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Retirement

Delivering the Power of the Proxy to Retirement Plans

Consistent with this overall trend, our survey findings suggest that there is an appetite among fund investors for understanding how their funds voted on ESG issues and that they may be prepared to act on this information. Sixty-one percent of our sample felt that ESG issues should be addressed in their funds’ proxy voting, and 75% indicated that they would like to have more of a say in how their funds voted.

Given that sustainable funds are rarely provided as investment options in workplace 401(k) plans, proxy voting may offer fund investors another way of aligning their ESG preferences with the funds they choose for their retirement savings. Some investors may prefer to use both approaches where available. Theoretically, plan participants could choose among funds based how funds voted on ESG issues on the proxy ballot. Just over half of survey participants indicated that they would be likely to use fund ESG proxy voting as a guide to fund selection.

We find that many of the funds with the most 401(k) assets vote predominantly against key ESG resolutions on corporate proxy ballots. Closer inspection shows that low 401(k) fund support for ESG is linked to voting positions taken by asset managers that dominate the list of the funds with most 401(k) assets—American Funds and Vanguard, which both have low overall levels of voting support for ESG issues.

The SEC’s interest in strengthening mutual fund proxy voting transparency—announced in March—is aimed at giving retail investors more insight into how their money is voted, especially in light of the growing interest in ESG shareholder proposals. SEC acting chair Allison Lee cited retirement savings’ contribution to index fund investing as a primary consideration in this initiative. And, in December 2020, the U.K. government set up a task force to investigate how pension funds’ voting policies can be better reflected in the voting practices of pooled funds in which they invest.16 This means that pension funds, as end investors, may get a greater say in the proxy voting of funds offered by asset managers. In February a partnership involving asset managers DWS and Northern Trust, together with proxy service providers AMX and Manifest, announced a new service that would split proxy voting in pooled funds according to the preferences of pension fund investors.

Furthermore, several startup initiatives, like U.K.-based Tumelo, are offering platforms and proxy services that aim to close the gap between the end investor and the voice that their investments carry through proxy voting and engagement. The general strategy is to offer transparency into ESG issues on proxy ballots and to drive shareholder involvement by allowing investors to share their ESG voting or engagement preferences via an online, streamlined process.18 Not only do these tools help companies understand their investors’ values, but they also have the potential to promote engagement and commitment between end investors, plan providers, and fund providers.

Although many individual investors may not yet be aware of the link between the retirement investments they make via their 401(k) plans and the voting power these investments carry, as general interest in ESG grows so will plan participants’ appetite for influence. We believe that it’s only a matter of time before proxy voting becomes another tool for fund investors to express their ESG preferences

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Retirement

Retirement with better proxy-fueled ESG investing

Retirement

12 Collectively, these 100 mutual funds account for $5.6 trillion in total assets, according to Morningstar Direct. Of these, 58 are funds that hold equity investments—accounting for $4.3 trillion in assets.

The massive volume of assets that the funds control is largely a function of their availability across workplace retirement plans. These funds will have found their way into numerous 401(k) plans available to employees, where their mandate is to protect and grow the retirement savings of millions of worker investors across the country.

To understand how strongly the largest mutual funds in 401(k) plans voted in support of ESG issues, we benchmarked their 2020 proxy votes against 67 key ESG resolutions that came to vote at U.S. publicly traded companies in 2020. Each was supported by at least 40% of shares cast by minority outside shareholders, which means this set resonated broadly with the broad shareholder base. Given the high levels of overall support, we would therefore expect to see high levels of support for our set of key resolutions from funds. Appendix 1 lists and describes the key resolutions set.

We began our analysis by narrowing down the BrightScope 100 funds list to those that had the opportunity to cast a vote on at least one of the 67 key resolutions—in other words, funds that contained a holding that voted on one of these issues. Of the list, 51 cast a vote on at least one of the 67 key resolutions and 38 cast at least 10 votes across the key resolution set.

Appendix 2 provides a fund-by-fund vote comparison across the 38 funds with 10 or more votes. It shows that support ranged from 100% to just 4%. As a group, funds in the BrightScope 100 ranking generally exhibited low levels of support for key ESG resolutions. Only eight of the 38 supported 75% or more of the resolutions they voted on; 15 supported at least half; while 23, or 60%, supported less than half.

Our previous research shows that proxy voting by individual funds closely maps to the “house view” of the provider of a fund, or the fund advisor with voting authority. Our current analysis supports this arrangement. Exhibit 4 compares individual funds’ votes with the “house view” of the parent or advisor of each of the BrightScope 100 funds with more than $100 billion in assets. “House view” is determined by examining votes across all funds offered by the asset manager.

