Digital Economy strategy - September 2022

September was a challenging month for investors

• Sentiment significantly worsened impacting most investments
• Macroeconomic and geopolitical risks continue to be dominant
• We expect companies will reset future growth forecasts during the 3rd quarter reporting period

What’s happening?

Global equity markets declined sharply in September, with the MSCI ACWI falling 9.5%¹ .  There were very few bright spots amongst the macro data that was released during the month with high inflation trending in many regions of the world resulting in additional interest rate hikes (and suggestions of more to come) by central banks.  This message was not well received by investors across many asset classes.

Expectations are increasingly factoring in a broad-based recession with the rising cost of living and the associated impact on the consumer continuing to be a headwind for businesses whilst the backdrop of the war in the Ukraine adds to current market uncertainty, contributing to higher energy prices and supports the current risk off sentiment.

Many companies have now completed their third quarter and will soon start to present these results and provide guidance for the fourth quarter.  The sharp decline in value of currencies against the US dollar creates a headwind and hence further risk to growth for the remainder of 2022 and 2023.

Portfolio positioning and performance

September was a difficult month across the board within our strategy as sentiment significantly worsened resulting in most investments seeing a fall in their value.  At the margin some of our Cybersecurity holdings generated a positive return, due to the defensive aspects of these company’s products.

The Enabler sub-theme (with the Data & Enablers theme) detracted most from performance during September.  This sub-theme contains investments in software and IT service companies who have recently been highlighted a longer duration in the sales process during the last reporting period.  We note that when there is macro uncertainty, companies can often defer investment in new technology or projects as they reassess their budgets and cash flow for a more difficult operating environment.  However, we believe that key investments cannot be paused forever and that these spending intentions will return as more certainty returns to global economies.

We sold the remainder of our investment in Zendesk, following the bid proposed by a consortium of private equity firms to acquire the company.  We also sold our position in real estate business Duke Realty which is being acquired by peer Prologis in an all-stock transaction.  We continued to add to our investments in cybersecurity firms, CyberArk Software, Tenable Holdings and Splunk.

Outlook

Whilst macro-economic and geo-political uncertainty continue, we would expect markets to remain volatile. The pressures from inflation, a strong US dollar, higher energy costs and rising interest rates will continue to have a negative impact on consumer spending and businesses exposed to consumer spending.  Near term growth expectations will likely be reset over the coming months.  However, we believe the longer-term growth potential for many of the companies within the Digital Economy strategy are likely to remain elevated above broader economic growth rates over the duration of an investment cycle and with the contraction of valuations we believe there are many attractive investment opportunities arising.  We are mindful that equity markets can overshoot in both directions, so we are not trying to call the bottom, but we do believe that our investment philosophy around identifying long term themes and the companies that will benefit from these themes remains intact despite the near-term challenges.

Whilst the long-term growth trends to which the fund is exposed are still intact the strength of the global economy may influence the pace of this growth.  It is even more important that we continue to focus on quality within our investment universe, identifying management teams who we believe can navigate their organisations through these challenging times.

Long term investment trends that our strategy is exposed to such as the growth in online advertising, the adoption of e-commerce and the importance of having a reliable and safe transaction and fulfilment operation continue to play an important role in many successful business models even in a difficult economic environment.  Arguably, the ability for companies to harness the power of data and digitalisation to make themselves more productive and efficient play an even more vital role during times when growth has become scarce.

No assurance can be given that the Digital Economy strategy will be successful. Investors can lose some or all of their capital invested. The Digital Economy is subject to risks including Equity; Emerging Markets; Global Investments; Investments in small and/or micro capitalisation universe; Investments in specific sectors or asset classes; ESG.