Corporate Engagement Update Q2 2022
Bailard’s approach to corporate engagement focuses on both the shareholder process and supporting other stakeholders working to improve disclosures on important environmental, social, and governance (ESG) issues. Here is our Q2 2022 Update.
Country Indices Flash Report – April 2022
April is the cruelest month of the year so far, putting a very harsh January in perspective. Equities sank globally, with few countries bucking the downtrend. As was the case in January, growth and technology got the worst: Nasdaq stocks suffered their steepest losses since October 2008.
Country Indices Flash Report – March 2022
In one month Russia went from the largest equity market in Eastern Europe to being excluded from all the standard indexes. Warmongering despotism will do that regardless of your resource wealth. For context, in 2006, Russia was a larger component of global indices than China.
When Tech and Environmental, Social,Governance (ESG) Investing Intersect
Dave Harrison Smith, CFA, Executive Vice President, Domestic Equities and lead Portfolio Manager of Bailard’s technology strategies, explores the subtleties and depth required to uncover tech companies that are both high quality and responsible.
March 31, 2022
Build fast and break things is a common mantra among technology leaders. It speaks to the rapid pace of innovation and the fearless embrace of failure as a mere step in the overall process. Like the laws of physics, change is one of the few constants in tech. The last decade has illustrated how quickly the sector can evolve, as well as how massive the implications can be for our society. The scope and scale of today’s technology companies means that policies created, as well as actions taken, can have enormous global repercussions. Whether these implications are for the betterment of society is a rather complicated topic, making the unwritten contract between society and technology more crucial than it’s ever been.
Investors often believe there is a trade-off between companies that “do good” and stocks that outperform. We couldn’t disagree more. In our investment approach, we look for high-quality companies with responsible management teams and a history of strong execution. Within tech specifically, we believe that firms that “do good” have a structural advantage that extends to business results: an ability to build better brands, attract a superior workforce, and less frequently encounter regulatory scrutiny. We maintain that building a responsible investment portfolio in technology can lead to better long-term investment returns via reduced risk and better operating results.
Yet the rapid pace of innovation that we love about the tech sector means responsible investing can be incredibly nuanced and complex. Perhaps the formative example of this occurred in the early days of the semiconductor boom that transformed California’s Silicon Valley. Firms that are household names today and technology that is pervasive in our lives was rapidly emerging, and in many cases moving too quickly for regulatory bodies to keep up. In 1981, leaks in underground storage tanks were discovered at IBM and Fairchild Semiconductor, which resulted in significant and dangerous water contamination in San Jose and neighboring areas. While the link has never been proven, there have been allegations of a causal connection between these leaks and higher levels of birth defects in San Jose at that time. The discovery prompted not only massive lawsuits, clean-up efforts, and environmental stewardship improvements by the subject firms, but also the development of local and federal regulations to require tech firms to store toxic chemicals in double-walled containers and monitor for leaks.1 We can trace many of the luxuries of modern life to these early scientific developments, but the breakneck pace of innovation meant regulatory bodies were caught playing catch up.
The complexities of rapidly-developing industries mean that one cannot be dogmatic in approach as an investor. Determining whether a company is “doing good” is not straightforward. Let’s take the rideshare industry as a modern-day example of this multifaceted issue. Rideshare has exploded into our economy on the back of the ubiquitous availability of mobile phone connectivity and, with that explosive growth, regulators and labor groups have struggled to respond with new guidelines. Often the business model of rideshare companies (the “gig economy” as it is known) generates intense scrutiny from regulators and media, with proponents praising the flexibility it offers and detractors claiming worker exploitation. Yet, studies have shown that the positive societal impact of rideshare is enormous. A recent study from the University of California, Berkeley estimated that the introduction of Uber in major cities reduced traffic fatalities by 4.0% overall and reduced alcohol related fatalities by a remarkable 6.1%.2
How do you reconcile an evolving regulatory environment in a nascent disruptive industry with the long-term potential benefits to society? We believe that the combination of deep sector and ESG expertise can provide crucial industry intelligence and help define what a leader looks like in this space, while helping clearly identify which companies are improving their trajectory and working to define good behavior. The rideshare industry has the potential to provide great benefits to society and shareholders, while also creating a fair and safe working environment for its drivers and passengers. These outcomes are not mutually exclusive. In fact, achieving them all will be the key to long-term growth and profitability. Investors and managers cannot rigidly apply backward-looking metrics to the industry, but instead must ‘look under the hood’ to understand company and industry nuances and trajectory.