For example, the Fidelity funds managed by Geode Capital Management supported nearly 90% of key ESG resolutions, whereas Fidelity’s FMR-managed funds supported around 50% of resolutions. An even starker contrast can be drawn between Vanguard’s index funds’ low support for key ESG resolutions—tracking the Vanguard “house view” at 24% support—and the Wellington-managed Vanguard funds, which supported almost 80% of the ESG resolutions voted on.

The 38 funds with at least 10 votes on our key resolution set account for $3.4 trillion in assets. They hold powerful sway over vote outcomes that shape ESG practices in the U.S. equities market. Yet most of these funds supported fewer than 50% of the key ESG resolutions.

To extend our analysis, we also examined votes by the largest 401(k) mutual funds on 14 resolutions put forward by public sector and labor union pension plans, whose concerns can be assumed to align more closely with those of workers invested via workplace retirement plans.

 General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

Downer’s Transformation to Urban Services Business Continues with More Mining Sold Down

In the past, Downer has also underperformed from an operational perspective, but the firm now appears to have learned some hard lessons. The company is pursuing a more capital-light business model for the future, with an emphasis on urban services. In late October 2014, Downer acquired Tenix, a major provider of long-term operations and maintenance services to the power, gas, water, industrial, and resources sectors in Australia and New Zealand. In April 2017, it bought facilities manager Spotless Group.

Key Considerations

  • In late fiscal 2014, Downer completed a high-profile state government rolling stock contract that had weighed on the company’s reputation for the past five years.
  • Based on AUD 36 billion of work-in-hand, Downer has over two and a half years of revenue life, close to the 2.5 year five-year historical average. This is courtesy of Spotless’ additions, many of which are considerably longer dated than mining and EC&M contracts.
  • A key concern in relation to future earnings relates to increased uncertainty surrounding the level and timing of new domestic infrastructure projects by the federal and state governments.

Company Profile

Downer operates engineering, construction, and maintenance; transport; technology and communications; utilities; mining; and rail units. But the future of Downer is focused on urban services, and mining and high-risk construction businesses are being sold down. The engineering, construction, and maintenance business has exposure to mining and energy projects through consulting services. The mining division provides contracted mining services, including mine planning, open-cut mining, underground mining, blasting, drilling, crushing, and haulage. The rail division services and maintains passenger rolling stock, including locomotives and wagons.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.               

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Fixed Income Fixed Income

Fidelity® Emerging Markets Z FZEMX

He joined Fidelity in 2006 as an analyst, and then built strong track records at Fidelity Pacific Basin FPBFX from 2013 and Fidelity Emerging Asia FSEAX from 2017 until he became the successor to this fund’s previous manager in February 2019. Since taking over the following October, Dance has leaned on Fidelity’s deep emerging- markets analyst team for support, a strong group that continues to play a role here as Dance learns more about the emerging markets he didn’t invest in at his previous charges.

Dance, a successful regional strategy manager, still must show he can consistently apply his process to a broader universe. He’s a growth-oriented investor who buys four kinds of stocks–sustainable growers, niche companies, firms with macroeconomic tailwinds, and special situations–and holds them for three to five years.

Dance considers regional economics and macro views more than many of his peers, looking to accumulate exposure in regions or sectors in which he sees high growth potential. He turned defensive in February 2020 after learning of the coronavirus outbreak in China, selling expensive stocks like Brazilian investment manager XP while buying consumer staples stocks like Angel Yeast and healthcare stocks like Shenzhen Mindray.

The portfolio reflects Dance’s preferences. Its average holding has better profitability metrics and competitive advantages than those of its MSCI Emerging Markets Index benchmark and diversified emerging markets Morningstar Category. Such stocks often come at a cost: The portfolio’s average valuation measures like price/earnings, price/book value, price/sales, and price/cash flow are higher than those of its benchmark and typical peer. Despite some price risk, Dance has succeeded at his previous charges with this approach, so there’s reason for optimism.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Funds Funds

Invesco Main Street Mid Cap Y OPMYX

Anello had been a lead manager of this fund since 2012 and had worked with Main Street team founder Mani Govil since 2006, but the fund had been a mediocre performer under his watch, so his departure was not really a shock. Now the fund’s sole lead manager is Belinda Cavazos, who was hired in February 2020 to manage this fund and Invesco Rising Dividends OARDX. She previously spent three years at Boston Trust managing small and mid-cap funds with some success. But this fund is much larger than any of her previous charges, and turning it around will be no easy task.

