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Sustainable Equity Strategy: Market update

13 November 2020

SUMMARY

The Sustainable Equity strategy (‘the Strategy’) seeks companies that create sustainable growth and social value in the long term. This means that we normally focus on long-term trends. However, given the events on the financial markets arising from the COVID-19 outbreak we feel it is appropriate to comment on shorter-term events in relation to the underlying fund portfolios. 

A positive reading on a potential COVID-19 vaccine was released on Monday. Pfizer and BioNTech said their vaccine candidate proved to be more than 90% effective in the first 94 subjects who were infected by coronavirus and developed at least one symptom.

When we re-open it is likely that two important transitions of our time will continue. The need for a sustainable economy and digital economy. These secular trends were in place before COVID-19, the pandemic simply accelerated them and they'll be here after the virus is gone.

In the short run badly beaten business models might have their place in the sun. But in the long run the winners of the two most important transitions of our time will have the ability to grow consistently.

“A GREAT DAY FOR SCIENCE AND HUMANITY”
Dr Albert Bourla, Pfizer chairman and chief executive -

A positive reading on a potential COVID-19 vaccine was released on Monday November the 9th:  

Pfizer and BioNTech said their vaccine candidate proved to be more than 90% effective in the first 94 subjects who were infected by coronavirus and developed at least one symptom. This is significantly better than 50% efficacy threshold FDA established for approval. The companies noted no serious safety issues thus far and they remain on track to ask FDA for emergency use authorization by end of November. Dr. Fauci said Moderna vaccine may see similar results because it is also based on mRNA technology and told CNN it is "very likely" people will begin to be vaccinated before end of 2020.

DO SHOOT THE MESSENGER
The vaccine candidate utilizes a new method of transfection called Messenger RNA (mRNA). As its name suggests, mRNA carries information between different parts of a cell, providing instructions to our body, like which proteins to make. Pfizer and BioNTech have made a mRNA vaccine that contains genetic material from the virus.

When someone receives a dose of this vaccine, their body responds to the new information by producing ‘spike protein’. Since spike proteins aren’t normally found in human cells, their presence triggers the immune system, leading to a defensive response to remove the proteins.

Now that the immune system had some practice, it’s ready for the real thing. If someone who was vaccinated against SARS-CoV-2 was exposed to the virus later on, their immune system is ready to react.

ZOOM OUT
Messenger RNA vaccines are relatively new on the scene, but have the potential to be safer and more effective than other vaccine types. There is no risk of getting COVID-19 from the vaccine, as the virus is never present in the body. They are also easier to manufacture than traditional vaccines. Which gives the option of a swift roll-out. Pfizer expects to produce globally up to 50 million vaccine doses in 2020 and up to 1.3 billion doses in 2021.

LOOKING FORWARD
The Pfizer data is promising, but there are some barriers that will need to be dealt with should we see broad production and distribution. 

The logistics are tricky, as the drug must be stored in a -80°C freezer. This is standard equipment for biomedical research labs in universities and hospitals, but rare in doctor’s offices and pharmacies. This is a severe requirement even by the standards of vaccines. Inactivated flu vaccines can often be stored in a normal 2-8°C fridge, and even Moderna’s similar mRNA vaccine only needs to be frozen at -20°C. 

The vaccine also needs two doses. This means at least twice as much vaccine needs to be manufactured as a single dose treatment, assuming perfect compliance with vaccine scheduling.

MARKETS
Markets responded with one of the biggest single-day rotations in history. John Authers:

For perspective, look at the relative performance of the Dow Industrials and the Nasdaq Composite. Both are flawed indexes, but both continue to frame much public perception of the markets. The Nasdaq is much more weighted toward technology, and includes all the FANGs. Monday saw the Dow’s biggest outperformance of the Nasdaq since the bursting of the internet bubble in 2000. Other than that, the only times the Dow managed to beat the tech-heavy index by this much were on days when both were down, most dramatically during the Black Monday crash of 1987. If there is another example of a rotation this extreme on the back of good news, I cannot think of it.

