Fundie bets on ‘anti-Amazon’ to power impact fund

Article Republished By Javier Troconis

In the past five years alone, assets in ESG and SRI mutual funds and exchange-traded funds globally have jumped more than 10-fold to $US2.1 trillion, according to data from EPFR Global.

In the nine months from the launch of the fund in March last year to the end of 2021, the portfolio jumped 21 per cent in value, a staggering achievement for the nascent strategy.

However, since 2022 began, the portfolio has slumped, tumbling 16 per cent in the past three months, twice as much as the MSCI global equity index. Since launch, returns have withered to just 1 per cent, far short of the 9 per cent gain for its benchmark.

It’s an early test for lead portfolio manager Hari Balkrishna, who was elevated to the role after serving as an assistant portfolio manager for T. Rowe’s global growth equity strategy.


“The first three months of the year have been extremely challenging,” says Balkrishna.

“You couldn’t have made up a worse movie in terms of the market environment for impact investing with high inflation, high commodity prices, rates going up, war in Russia and Ukraine.”

The London-based portfolio manager is a former Goldman Sachs banker and graduate of the University of NSW, who went on to study a master of business administration at Harvard University before joining T. Rowe.

Some of the fund’s biggest holdings have dropped sharply, reflecting the effects of higher interest rates in a shift that has already wiped 10 per cent from the S&P 500 benchmark of US blue chips this year.

The portfolio’s two largest positions, NextEra Energy, the world’s largest listed electricity utility holding company, and Danaher, a $US250 billion company that makes medical and industrial devices, have both shed a fifth of their value since the year began.

In response, Balkrishna has slimmed down the number of positions in the fund by 10 to about 65 to focus on its best ideas, from Europe-based heat pump group Nibe Industrier to Shopify, the e-commerce juggernaut that allows small and medium-sized retailers to compete with Amazon.


The performance of Shopify is emblematic of the challenges facing the portfolio. The stock was one of the hottest sharemarket plays through the first two years of the pandemic, jumping more than five-fold in value to peak in November 2021.

However, since then, the shares have shed three-quarters of their value as investors soured on the technology sector, which is among the most vulnerable to rising interest rates.

Despite the tumble, Balkrishna remains upbeat on the stock and thinks the company’s shares could again soar given its leading role as a rival to Amazon.

“I think it’s worth about four times what it is today,” he says. “There is a huge amount of monetisation opportunity in its ecosystem and growth potential in their customer base for Shopify to be a really good stock over the medium term.


“Shopify is a truly mission-driven, founder-led company, which basically serves as the anti-Amazon. It adds power to the hands of the SMEs,” he says. “SMEs pay a third of their revenue to Amazon, and they lose their brand cachet to Amazon.”

Shopify also offers a clear impact thesis: by backing a company that is focused on helping smaller businesses compete against large incumbents, the investment feeds into global efforts to bolster SMEs around the world.

“If you look at the United Nations Sustainable Development Goals, SME enablement is one of the key tenets both in developed markets and emerging markets in terms of reducing income and social inequality in society,” says Balkrishna.

The fund equally has a large focus on companies that help to reduce carbon emissions and many of the holdings reflect Balkrishna’s belief that consumers and businesses have already begun to show a clear preference for low-carbon products and services.

“My firm view remains that this train has left the station. When you look at consumer preferences, industrial preferences, political and regulatory preferences – and in spite of the fact at COP26 we could have had a lot more action – the reality remains that a lot of politicians and regulators around the world are still incentivising new climate technologies.”

A bullish bet the fund has made to that end is backing Rockwool International, a Danish company that provides wool insulation that helps homes retrofit with heat-saving materials, reducing the role housing plays in carbon emissions, which sits at around 40 per cent globally.


Balkrishna is betting on a return to the disinflationary backdrop that supported equity markets since the financial crisis, until consumer prices began to skyrocket in many developed economies 12 months ago, notably the US.

Inflation in the US sits at the highest level in four decades and has spurred the central bank to quickly raise rates, including a 50 basis point increase this month, further pressuring growth stocks.

“Demographics that have worsened because of the pandemic, technology adoption, which has actually accelerated again because of the pandemic, and the sheer amount of sovereign debt that has been taken on through the pandemic, are all deflationary in my view,” he says.

“While we have a very severe form of supply-side driven inflation and tightness in a lot of supply chains today, my base case remains that those deflationary forces on a medium-term view will still be the majority driver of what inflation looks like.”

The burst of inflation in the past year has also underscored the fund’s goal to deliver impact, which includes social equality, because consumer price increases are most sorely felt by those least able to weather higher prices.

“Inflation has gone to a point where those people who are struggling most are struggling more because of the cost-of-living pressures and because real wages aren’t keeping up with inflation in a lot of developed and emerging markets,” Balkrishna says.


Higher consumer prices will begin to weigh on demand, he believes, threatening economic growth but allowing inflation to work itself through the system, placing less pressure on central banks to raise rates.

“From a market standpoint, cyclically, we will see a demand reaction from where inflation is today, where we let inflation correct itself the unfortunate way – through demand correcting itself,” he says.

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