Alpha-Centric ESG Research

Kyle Rudden

Oh, the inhumanity of Monopolium Inquisitorum, leviathans made to stand before the judgement of inquisitorial courts. Repent and reform, or burn in everlasting… fine, maybe just shed a few worldly possessions, WhatsApp would be a good start, and stop coveting thy neighbors' data so much.Big technology companies (aka "Big Tech") are the subject of ever-expanding antitrust inquisitions by regulators and courts around the world. In the U.S., informal inquiries into prominent members of FAANG by the U.S. Congress turned into formal antitrust suits, first Alphabet then Facebook.Yesterday, the U.S. Federal Trade Commission (FTC) announced yet another inquiry, this one into the data collection practices of social media companies. It mentioned nine companies by name, a few of which are "new" to this conversation (ByteDance, Tencent-investee Discord, and Snap).This Insight looks at one particular ESG angle to this antitrust stuff. Specifically, the potential for antitrust investigations – not the outcomes, but the process – to trigger ESG ratings downgrades and, in turn, constituency changes to major ESG indices. Summary points, for the cover page:<ul>
<li>Antitrust investigations will inevitably result in additional ESG ratings downgrades, and since most ESG indices are constructed using those ratings, constituency changes are likely.</li>
<li>Index changes might not happen until annual reviews a few months from now, but they are not tied to eventual antitrust outcomes (e.g., breakups) that could be years away, or not at all.</li>
<li>Presently, Facebook and Alphabet are the only U.S. stocks that stand out vis-à-vis the potential for antitrust-driven changes to ESG ratings and/or ESG indices (more so for Facebook).</li>
<li>Let's be honest, we are not talking about Tesla being added to the S&amp;P 500. Even for larger ESG indices, index-linked AUM is comparatively small vis-à-vis broader market indices.</li>
<li>However, one thing keeps it interesting. ESG indices are bloated with Big Tech, many of which are right behind Facebook and Alphabet on the antitrust plank walk.</li>
</ul>Herein, I explain my thought process – antitrust, to ESG ratings downgrades, to ESG index changes – then cover Facebook and Alphabet in some detail (albeit limited by constraints). There is less to say about the other U.S. "antitrust stocks" at the moment, but that may change. More importantly, I am looking into something similar, but related to Asian stocks. So, more to come.

Oh, the inhumanity of Monopolium Inquisitorum, leviathans made to stand before the judgement of inquisitorial courts. Repent and reform, or burn in everlasting… fine, maybe just shed a few worldly possessions, WhatsApp would be a good start, and stop coveting thy neighbors' data so much.Big technology companies (aka "Big Tech") are the subject of ever-expanding antitrust inquisitions by regulators and courts around the world. In the U.S., informal inquiries into prominent members of FAANG by the U.S. Congress turned into formal antitrust suits, first Alphabet then Facebook.Yesterday, the U.S. Federal Trade Commission (FTC) announced yet another inquiry, this one into the data collection practices of social media companies. It mentioned nine companies by name, a few of which are "new" to this conversation (ByteDance, Tencent-investee Discord, and Snap).This Insight looks at one particular ESG angle to this antitrust stuff. Specifically, the potential for antitrust investigations – not the outcomes, but the process – to trigger ESG ratings downgrades and, in turn, constituency changes to major ESG indices. Summary points, for the cover page:
Antitrust investigations will inevitably result in additional ESG ratings downgrades, and since most ESG indices are constructed using those ratings, constituency changes are likely.
Index changes might not happen until annual reviews a few months from now, but they are not tied to eventual antitrust outcomes (e.g., breakups) that could be years away, or not at all.
Presently, Facebook and Alphabet are the only U.S. stocks that stand out vis-à-vis the potential for antitrust-driven changes to ESG ratings and/or ESG indices (more so for Facebook).
Let's be honest, we are not talking about Tesla being added to the S&amp;P 500. Even for larger ESG indices, index-linked AUM is comparatively small vis-à-vis broader market indices.
However, one thing keeps it interesting. ESG indices are bloated with Big Tech, many of which are right behind Facebook and Alphabet on the antitrust plank walk.
Herein, I explain my thought process – antitrust, to ESG ratings downgrades, to ESG index changes – then cover Facebook and Alphabet in some detail (albeit limited by constraints). There is less to say about the other U.S. "antitrust stocks" at the moment, but that may change. More importantly, I am looking into something similar, but related to Asian stocks. So, more to come.