This fund is a mid-cap counterpart to Invesco Main Street MSIGX, which tries to identify profitable, well-run companies trading at reasonable valuations. Cavazos has not made any major changes to the process, but she has tried to put her own stamp on the fund, especially since Anello left. She reduced the portfolio’s exposure to some interest-rate-sensitive sectors, notably real estate and utilities, and added to some cyclical names such as Vulcan Materials VMC and homebuilder

D.R. Horton DHI. She also reduced the overweighting in energy that the fund typically had under Anello and sold some large-cap names that didn’t really fit with the fund’s mid-cap mandate. The effect has been to make the fund less reliant on sector bets and more driven by stock-picking. So far, the results haven’t been great. In 2020, the fund trailed about two thirds of its midcap blend Morningstar Category peers, similar to its performance over the past three, five, and 10 years. Results were similarly disappointing in the first five months of 2021. It is hard to come to any firm conclusions based on such a short time period, but Cavazos will definitely need to achieve better results than this before concluding that the fund is on the right track.

This fund’s strategy is straightforward in most respects. It is similar to the approach used by Invesco Main Street MSIGX, but less tested. It earns an Average Process rating. Lead manager Belinda Cavazos and her six co-managers employ a version of the strategy developed over the years by Main Street team leader Mani Govil. They seek companies with strong management teams and a fundamental catalyst for future value creation over the next two to five years, such as pricing power, market share gains, or improving profitability.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

L Brands Post Strong Margins

Bath & Body Works continued to impress with a 26% operating margin, a figure in line with luxury retailers. While some expense leverage probably came from sales that rose to $3 billion (up 83%, lapping roughly six weeks of COVID-related closures last year), we think some gross margin gains could stay, given their attribution to better merchandising. However, we also expect some gains to recede, as the promotional cadence is likely to pick up over time. For reference, sales in the first quarter of 2020 were just $1.65 billion, since locations were closed for half of the fiscal quarter due to COVID-related restrictions.

L Brands’ second-quarter outlook also provides a lift to our fair value estimate, with 10%-15% sales growth and $0.80- $1.00 in EPS anticipated; these marks are ahead of the $2.9 billion in sales and $0.53 in EPS we projected for the period. As such, we plan to lift our full-year sales and EPS estimates to more closely reflect probable first-half performance, though the firm did not provide full-year guidance. We plan to stand firm on our long-term projections, which include 2% sales and mid-single-digit EPS growth along with midteens operating margins. As the division of the VS and BBW segments approaches, we expect to have more clarity on the capital structures of the separate businesses, which will allow us to value the stand-alone brands properly. Until then, we will continue to model the two businesses under the same umbrella, rendering an outcome based on current capabilities.

L Brands is still targeting August as the official separation date for its two brands, though it provided few additional details. For VS, the company will aim for midteens operating margins, an objective that feels increasingly attainable, given the brand’s latest success. VS will maintain its recent focus on inclusivity in both the VS and Pink labels, with the hope of regaining consumer confidence and demand. For BBW, the firm intends to stay the course, considering the success it has achieved with its current strategy, though it has expressed interest in expanding into whitespace categories such as sustainable hair and skincare, a move we commend given the recent focus on “green” consumption. Both brands will be expanding buy online/pick up in store capabilities, especially as they transition to more off-mall locations, which should improve throughput and profitability.

In anticipation of the spin-off, the firm named new CFOs for the two independent companies. Bath & Body Works’ CFO will be Wendy Arlin, current senior vice president and controller for L Brands, who previously was an audit partner at KPMG. Victoria’s Secret’s CFO will be Tim Johnson, former CFO of Big Lots. We believe both individuals will bring important knowledge and expertise to the two new standalone entities. In particular, Johnson’s retail industry experience will be useful as VS attempts to maintain its current trajectory.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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IPO Watch

Marqeta’s $1.2 Billion IPO: What to Know

Financial technology companies in particular have garnered significant investor interest this year, perhaps pushing more startups to gopublic. Two other payments-related companies, Flywire FLYW and Paymentus PAY recently went to market. Flywire’s stock jumped about 46% and Paymentus’ went up about 36% on their first day of trading.

Marqeta has scaled quickly, fueled by the growth of financial technology, e-commerce, and the gig economy. But its future is anything but certain.

Marqeta’s clients include familiar tech names like Square SQ, AffirmAFRM, Uber UBER, DoorDash DASH, and Instacart. These companies use Marqeta’s platform to build payment experiences for their own customers or streamline business payments.

What’s Behind Marqeta’s Strong Revenue Growth

Most of Marqeta’s revenue comes from transaction fees, so processing volume is the name of the game. Marqeta has benefited from the accelerated shift to e-commerce and digital payments brought on by COVID-19. The company’s total processing volume reached roughly $60 billion in 2020, up from $21.7 billion the year before, according to the Marqeta’s SEC filing. The momentum has continued into 2021; Marqeta says its platform processed $24 billion in the first quarter.

