Rob Mundy

Hi The attached note looks at seasonal patterns in shares and whether its time to “sell in May and go away” along the lines of the old share market saying. The key points are as follows: Seasonal patterns in shares gave rise to the saying “sell in May and go away, buy again on St Leger’s Day.” However, seasonal patterns can’t always be relied on so while investors should be aware of them, betting on them solely to drive investment decisions is not wise. We continue to see shares having reasonable returns this year but expect a more constrained and volatile ride over the rest of the year than was the case in the first three months. All the best Shane

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This is good: slowly but surely the market is polarising to the two extremes of the spectrum, fully passive and fully active (as it should be in an ideal world) “Boom in active bond ETFs could put total inflows on track for $1tn year” https://lnkd.in/dQRRF_SJ This follows similar news on the debut of more and more active ETFs, which can be used for complex strategies if you like them (option pay-offs, private assets, …) https://lnkd.in/drvidpSk As a reminder, active management is not per se inferior to passive strategies: obviously, as in any profession there are those that good at it and those that are just mediocre. But all the stats that we continuously see around (SPIVA Scorecard, etc…) don’t paint the full picture: “traditional” mutual funds underperform their benchmarks / the market not because they are active, but because they are burdened by needless costs (structure; distribution system / selling commissions; “research costs” to be just a closet indexer; …) A good “Core Plus” fixed income active bond ETF today only costs 25-30 bps (vs 10-15 bps to construct a similar portfolio with passive ETFs, but with the need to do the “rebalancing” yourself depending on market opportunities)

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Budget Flash – Is the EIS & VCT Industry Too Complacent Regarding The Chancellor? A few weeks before the UK election in 2019, I was speaking at an Intelligent Partnership EIS Forum involving eight EIS fund managers, presenting to a group of about forty wealth manager and IFA groups. During the Q&A session, one participant asked the panel of fund managers whether they believed that the election of Jeremy Corbyn would lead to the end of EIS and VCT tax reliefs. With only one exception, they were unanimous in pouring cold water on this suggestion. Too many jobs would be lost; the UK needed investment in early-stage life sciences, fintech, blockchain technology, AI, and robotics; the creative fulcrum of entrepreneurial Britian would be sacrificed etc. All logical and well-reasoned arguments. Symvan was the exception that day and argued that these schemes would be amongst the first to go for the very simple reason that the Corbyn/McDonnell axis viewed the world through an essentially post-Marxist prism and simply saw such schemes as ‘tax breaks for rich guys.’ The private sector has little or no role in generating economic growth when you remove yourself sufficiently from reality. That intellectual depravity does not exist with the current government, but expediency potentially calls the wolf to the door nonetheless. And so Martin Vander Meyer offers a warning in a worryingly prescient article in this week’s Spectator in which he argues that, although the Chancellor has emphatically denied that she wishes to punish early-stage companies in the UK, she may have to “scrape the bottom of the bin” and punish the sector as the Treasury and the OBR have removed Labour’s delusions about what the costs of its mooted tax rises will mean for the UK economy. If the furious lobbying ahead of Wednesday’s budget has taught us anything, it is that the power of the unions is forcing the Chancellor to make sub-optimal decisions and the UK as a whole will bear the cost. Will entrepreneurial Britain pay the price? #EIS #VCT #The Spectator #Martin Vander Weyer #UK Budget

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Hello everyone. Hope your week has started well. I just wanted to highlight some excellent reporting from Jamie Colvin in Citywire - see article in first link below. Tom Poynton has also had the ingenious idea to create a "forum" to garner an understanding of retail investors' understanding of the many issues facing the investment companies sector (the link is in the article). Our campaign has often highlighted how new well-intended Consumer Duty regulations have turbo-charged the negative impact of IC "cost" disclosures. Recent attention has rightly been given to one aspect of this turbo-charging: retail platforms wrongly interpreting "value" and "cost" and not only misinforming consumers, but now banning them from investing in investment companies based on utterly floored logic. Do these platforms have the expertise to be making these judgements? Where they do not and they outsource, has there been proper due diligence on third parties used to make assessments of value? https://lnkd.in/eA4SHXjW We will not rest. Have a good week. Ben https://lnkd.in/eh9G9NWM