Big Tech Antitrust Scrutiny Could Mean ESG Ratings Downgrades, Constituency Changes for ESG Indices

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Equity Bottom-Up

<ul>
<li>The percentage of US active funds invested in Tesla has risen sharply over the course of the year.  A total of 18%, or 88 out of the 496 funds in our US analysis hold a position in Telsa.  Average fund weights across all funds is 0.42%, across Telsa holders is 2.34%.  </li>
<li>Total dollar holdings are at peak levels among the funds in our analysis, with combined AUM in <a href="https://www.smartkarma.com/entities/tesla-motors-inc" target="_blank" data-smartkarma-citation="entities:20279:1" rel="noopener">Tesla Motors (TSLA US)</a> of $37.6bn among the 88 holders.  </li>
<li>Current holders have tended to sell in to strength this year, with $4.4bn in outflows as managers keep Telsa from dominating portfolios if left unchecked.</li>
<li>At current levels, <a href="https://www.smartkarma.com/entities/tesla-motors-inc" target="_blank" data-smartkarma-citation="entities:20279:1" rel="noopener">Tesla Motors (TSLA US)</a> will join the ranks as one of the top underweight holdings among active US managers, currently led by <a href="https://www.smartkarma.com/entities/apple-inc" target="_blank" data-smartkarma-citation="entities:666:1" rel="noopener">Apple Inc (AAPL US)</a> and <a href="https://www.smartkarma.com/entities/microsoft-corp" target="_blank" data-smartkarma-citation="entities:15273:1" rel="noopener">Microsoft Corp (MSFT US)</a> .  If no further buying occurs, Tesla will likely slot in to 4th place behind <a href="https://www.smartkarma.com/entities/amazon-com-inc" target="_blank" data-smartkarma-citation="entities:409:1" rel="noopener">Amazon.com Inc (AMZN US</a> (assuming an inclusion weight of ~1.5%).</li>
<li>We expect buying pressure from benchmark aligned funds who are currently not invested in the stock.  Estimates of $5.8bn when analysing previous index inclusions <a href="https://www.smartkarma.com/entities/facebook-inc-a" target="_blank" data-smartkarma-citation="entities:665:1" rel="noopener">Facebook Inc A (FB US)</a> and <a href="https://www.smartkarma.com/entities/berkshire-hathaway-inc-cl-b" target="_blank" data-smartkarma-citation="entities:8635:1" rel="noopener">Berkshire Hathaway Inc Cl B (BRK/B US)</a> .</li>
<li>Potential $37bn of selling from active US funds, though current holders are long-term holders and not guaranteed to sell in to the rebalance.  We see an imbalance of buying from passive funds who may need to push prices significantly higher to entice these long-term holders to sell.</li>
</ul>Analysis taken from our US research, covering 496 active US equity funds with a combined AUM of $3.4tr.


The percentage of US active funds invested in Tesla has risen sharply over the course of the year.  A total of 18%, or 88 out of the 496 funds in our US analysis hold a position in Telsa.  Average fund weights across all funds is 0.42%, across Telsa holders is 2.34%.  
Total dollar holdings are at peak levels among the funds in our analysis, with combined AUM in Tesla Motors (TSLA US) of $37.6bn among the 88 holders.  
Current holders have tended to sell in to strength this year, with $4.4bn in outflows as managers keep Telsa from dominating portfolios if left unchecked.
At current levels, Tesla Motors (TSLA US) will join the ranks as one of the top underweight holdings among active US managers, currently led by Apple Inc (AAPL US) and Microsoft Corp (MSFT US) .  If no further buying occurs, Tesla will likely slot in to 4th place behind Amazon.com Inc (AMZN US (assuming an inclusion weight of ~1.5%).
We expect buying pressure from benchmark aligned funds who are currently not invested in the stock.  Estimates of $5.8bn when analysing previous index inclusions Facebook Inc A (FB US) and Berkshire Hathaway Inc Cl B (BRK/B US) .
Potential $37bn of selling from active US funds, though current holders are long-term holders and not guaranteed to sell in to the rebalance.  We see an imbalance of buying from passive funds who may need to push prices significantly higher to entice these long-term holders to sell.
Analysis taken from our US research, covering 496 active US equity funds with a combined AUM of $3.4tr.

Tesla Inclusion.  What Will Active US Funds Do?