With the boost in processing volume, Marqeta brought in $290.3 million in revenue in 2020, more than double its 2019 revenue.

While the past year has been sweet for Marqeta in terms of revenue growth, we have to look at the numbers with a grain of salt because they may not be indicative of the future. COVID-19 has impacted consumer spending patterns, boosting online purchases and demand for delivery services and contactless payments. While the need for virtual payment processing and card issuing may continue to trend upward, the dramatic shift seen during the pandemic will likely subside.

Despite the boost in revenue over the past year, Marqeta isn’t yet profitable. The company has shown a decline in net losses in recent years but still lost $47.7 million in 2020.

Marqeta expects to incur losses for the foreseeable future as the company continues to invest in its growth. Ultimately, the future is uncertain. And Marqeta acknowledges in its SEC filing that it may never achieve or sustain profitability.

Marqeta Has a Dependency Problem

Marqeta’s growth over the past year has mirrored the performance of its customers, particularly payments processing company Square, which generates most of Marqeta’s revenue. Square was responsible for 70% of Marqeta’s net revenue in 2020. That percentage rose to 73% for first-quarter 2021.

Square’s rapid growth during the pandemic has been a boon for Marqeta, but Morningstar senior equity analyst Brett Horn sees risk in customer concentration: “This tends to be mainly a growth issue, as customers have leverage to demand better pricing.”

The current term of Marqeta’s agreement with Square for Square Card expires in December 2024, and the current term of their agreement with Square for Cash App expires in March 2024. There is no guarantee that the relationship will continue on the same terms.

Losing revenue from Square, whether from Square’s poor performance or a severance of the relationship, would also have an adverse effect on Marqeta’s business.

Market Tailwinds Can Benefit Marqeta and Competitors

Horn and equity analyst Michael Miller believe there are significant opportunities for companies like Marqeta to draft off the secular trend toward electronic payments, which would act as a tailwind to card payment volumes. Euromonitor International, a market research firm, projects electronic payments will represent 46% of the total global transaction volume by 2025, up from 31% in 2017.

Horn sees competition between traditional players relying on scale and better pricing while newer upstarts like Marqeta try to win with services that better fit higher-growth areas. Industry growth creates room for new players, but Horn ultimately believes scale is the best form of long-term advantage in the space. This benefits existing players, like FIS and Fiserv, and gives them a window to replicate new offerings.

Miller said the rise of buy-now-pay-later offerings is another major trend in the card payments space. Such offerings allow consumers to pay for retail goods under an installment plan. “These firms are more prominent in Europe and Australia, but they’ve been investing heavily in the U.S. to gain market share,” Miller said. “That said, in my view, they have a difficult path to significant adoption in the U.S. since they don’t have a clear benefit over existing credit card products already available in the country.”

Marqeta already supports providers in this space, like Affirm and Klarna, and Marqeta’s global presence (the company is certified to operate in 36 countries) would allow it to take advantage of this growth outside of the United States.

Marqeta’s potential markets are growing and evolving, and it will have to grow and evolve with them. Profitability will take a back seat as the company pursues further growth and innovation.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Palo Alto Networks : Platform Approach Resonating With Clients Across Network, Cloud, and Automation

Over the shoulder view of and stock broker trading online while accepting orders by phone. Multiple computer screens ful of charts and data analyses in background.

The complexity of an entity’s threat management increases as the quantity of data and traffic being generated off-premises grows. Network security can be attacked from various angles, and we posit that security will remain a top concern for all enterprises and governments, which bodes well for Palo Alto and its peers. Security point solutions were traditionally purchased to combat the latest threats, and IT teams had to manage various vendors’ products simultaneously, which leads us to believe that IT teams are clamoring for security consolidation to manage disparate solutions. Core to Palo Alto’s technology is its security operating platform, which provides centralized security management. We believe the ability to add technologies via subscriptions in the Palo Alto framework can alleviate complications by providing more holistic security, which can generate sustainable demand.

We expect that Palo Alto will continue to outpace its security peers by focusing on providing solutions in areas like cloud security and automation. Palo Alto’s concerted efforts into machine learning, analytics, and automated responses could make its products indispensable within customer networks. Although we expect Palo Alto to remain acquisitive and dedicated to organic innovation, we believe significant operating leverage will be gained throughout the coming decade as recurring subscription and support revenue streams flow from its expansive customer base.

Adding on modules to Palo Alto’s security platform could win greenfield opportunities and increase spending from existing customers.