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The British Business Bank produced a great report last week on the performance of UK VC funds (link in comments) over the last 20+ years. As with all reports like this, it's really important to dig into the detail and not just rely on the headlines. In particular, I was keen to compare the performance of the best UK funds to those in the US. While accepting the limitations of the data (all performance data on VC is based on a very low sample size), it's still interesting to see how the UK funds in the BBB report compare to the Cambridge Associates US VC benchmarks. As you can see from the chart below, the top quartile benchmark for UK funds exceeded the US funds for the period 2002-2007. But the sample size for UK funds in this period is particularly low (eg just five funds for the 2004/05 period). Since 2008, the top quartile UK funds have underperformed the US benchmark, and since 2010 are much closer to the US median return than the upper quartile. There are some outstanding founders and companies in the UK and some strong-performing VC funds. But the reality of VC is that performance is driven by a small number of outlier investments. Without these, it's almost impossible to deliver 3x net returns to LPs. For the UK to really become competitive with the US, we need to see more UK-based companies able to scale and exit at valuations in excess of $5bn. Unfortunately, there are no easy solutions to achieving this. We consistently hear from our VC managers that there is no shortage of capital for the best UK companies. Where there is a shortage is in the number of world-class founders looking to build in the UK. Get this right and the capital (and returns) will follow.

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Investors love talking about ‘skin in the game’. It has become something of a truism that a fund manager with substantial sums of their own money invested in their strategy will make better decisions. Not only is this a dubious generalisation but it also overly simplifies what can be quite a messy incentive problem. Incentives drive behaviour. If we could only know one piece of information to predict how someone would behave in a given situation, it would be their incentives. The idea of having skin in the game is a form of incentive alignment, it means that people directly experience the consequence (or risks) of their actions, not simply enjoy the benefits. The decisions that we make will be heavily influenced by the distribution of potential outcomes that we face. An individual who bears all of the upside but none of the downside in a given situation, will make different choices to someone who faces the reverse. Skin in the game is a critical concept, but one which investors can easily misjudge. Here are three examples: Our skin in their game – The most obvious and frustrating scenario is where we believe that our interests are aligned with an investor that we are allocating money to, when in fact the structure is horribly asymmetric. Here we bear the majority of the downside risk, but the fund manager captures a disproportionate amount of the upside. The classic case of this is traditional hedge fund performance fees, where client capital is put at risk and large performance fees can be generated (and crystallised) for fleeting periods of outperformance. Skin in the game as a negative signal – Now for an unpopular view. What if a fund manager investing heavily in their own strategy was a sign that they were not a good investor, but rather an overconfident and imprudent risk taker? This is an exaggeration for effect here, but it is not clear to me that a fund manager holding a significant portion of their net worth in their own strategy is always a positive. It might be the right thing to do, but that doesn't make it a useful signal. Skin in different games – The final area is one where we tend to ignore issues around skin in the game and incentive structures: group decision making. Somewhat bizarrely little attention is paid to how groups of people make judgements despite most of our choices being made as part of a collective. One of the primary reasons that boards and committees are so often dysfunctional is because they suffer from profound incentive misalignment problems. There is no meaningful, unified skin in the game because everyone is playing entirely different games. --- Incentives are almost certainly the most important driver of human behaviour and sometimes they are incredibly easy to observe, but, as the notion of skin in the game shows, they can be a little more complex than they might first appear.  Link to full blog in comments.