This is no easy feat. At Bailard, we combine our deep technology sector expertise and robust history of ESG management to go above and beyond basic screens and scores. We stand confident that our approach is differentiated in three important ways:
- Non-Standard Data (ESG Capture®). The ESG field has come a long way toward standardization over the last decade. Vendors like MSCI and Sustainalytics provide broad and deep datasets. Yet, as we discussed above, traditional ESG data can be lacking, particularly in small or newly public companies or in industries undergoing rapid transformation. This underscores the importance of augmenting analysis with non-standard datasets. We have identified several areas within our ESG Capture® process that work well in the technology sector, particularly around workplace sentiment, corporate governance, and real-time controversy monitoring. We believe these alternative indicators of responsible management are highly relevant to the tech sector and provide important complementary perspectives on individual companies. Bailard’s work here is always ongoing and we continue to find new ways to innovate and improve our process.
- Transitional Assessments. Subtleties are often not captured in standardized ESG screens. We have noted particular issues with evolving industries and relatively new companies. Our practice is to utilize transitional assessments of technology firms, where we attempt to identify and understand relevant societal, environmental, and governance issues in rapidly changing or nascent industries. For newly-public companies in particular, we have found transitional assessments to be critical, as traditional ESG vendors can have significant gaps in data due to lack of standardized reporting.
- Engagement. We believe investors can influence companies to behave more responsibly, and we are active members of several investor groups including As You Sow, the Ceres Investor Network, the Interfaith Center on Corporate Responsibility, and CDP (formerly known as the Carbon Disclosure Project). In addition to traditional ESG engagement opportunities, Bailard has begun a program to work with public companies where we observe discrepancies between the company’s sustainability track record and the stock’s vended ESG scores from major providers. Our teams conduct a gap analysis on vendor score discrepancies and discuss our findings with both the vendor and leaders at the target company. We believe this shareholder activism has the potential to positively influence the company’s stock price as ESG data is made current, the vended scores rise, and the shareholder base broadens.
“Build fast and break things” can be a powerful guiding principal that results in rapid code and product development. As we’ve seen, the global influence and power of the technology sector has never been greater, and actions taken by technology firms can reverberate with global ramifications. We believe that technology firms behaving in a responsible manner will not only exhibit lower risk but have increased potential to outperform in the long run. We also believe that investors can express their values and preference for responsibly-run companies through their investment portfolios while achieving competitive returns.
Given the nuance and rapid evolution of industries within technology, a thorough and thoughtful approach is necessary with collaboration between companies, investors, activists, and stakeholders. We are excited to continue our efforts on measuring, evaluating, and engaging with companies to encourage long term, responsible corporate strategies that encompass and benefit all stakeholders. Done right, investors can express their values via their portfolios, engage to influence companies in a positive direction, and achieve competitive returns in a responsible, principled way.
1 https://www.sfgate.com/bayarea/article/The-valley-s-toxic-history-IBM-trial-is-latest-2826844.php
2 https://bailard.com/wp-content/uploads/attachments/w29071.pdf
Bailard Becomes CDP Investor Signatory
- Strengthens firm’s formal commitment to ESG
- Adds to existing environmental commitments including to Principles for Responsible Investment (PRI) and Climate Action 100+
FOSTER CITY, Calif. – March 15, 2022 – Bailard, Inc., an independent, values-driven wealth and asset management firm in the San Francisco Bay Area, is pleased to announce that it has furthered its commitment to mitigating climate change risk in its portfolio and driving corporate climate disclosure by becoming an investor signatory to CDP (formerly known as the Carbon Disclosure Project), the non-profit that runs the global environmental disclosure system.