Palo Alto could showcase great operating margin leverage as it moves from brand creation into a perennial cybersecurity leader. Winning bids should be less costly as the incumbent, and we think Palo Alto is typically on the short list of potential vendors.

The company is segueing into high-growth areas to supplement its firewall leadership. Analytics and machine learning capabilities could separate Palo Alto’s offerings.

The large public cloud vendors are developing security suites that may be preferred over those of a pure-play security supplier. If these companies offer products outside their data centers, Palo Alto may be stuck with niche applications and on-premises products.

Palo Alto competitors are also offering consolidated platforms, which could make displacing competitors more challenging.

Cloud and software-based startups could disrupt Palo Alto’s high-growth plans. The market for acquiring bolt-on firms could be hotly contested, and Palo Alto could miss out on the next big technology.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares

Ralph Lauren Closes Fiscal 2021 on Positive Note

In the quarter, Ralph Lauren saw a constant-currency sales decline of just 4% in Europe (our forecast was negative 19%) as strong e-commerce growth (owned up 79%) overcame store closures. Its sales in Asia and North America were close to our estimates. While sales have continued to decline in North America because of reduced distribution and less off-price selling, we view this strategy as favourable for Ralph Lauren’s brand strength, the basis of our narrow moat rating. We project long-term growth of less than 1% for the company in the region but anticipate mid- to highsingle- digit percentage growth in Europe and Asia on store openings, e-commerce, and wholesale expansion. For fiscal 2022, Ralph Lauren projected overall sales growth of 20%-25%, in line with our previous forecast (adjusted for the impending sale of Club Monaco, which generated $210 million in sales in prepandemic fiscal 2020).

Ralph Lauren reported an adjusted gross margin of 62.9% in the quarter, 140 basis points above our forecast, due to strong pricing and mix. Our long-term forecast calls for sustainable 63% gross margins.

As has typically been the case, Ralph Lauren closed the fourth quarter in a net cash position, with long-term debt of $1.6 billion more than offset by $2.6 billion in cash (net cash of about $13 per share). The firm will also receive cash soon (undisclosed terms) from the sale of Club Monaco, which it bought for about $52 million in 1999. Given its strong balance sheet, Ralph Lauren has reinstated its quarterly dividend of $0.6875 per share, as we had anticipated. We forecast its long-term dividend payout ratio at about 50%. We forecast limited buybacks in fiscal 2022 (just over $100 million) but increasing share repurchases in subsequent years. Our capital allocation rating is Standard.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

S&P Global and IHS Markit Are a Collection of Moaty Franchises

Human hand stacking generic coins over a black background with hexagonal golden shapes. Concept of investment management and portfolio diversification. Composite image between a hand photography and a 3D background.

 Key Takeaways

  • S&P Global and IHS Markit are high-margin, largely recurring-revenue businesses that serve a diverse set of customers. IHS Markit has modestly more recurring revenue, which should lead to smoother earnings for the combined business.
  • S&P Global and IHS Markit have seen meaningful operating margin expansion over the past five years. S&P Ratings, the firm’s largest segment, has seen strong revenue growth and has expanded adjusted operating margins to 62% in 2020 from 50% in 2016 driven by robust issuance and pricing.
  • Following the merger, S&P Global and IHS Markit’s transportation and consolidated markets and solutions segments will continue to be stand-alone segments. Financial information and services will be created from S&P Market Intelligence and IHS Markit Financial Services (excluding indices), commodities and energy will be created from S&P Platts and IHS Markit Resources, and Indices will be created from S&P Dow Jones Indices and Markit Indices.
  • We expect S&P Global to achieve its $480 million expense synergy target. While we acknowledge some potential upside to this target, at a certain point the margin expansion implied by additional cost synergies would become unrealistic. Furthermore, S&P Global’s expense synergy targets are on top of existing expense efficiency programs.
  • S&P Global expects $350 million in revenue synergies within five years, though thus far it has given only limited detail on this. In Exhibit 1, we provide a list of where we think those revenue synergies may lie.
  • Rather than use the cross-sell versus new product framework, we instead categorize potential revenue synergies based on the segment and then identify vectors of where revenue synergies may be achieved. We expect the majority of revenue synergies to be in the financial information and services segment; to achieve its targeted synergies, we estimate the segment would need to grow 1.3% faster than it would have on its own. We view this as reasonable and could envision upside to this scenario.
  • While synergies are important, we believe investors should not overly concentrate on them. Other factors may have a greater impact in determining earnings, such as bond issuance volume. In addition, it can be difficult to precisely measure revenue synergies, given product bundling and other factors.

(Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.