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Acadian Asset Management has an interesting study on concentrated portfolios (“𝗖𝗼𝗻𝗰𝗲𝗻𝘁𝗿𝗮𝘁𝗲𝗱 𝗘𝗾𝘂𝗶𝘁𝘆: 𝗣𝗿𝗮𝗰𝘁𝗶𝗰𝗲 𝗩𝗲𝗿𝘀𝘂𝘀 𝗣𝗿𝗲𝗺𝗶𝘀𝗲” https://lnkd.in/eZsdkM9f ) Being a systematic manager which invests in very diversified portfolios, Acadia’s conclusions are not a surprise: “𝘉𝘶𝘵 𝘪𝘯 𝘢𝘯 𝘦𝘮𝘱𝘪𝘳𝘪𝘤𝘢𝘭 𝘢𝘯𝘢𝘭𝘺𝘴𝘪𝘴 𝘰𝘧 𝘢 𝘣𝘳𝘰𝘢𝘥 𝘴𝘦𝘵 𝘰𝘧 𝘤𝘰𝘯𝘤𝘦𝘯𝘵𝘳𝘢𝘵𝘦𝘥 𝘴𝘵𝘳𝘢𝘵𝘦𝘨𝘪𝘦𝘴, 𝘸𝘦 𝘧𝘪𝘯𝘥 𝘯𝘰 𝘦𝘷𝘪𝘥𝘦𝘯𝘤𝘦 𝘵𝘩𝘢𝘵, 𝘪𝘯 𝘱𝘳𝘢𝘤𝘵𝘪𝘤𝘦, 𝘵𝘩𝘦𝘺 𝘰𝘶𝘵𝘱𝘦𝘳𝘧𝘰𝘳𝘮 𝘢𝘴 𝘢 𝘨𝘳𝘰𝘶𝘱.” Concentrated equity strategies have drawn considerable interest from institutional investors in the long-only universe: frustrated with active fees charged for closet indexing, the premise of investing with stock pickers who focus on a limited set of “high conviction” holdings has intuitive appeal. The main result from the study is “𝘵𝘩𝘢𝘵 𝘸𝘩𝘪𝘭𝘦 𝘥𝘪𝘴𝘤𝘳𝘦𝘵𝘪𝘰𝘯𝘢𝘳𝘺 𝘴𝘵𝘰𝘤𝘬 𝘱𝘪𝘤𝘬𝘪𝘯𝘨 𝘢𝘣𝘪𝘭𝘪𝘵𝘺 𝘴𝘶𝘳𝘦𝘭𝘺 𝘦𝘹𝘪𝘴𝘵𝘴 𝘢𝘮𝘰𝘯𝘨 𝘪𝘯𝘴𝘵𝘪𝘵𝘶𝘵𝘪𝘰𝘯𝘢𝘭 𝘮𝘢𝘯𝘢𝘨𝘦𝘳𝘴, 𝘤𝘰𝘯𝘤𝘦𝘯𝘵𝘳𝘢𝘵𝘪𝘰𝘯 𝘪𝘴 𝘯𝘰𝘵 𝘢𝘯𝘺 𝘦𝘢𝘴𝘺 𝘴𝘰𝘭𝘶𝘵𝘪𝘰𝘯 𝘧𝘰𝘳 𝘪𝘯𝘷𝘦𝘴𝘵𝘰𝘳𝘴 𝘭𝘰𝘰𝘬𝘪𝘯𝘨 𝘵𝘰 𝘣𝘰𝘰𝘴𝘵 𝘢𝘤𝘵𝘪𝘷𝘦 𝘱𝘦𝘳𝘧𝘰𝘳𝘮𝘢𝘯𝘤𝘦”. Strategies with the most concentrated portfolios represent a disproportionate fraction of the best performers, but also of the worst performers: these strategies are either very good or very bad, no middle ground. “𝘛𝘩𝘪𝘴 𝘪𝘴 𝘪𝘯𝘵𝘶𝘪𝘵𝘪𝘷𝘦: 𝘤𝘰𝘯𝘤𝘦𝘯𝘵𝘳𝘢𝘵𝘦𝘥 𝘴𝘵𝘳𝘢𝘵𝘦𝘨𝘪𝘦𝘴 𝘥𝘦𝘭𝘪𝘣𝘦𝘳𝘢𝘵𝘦𝘭𝘺 𝘧𝘰𝘳𝘨𝘰 𝘥𝘪𝘷𝘦𝘳𝘴𝘪𝘧𝘪𝘤𝘢𝘵𝘪𝘰𝘯, 𝘢𝘯𝘥, 𝘵𝘩𝘦𝘳𝘦𝘧𝘰𝘳𝘦, 𝘥𝘪𝘴𝘱𝘭𝘢𝘺 𝘩𝘪𝘨𝘩𝘦𝘳 𝘭𝘦𝘷𝘦𝘭𝘴 𝘰𝘧 𝘢𝘤𝘵𝘪𝘷𝘦 𝘳𝘪𝘴𝘬.” This is also common sense: no one ever said stock picking is easy and for everyone. However, I believe the reason for the aggregate underperformance is due not to concentration per se, but rather to execution (as discussed in this book review https://lnkd.in/eWuZ2X_u ): 𝘁𝗵𝗲 𝗿𝗲𝗮𝗹 𝘀𝗸𝗶𝗹𝗹 𝗶𝗻 𝘀𝘁𝗼𝗰𝗸 𝗽𝗶𝗰𝗸𝗶𝗻𝗴 𝗶𝘀 𝗻𝗼𝘁 𝗶𝗻 𝘀𝗲𝗹𝗲𝗰𝘁𝗶𝗻𝗴 𝘁𝗵𝗲 𝗯𝗲𝘀𝘁 𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁𝘀, 𝗯𝘂𝘁 𝗶𝗻 𝘄𝗵𝗮𝘁 𝘆𝗼𝘂 𝗱𝗼 𝗮𝗳𝘁𝗲𝗿, 𝘄𝗵𝗲𝗻 𝘀𝘁𝗼𝗰𝗸𝘀 𝗲𝗶𝘁𝗵𝗲𝗿 𝗴𝗼 𝘂𝗽 𝗼𝗿 𝗱𝗼𝘄𝗻. 