For many quant managers, this rotation will have felt a lot like the financial equivalent of stepping on a rake and having its handle hit you in the face. Sudden reversals like this have in the past caused serious market dislocations. We don’t yet know if this has left any funds in trouble; this should grow clearer over the days ahead.

Meanwhile, growth managers, who have done brilliantly for a while by betting on a factor perceived to be scarce, have also suffered a sharp reversal compared to value. All their outperformance of the last four months has been undone — although value still has the potential for a lot more strong performance if this rotation continues.

SUSTAINABLE EQUITY
We have long held the believe that at some point we will be able to manage the virus and return to a more normal state-of-business. This was aided by insights via a number of our investments working towards mRNA vaccines for the past months. As we now know the following companies in our portfolio will be part of the Pfizer vaccine: 

- Croda International, a longstanding investment, will supply excipients for stabilization of the vaccine
- Thermo Fisher and Lonza Group will play a role in production. 

The development of a vaccine could potentially be a turning point in humankinds battle versus the virus. We may soon be able to once again go out for diner, on holiday or even back to work. Markets are starting to price in this potential re-opening. 

When we re-open it is likely that two important transitions of our time will continue. The need for a sustainable economy and digital economy. These secular trends were in place before COVID-19, the pandemic simply accelerated them and they'll be here after the virus is gone. 

However it is likely that growth rates will come down, from the recent levels. While growth rates of badly hit sectors like travel will likely go up. This can create some short-term volatility and rotation from the winners of the pandemic into the losers

In the short run badly beaten business models might have their place in the sun. But in the long run the winners of the two most important transitions of our time will have the ability to grow consistently. Therefore we eagerly await this opportunity and look for the following business characteristics as opportunities during heavy market swings:

- High quality industries supported by long term growth tail winds;
- Clear long term strategy;
- Ability to grow via innovation;
- Sustainability integral to the business model;
- Durable competitive advantages;
- Valuation support 

OTHER
Note this text paraphrases large parts of the following articles. Do consider giving it a thorough read for more information:

https://massivesci.com/articles/mrna-vaccine-covid19-coronavirus-moderna/ 
https://www.bloomberg.com/opinion/articles/2020-11-10/stocks-rotation-on-vaccine-may-cause-fallout-for-quant-funds 

The aim of this update is to provide you with more background information on the positions and performance of the Kempen Sustainable Value Creation Strategy in the current, challenging market conditions. Events relating to the COVID-19 virus will continue to dominate the markets for the time being, but we will continue to monitor the risks and opportunities through the lens of a long-term investor. Please do not hesitate to contact us if you require any further clarification.

 

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DISCLAIMER 

Kempen Capital Management N.V. (KCM) is the management company of the Kempen (Lux) Sustainable Value Creation Fund, the Kempen Global Sustainable Equity Fund N.V and the Kempen European Sustainable Value Creation Fund N.V. (the “Funds”). KCM is authorised as a management company and regulated by The Netherlands Authority for the Financial Markets Fund.

The information in this document provides insufficient information for an investment decision. Please read the Key Investor Document (available in Dutch, English and several other languages, see website) and the prospectus (available in English). The information on the website is (partly) available in Dutch and English. The value of your investment may fluctuate. Past performance provides no guarantee for the future. The performance shown does not take account of any commissions and costs charged when subscribing to and redeeming units.

The Funds currently may hold financial instruments in the subject companies. The views expressed in this document may be subject to change at any given time, without prior notice. KCM has no obligation to update the contents of this document. As asset manager KCM may have investments, generally for the benefit of third parties, in financial instruments mentioned in this document and it may at any time decide to execute buy or sell transactions in these financial instruments.

This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. This document has been produced independently of the companies and the views contained herein are entirely those of KCM van KCM.

The authors

Martijn Kleinbussink
Richard Jacobs
Mark Oud

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