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

The S&amp;P DJI Global Indices team <a href="https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20201211-1277389/1277389_tes15aircaivspindnkn4.pdf?force_download=true" target="_blank" rel="noopener">confirmed</a> Friday night that <a href="https://www.smartkarma.com/entities/tesla-motors-inc" target="_blank" data-smartkarma-citation="entities:20279:1" rel="noopener">Tesla Motors (TSLA US)</a> would join the S&amp;P500 and the S&amp;P100 at the close of trading on 18 December, with <a href="https://www.smartkarma.com/entities/apartment-invt-mgmt-co-a" target="_blank" data-smartkarma-citation="entities:2193:1" rel="noopener">Apartment Invt &amp; Mgmt Co A (AIV US)</a> coming out of S&amp;P500 and its 14 December spin-out Apartment Income REIT replacing <a href="https://www.smartkarma.com/entities/dunkin-brands-group-inc" target="_blank" data-smartkarma-citation="entities:15866:1" rel="noopener">Dunkin' Brands Group (DNKN US)</a> in the S&amp;P Midcap 400, and <a href="https://www.smartkarma.com/entities/occidental-petroleum-corp" target="_blank" data-smartkarma-citation="entities:17075:1" rel="noopener">Occidental Petroleum (OXY US)</a> coming out of the S&amp;P100 but staying in the S&amp;P500. When the S&amp;P announced on the 16th of November that Tesla would be joining the S&amp;P500 in December, it said the pro-forma inclusion weight would be ~1.01% (without measuring what would come out). S&amp;P also said that it would update the pro-forma inclusion weight and trading value impact when the Deletion was announced, but they did not. My calc suggests it is 1.47% as of Friday's close. And the two-way trading value based on the S&amp;P's original US$51bn number is, as of today, ~US$152bn.Which is a lot.The arithmetic, and an explanation of why it matters, follow.

The S&amp;P DJI Global Indices team confirmed Friday night that Tesla Motors (TSLA US) would join the S&amp;P500 and the S&amp;P100 at the close of trading on 18 December, with Apartment Invt &amp; Mgmt Co A (AIV US) coming out of S&amp;P500 and its 14 December spin-out Apartment Income REIT replacing Dunkin' Brands Group (DNKN US) in the S&amp;P Midcap 400, and Occidental Petroleum (OXY US) coming out of the S&amp;P100 but staying in the S&amp;P500. When the S&amp;P announced on the 16th of November that Tesla would be joining the S&amp;P500 in December, it said the pro-forma inclusion weight would be ~1.01% (without measuring what would come out). S&amp;P also said that it would update the pro-forma inclusion weight and trading value impact when the Deletion was announced, but they did not. My calc suggests it is 1.47% as of Friday's close. And the two-way trading value based on the S&amp;P's original US$51bn number is, as of today, ~US$152bn.Which is a lot.The arithmetic, and an explanation of why it matters, follow.

Tesla Into S&P - Rebal Details, and Implications for Vol and Active Portfolio Reconstruction

IPO and L/S equity, 2015 Starmine top stock picker, Global Equity Research Ltd

Rickin Thakrar

IPO and L/S equity, 2015 Starmine top stock picker

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

NY Attorney General Letitia James filed an anti-trust lawsuit against <a href="https://www.smartkarma.com/entities/facebook-inc-a" target="_blank" data-smartkarma-citation="entities:665:1" rel="noopener">Facebook Inc A (FB US)</a> which is co-sponsored by Federal Trade Commission and 46 US states. This is not dissimilar to historical legal anti-trust challenges to break up big companies such as Microsoft and AT&amp;T.  While we believe this is unlikely to be resolved soon, we believe Facebook and Big Tech have drawn bipartisan ire due to concerns about anti-competitive behaviour and the spread of disinformation. Our thoughts on the litigation as well as operational concerns are below the fold. 
Our previous research on US regulatory matters and Facebook can be found here
<a href="https://www.smartkarma.com/insights/us-congress-passes-bill-that-could-lead-to-the-delisting-of-chinese-companies-on-us-exchanges" target="_blank" data-smartkarma-citation="insights:46004" rel="noopener">US Congress Passes Bill that Could Lead to the Delisting of Chinese Companies on US Exchanges</a> 
<a href="https://www.smartkarma.com/insights/lvmh-tiffany-oh-bernie-not-like-this" target="_blank" data-smartkarma-citation="insights:43151" rel="noopener">LVMH-Tiffany: Oh Bernie, Not like This.</a> 
<a href="https://www.smartkarma.com/insights/facebook-4q-results-an-easy-beat-has-zuck-turned-the-tanker" target="_blank" data-smartkarma-citation="insights:27657" rel="noopener">Facebook 4Q Results: An Easy Beat - Has Zuck Turned the Tanker?</a> 
<a href="https://www.smartkarma.com/insights/facebook-3q-results-are-the-fangs-safe-for-now" target="_blank" data-smartkarma-citation="insights:25513" rel="noopener">Facebook 3Q Results: Are the FANGS Safe...for Now?</a>

NY Attorney General Letitia James filed an anti-trust lawsuit against Facebook Inc A (FB US) which is co-sponsored by Federal Trade Commission and 46 US states. This is not dissimilar to historical legal anti-trust challenges to break up big companies such as Microsoft and AT&amp;T.  While we believe this is unlikely to be resolved soon, we believe Facebook and Big Tech have drawn bipartisan ire due to concerns about anti-competitive behaviour and the spread of disinformation. Our thoughts on the litigation as well as operational concerns are below the fold. 
Our previous research on US regulatory matters and Facebook can be found here
US Congress Passes Bill that Could Lead to the Delisting of Chinese Companies on US Exchanges 
LVMH-Tiffany: Oh Bernie, Not like This. 
Facebook 4Q Results: An Easy Beat - Has Zuck Turned the Tanker? 
Facebook 3Q Results: Are the FANGS Safe...for Now? 