As an investor signatory, Bailard joins a group of 680+ financial institutions, with over $130 trillion in assets, requesting disclosures using CDP’s climate change, deforestation, and water security questionnaires, which are fully aligned with the recommendations issued by the Task Force on Climate-related Financial Disclosures (TCFD). Additionally, the membership affords Bailard access to the most up-to-date research from the world’s largest corporate environmental dataset, which it will use to inform its investment process and its corporate engagement activities. Last year, over 3,100 public companies reported environmental data to investors through CDP’s disclosure system.
Bailard is already a signatory to the Principles for Responsible Investment (PRI) and the Climate Action 100+. With this CDP signature, Bailard builds upon its formal commitment to Environmental, Social, and Governance (ESG).
“Companies differ drastically on carbon performance, climate goals, and the disclosure of related information. To reach alignment with the Paris Accords and achieve net-zero, we need climate change-informed investment decision-making, backed by accurate carbon emissions disclosure from all economic players,” said Blaine Townsend, CIMC®, CIMA®, Executive Vice President and Director of Sustainable, Responsible and Impact Investing at Bailard.
Townsend continued, “CDP is driving transparency, accountability, and action through the carbon data it gathers from thousands of companies, cities, states, and regions around the world. Bailard is committed to being a climate leader through our investment approach, our corporate engagement, and our client engagement in support of carbon disclosure and climate action.”
“Our signature to the CDP reflects our dedication to ensuring we are functioning as a good actor in our industry,” said Sonya Mughal, CFA, CEO of Bailard. “We are a company committed to our values—on behalf of the individuals, families, and institutions we serve, as well as with respect to our own corporate engagement.”
About Bailard, Inc.
Founded in 1969, Bailard is an independent asset and wealth management firm serving individuals, families, and institutions alike. Bailard has built a long‐term asset management track record across domestic and international equities, fixed income, and private real estate, as well as robust, in‐house ESG expertise. These investment capabilities are combined with financial, tax, and estate planning to provide sophisticated and comprehensive wealth management. Through it all—and in line with its core principles and strong ESG mindset—Bailard works with clients to align their financial goals with their values.
With over $5.5 billion under management, Bailard is a majority employee‐owned and women‐led firm, and a Principles of Responsible Investing (PRI) signatory. A values‐driven firm based in the San Francisco Bay Area, Bailard has its own private charitable foundation and is deeply committed to its core values of accountability, compassion, courage, excellence, fairness, and independence.
All information as of 12/31/2021. Neither Bailard nor any employee of Bailard can give tax or legal advice. Please consult your tax or legal professional for such advice.
About CDP
CDP is a global non-profit that runs the world’s environmental disclosure system for companies, cities, states and regions. Founded in 2000 and working with more than 680 investors with over $130 trillion in assets, CDP pioneered using capital markets and corporate procurement to motivate companies to disclose their environmental impacts, and to reduce greenhouse gas emissions, safeguard water resources and protect forests. Over 14,000 organizations around the world disclosed data through CDP in 2021, including more than 13,000 companies, worth over 64% of global market capitalization, and over 1,100 cities, states and regions. Fully TCFD aligned, CDP holds the largest environmental database in the world, and CDP scores are widely used to drive investment and procurement decisions towards a zero carbon, sustainable and resilient economy. CDP is a founding member of the Science Based Targets initiative, We Mean Business Coalition, The Investor Agenda and the Net Zero Asset Managers initiative. Visit cdp.net or follow us @CDP to find out more.
