (-0.8% and -0.3%, respectively), but below the higher equity risk ARC Balanced PCI index (-0.3% and +1.5%).
Within our diversified portfolio, Impact Venture & Growth Capital continued to prove resilient, underpinned by strong growth of the underlying businesses. eFishery completed its $200m Series D round in Q2 to become the first startup in the global aquaculture industry to reach unicorn status (a venture company with a valuation in excess of $1 billion). The Impact Venture & Growth allocation returned almost +15% over the last 12 months even though it contains a large proportion of immature funds where J-curves depress returns in the early years.
Our Social Living & Supported Housing investments rebounded somewhat from low share prices and wide discounts to NAV for listed holdings, with returns of +15% in Q2 on the back of a takeover bid for Civitas Social Housing and a related uplift for Triple Point Social Housing.
Renewable energy infrastructure was the worst-returning impact asset class (-6.8% in the quarter), due to declines in listed investment trust share prices. Higher interest rates have led investors to apply higher discount rates to the trusts’ assets and softer electricity prices appear to have dampened enthusiasm to hold these trusts. Our investment thesis did not rely on a continuation of high power prices, and a large proportion of the assets in fact have revenues linked to inflation or power prices contracted ahead. We also note that a higher discount rate reduces asset values today but implies a higher return in the future (Greencoat UK Wind is now using an 11% discount rate to value its assets). Wide discounts to NAVs may offer some cushion to asset values and upside opportunity in the future, so we will be examining opportunities in this space.
Our listed equities allocation was down -0.9% in the quarter (+6.8% IRR over 12 months) despite the recent stock market rally, with discount widening at one listed investment trust a culprit. But dig a little deeper and the equity market rally this year has been driven disproportionately by the so-called “Magnificent Seven” mega-cap tech stocks: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta. Together, they propelled the Nasdaq to its strongest first-half performance for 40 years and accounted for 75% of the total gains made by world equity markets during the period, with the rest of the market producing more modest returns. The investment strategies of Snowball’s managers are focused on finding companies key to solving the world’s major environmental and social challenges, so we would not necessarily expect to have significant exposure to the stocks above, whose impact is not unambiguously positive.
Nonetheless, our public equities managers believe they are seeing a more positive environment for stock-picking, with macro and supply chain shocks abating, companies better able to focus on execution and structural tailwinds supporting our impact themes.
In general, private holdings across impact asset classes in the portfolio displayed far less volatility than the liquid holdings and continued to execute on their long-term strategies without too much distraction from market ups and downs.
Looking forward, the economic, policy and market outlook remains mixed and uncertain.
Inflation has slowed in most major economies but is still higher than target, especially in the UK. PMI indices indicate cooling in most sectors of the economy, suggesting that we may be close to peaks for interest rates – but whether a “soft landing” can be achieved without further damage to some asset classes remains to be seen. Labour market tightness and wage pressures persist but, in general, corporate earnings have so far not suffered (indeed some are seeing benefits from inflation).
Uncertainties such as the impact of higher financing costs on companies, governments and consumers, and the risk of another shock to energy and commodity prices (from the Ukraine war or elsewhere) persist and could cause things to turn rapidly for the worse; but upside possibilities also exist (e.g. improvement in geopolitical situation, re-emergence of China as a driver of global growth and disinflation, productivity impacts of AI).
In this environment we are pursuing 3 main approaches to enhance returns and impact over the longer-term for our investors:
Actively rebalance the portfolio and seek to take advantage of opportunities presented by market volatility
Continue to increase exposure to higher-returning and higher-impact private strategies across asset classes
Continue to deploy capital in Impact Venture and Growth Capital where we believe the recent fall in valuations means current vintages should prove to be strong performers over the long-term and where invested capital can enable very significant positive impact through innovation
If you would like more information about the Snowball fund, please email email@example.com