Facebook and Antitrust - The Beginning of the End for Big-Tech?

Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Tracking Traffic

Focusing on Asian logistics, transportation, and travel companies

The US Federal Trade Commission (FTC) and almost four dozen US states and territories have filed antitrust suits against <a href="https://www.smartkarma.com/entities/facebook-inc-a" target="_blank" data-smartkarma-citation="entities:665:1" rel="noopener">Facebook Inc A (FB US)</a>, seeking to force the social giant to divest its Instagram and Whatsapp functions. For the suits against FB to succeed, the plaintiffs must establish that FB a) enjoys monopoly power that it has used to stifle smaller rivals and that b) consumers have been harmed as a result. Proving that consumers have been harmed will likely prove especially, in our opinion. For its part, FB executives have made it clear they view efforts to break up the company as an "existential threat".So how will the suits play out? The US government's case appears to have bi-partisan and popular support, and FB has made it clear they intend to fight. We expect this case to move slowly, perhaps requiring years to resolve. A clear win for the US government is unlikely; a more likely outcome would be a settlement in which FB agrees to limit its expansion in certain areas and/or its commercial use of user data. Increased scrutiny of FB's practices and a potential settlement could slow FB's growth, but is this really a growth stock? In Q320, OP increased by just 12% on 22% revenue growth, and consensus estimates for 2021e call for similar growth. In our view, the suits represent a likely headache for FB, but not much more, and are thus unlikely to have much impact beyond the company, either.

The US Federal Trade Commission (FTC) and almost four dozen US states and territories have filed antitrust suits against Facebook Inc A (FB US), seeking to force the social giant to divest its Instagram and Whatsapp functions. For the suits against FB to succeed, the plaintiffs must establish that FB a) enjoys monopoly power that it has used to stifle smaller rivals and that b) consumers have been harmed as a result. Proving that consumers have been harmed will likely prove especially, in our opinion. For its part, FB executives have made it clear they view efforts to break up the company as an "existential threat".So how will the suits play out? The US government's case appears to have bi-partisan and popular support, and FB has made it clear they intend to fight. We expect this case to move slowly, perhaps requiring years to resolve. A clear win for the US government is unlikely; a more likely outcome would be a settlement in which FB agrees to limit its expansion in certain areas and/or its commercial use of user data. Increased scrutiny of FB's practices and a potential settlement could slow FB's growth, but is this really a growth stock? In Q320, OP increased by just 12% on 22% revenue growth, and consensus estimates for 2021e call for similar growth. In our view, the suits represent a likely headache for FB, but not much more, and are thus unlikely to have much impact beyond the company, either. 

US FTC & States' Suits Against Facebook Unlikely to Result in Breakup, but Could Slow Expansion

United States

Microsoft Corporation operates as a software company. The Company offers applications, extra cloud storage, and advanced security solutions. Microsoft serves customers worldwide.

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Microsoft Corp (MSFT US)

Big Tech Antitrust Scrutiny Could Mean ESG Ratings Downgrades, Constituency Changes for ESG Indices

Antitrust broaches several highly-material ESG issues. Growing antitrust scrutiny of "Big Tech" could lead to ESG rating downgrades, and in turn,...

Kyle Rudden

Tesla Inclusion. What Will Active US Funds Do?

What are the current levels of ownership in Tesla Motors? We analyse 496 US active funds with a combined AUM of $3.4tr to find out.

Steven Holden

Tesla Into S&P - Rebal Details, and Implications for Vol and Active Portfolio Reconstruction

The TSLA S&P500 inclusion involves $150bn of direct flows and perhaps another $200-300bn indirect flows. It really is a MAMMOTH trade. And index...

Travis Lundy

Facebook and Antitrust - The Beginning of the End for Big-Tech?

NY Attorney General Letitia James filed an anti-trust lawsuit against Facebook Inc A (FB US) which is co-sponsored by Federal Trade Commission and...

Rickin Thakrar

US FTC & States' Suits Against Facebook Unlikely to Result in Breakup, but Could Slow Expansion

We believe the US government is unlikely to get a clear win against FB. A drawn-out trial may end in a settlement, but this could take two+ years....

Tracking Traffic

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