Country Indices Flash Report – February 2022
Vladimir Putin’s attempt to reconstruct the Soviet Union has hit a hard patch, with President Zelensky of Ukraine inspiring his people and the world to stand up to the Russian Bear. Prior years’ sanctions have had (evidently) little deterrent effect, but the severity and global coordination of this latest round may give the Kremlin pause – or at least make continued aggression cost dearly.
Corporate Engagement Update Q1 2022
Bailard is a sponsor of the Moskowitz Prize, which builds on a legacy of identifying research whose findings have the potential to influence the future of the practice of responsible finance. First presented in 1996 by the U.S. Social Investment Forum, the Moskowitz Prize was awarded by University of California, Berkeley’s Haas School of Business from 2005 – 2019. In 2020, the Prize became an initiative of Northwestern University’s Kellogg School of Management. Its winners have explored shareholder activism, socially responsible mutual funds, and socially responsible investing as a catalyst to improved financial performance, among other topics.
Country Indices Flash Report – January 2022
So far, 2022 is a bear, but international equities are outperforming the U.S., led by emerging markets. From a style perspective, stocks representing better value are dramatically outperforming growth stocks (especially those backed by little to no earnings).
Country Indices Flash Report – December 2021
December marked a strong finish to a bullish quarter and year for developed market equities. Despite a rocky start to the month on news of highly-transmissible Omicron, investor concerns abated as evidence showed relatively mild effects in those vaccinated.
Redrawing the Emerging Markets Map
Anthony R. Craddock, Senior Vice President of International Equity Research, highlights the changing Emerging Markets landscape amid geopolitical and economic volatility related to Russia and China.
March 31, 2022
For all its potential, emerging markets (EM) as an asset class has been more a source of risk than reward over the past year. Russia and China are the two EM countries creating the most uncertainty for stock investors, as their actions have added significantly to geopolitical and economic tensions worldwide. Russia’s swift relegation to global pariah has brought—among many other consequences—exclusion from the standard stock market indices. Meanwhile, China remains the EM index heavyweight, even after its recent dramatic share declines that were spurred in part by the government’s heavy-handed regulation of the corporate sector.
In navigating this shifting landscape, an active investment manager can’t simply choose countries and companies based on attractive valuations and growth prospects, or trust the metrics used and the efficient allocation of global capital to produce a successful result. Instead, it seems prudent to place primary importance on politics and governance, removing certain firms (and possibly entire markets) from consideration and tailoring a unique policy for China as the dominant constituent.
Evaluating “Countries First” takes on a new meaning
Russia’s wholesale invasion of Ukraine surprised many Western analysts—those expecting a limited eastern incursion—in its brute force, and has surprised again with its incompetence. For President Vladimir Putin, war has delivered coordinated sanctions from a rejuvenated U.S.-European alliance as well as more Russian casualties in one month than were suffered during a decade in Afghanistan. For the rest of the world: a humanitarian crisis as millions of refugees flee for Poland and parts West; rising energy prices feeding already high inflation and threatening recession; and the revived specter of a nuclear standoff between the old Cold War superpowers, largely absent for a generation. As a destination of interest to equity investors, Russia was already greatly diminished, having seen its weight in the MSCI Emerging Markets Index drop from a high of 11% in mid-2008 to just over 3% pre-invasion. The Russian stock market and ruble collapsed in late February, leading the MSCI Russia Index to lose more than half its value in U.S. dollar terms over the month. The country was then removed from the overall EM Index in March as sanctions made share trading virtually impossible.
With Russia becoming increasingly cut off from the rest of the world, one looming question is how far China will go in providing an economic lifeline or even military support to the country it had earlier declared a “no limits” strategic partner. China-watchers already had plenty to worry about prior to this. Following the Hong Kong protests of 2019-2020, Beijing imposed a national security law that effectively ended the “one country, two systems” principle a quarter-century ahead of schedule. Although he did not provide a timetable, President Xi Jinping vowed last year that China will achieve “reunification” with Taiwan. China’s military has been probing airspace over the island and testing the waters of the South China Sea; one hopes that Russia’s experience underlines the difficulties that motivated and well-supplied homeland defenders can cause for a large, but largely untested, aggressor. On the economic front, China’s maintenance of its (ultimately untenable) zero-COVID policy, requiring lockdowns of cities as important to the global supply chain as Shenzhen and Shanghai, kept upward pressure on consumer prices and put a brake on trade and commerce.
The shifting sands of the EM Index
China’s importance in the EM Index has grown dramatically over the last 15 years. In fact, back in late 2006, Russia was the larger index component. Stretches of outperformance and, more to the point, a stream of new and newly-included equity listings brought China’s weighting to 30% by the end of 2017. Then, in 2018, MSCI began tapping into the huge pool of mainland A-shares, including them in indices alongside the country’s Hong Kong and U.S. listings. China’s weight peaked at 43% late in 2020, helped by strong returns out of the pandemic by its internet and e-commerce giants, as steady growers that fit into the “stay at home” investment thesis were much in favor globally. Intensifying government regulation—across technology as well as many other sectors of the economy—helped bring about the recent period’s sharp market decline, taking country weight back down to 30% by the end of Q1 2022.
With its combination of size and volatility, China has a huge influence on overall EM Index moves, making “China policy” arguably the most critical and difficult decision to make. At its high point in 2020, managers could factor in further A-share inclusion and extrapolate a near-future weight above 60% for the China juggernaut. It was then fair to ask if the EM Index would continue to behave as a diversified group at all, or become more akin to a single-country vehicle.
Currently the worry is in the opposite direction: how much further downside risk does the country embody, starting at nearly one-third of the total Index? Chinese leadership appears willing to put economics and financial interests to one side when it feels the need to reinforce the primacy of the Party over business and society. The lack of legal protection for private property (including foreign firms’ intellectual property) has been an ongoing source of tension with other nations, not least America. The U.S. government has delisted or restricted investment in shares deemed linked to “Chinese military companies” and regulators have been increasing their scrutiny of Chinese listings in New York. There has been very recent (early April) progress on sharing of company audit data that could break the stalemate on listings. And plans announced in March to ease the regulatory crackdown, support the real estate sector, and relax COVID restrictions sparked a historic one-day rally. In the EM context, China is too big to ignore, but outright bullishness should be underpinned by more such indications of “market-friendly” improvements.
Now that Russia is out, the weight of MSCI’s Emerging Europe region stands at less than 2%, in “safe to ignore” territory even for managers with a dedicated EM mandate. It is therefore possible to squint at the big picture view and see two super-regions, each with a distinct investment theme. For the first, combine Latin America with Middle East & Africa and Southeast Asia (mainly Indonesia and Thailand) to get the “old school” EM mix of commodity exposure and sensitivity to U.S. dollar strength. For the other, the rest of Emerging Asia (think China, Korea, Taiwan, and India) offers an emphasis on technology and innovation that has held greater relevance in recent years.
Questions and choices ahead
Given that energy-led inflation is on the rise with pressures likely to persist, investors might ask if we are about to witness a replay of the mid-2000’s “peak oil” and commodity super-cycle. Will the old school become new again, as resource producers become the next EM darlings and index drivers? Or will growth and tech regain and retain the bulletproof armor worn over much of recent history? The savvy EM manager will probably highlight to clients the benefits of owning a piece of both high-potential outcomes, and this is also the case to make for passive index or ETF investments.
For an active manager, whichever of the super-regions proves ascendant, by now it should be clear that individual country choices matter a great deal. Seeking out cheap and profitable companies wherever they are found—“holding your nose” to ignore reckless or unsavory or unaccountable leadership—is an approach that puts a false veneer of sophistication over a fundamental naivete.