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From a Cash Flow Returns On Investments point of view, the UK looks undervalued. These are the largest UK companies excluding Financials and Real Estate. Please feel free to contact me if you want a full breakdown of companies on the list. We also have a list for the UK small, over 1,100 of the largest US companies, and 500 of the largest companies in Europe. #investing #finance #assetmanagement #investmentmanagement

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Out 10th Macro and Volatility Podcast is out and can be accessed on major podcast platforms. We delve into the rotation trade and some of the more unusual cross asset relationships which have been developing. Bull markets don't have to be boring!

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I often refer to select specific investment options as “assets and earnings” plays where one gains exposure to tangible assets and growing profits at the same time. Whitbread (in the FTSE 100) ticks this box for me. The shares have retreated significantly from previous highs and thus have not been part of the increased buoyancy we have witnessed in the blue chip index in the recent past. This is Premier Inns in disguise with most of the business in the UK. Capital growth potential with a growing dividend not to mention always a possibly of takeover interest, an interesting opportunity perhaps. This is not investment advice and everyone must do their own research in determining suitability.

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Morning. Our latest podcast covering possibility of disinflation, slowdown in software earnings and Idexx Labs, the Astra for pet.

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#Venture is never easy - and we welcome the UK government's initiative to unlock additional capital for high-growth UK private companies, and to boost retirement income for UK workers. However, the way forward is more complex than what one might think. Have a look at the interview of our CIO, David Clark, to understand what investors need to know before building a #venturecapital investment programme.

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QIL Portfolio Reviews 1st Half 2024 Our balanced Benchmark Portfolios have done quite well in the 1st half of 2024 with returns of 10.85% (below 10 million), respectively 8.95% (over 10 million). However, for years we also run a pure equity portfolio the “The QIL max 20”; so far it is up 88% this year. It can hold max 20 positions divided into 5 growth stocks, 5 value stocks, 5 conviction stocks, and 5 special situations stocks. Currently, we hold 15 positions but have started to rebalance the weight of our growth positions in favor of some new value and special situations.  We don’t trade a lot; we are patient and have a buy-and-hold approach and the results can be seen also over time. #portfoliomanagement #performance #equitymarkets #benchmarks #passiveinvesting #stockpicking #outperformance #excellence #privatebanks #moneymanagers #assetmanagers

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Providing liquidity is one of the toughest and most so important metrics for LPs to see from the GPs they invest with. Interestingly, PitchBook put together this graph showing the industry's illiquidity. The exit environment has lacked significantly and the below shows the proportion of companies that exited (not DPI) within VC portfolios, since 2011. With rates coming down, over 50% of VCs assume that the exit window will open up, ultimately having the potential to release over $2.5T worth of company value, currently held privately. Think about that, trillions of dollars of value have been locked up in private markets due to the illiquidity. This number is growing rapidly, with some monster rounds reported from Anthropic, OpenAI and other revolutionary companies.

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An excellent new essay from Jan Nieuwenhuijs. Who sets the price of any commodity, gold or not? > "Identifying the marginal buyer provides context to why the gold price goes up or down. Historically (for the past 100 years), Western institutional supply and demand have set the price, while the East lowered volatility by selling into bull markets or buying in bear markets." What has happened since last June? > "What happened since last June is that the gold price has been rising, gold ETF inventory has gone up, and the U.K.—home of the London Bullion Market—has turned into a net importer. ... Global indicators signal the West is back in charge of the market." From "speculation" to other form of speculation (as all human action is fundamentally speculative) > "Whenever the West pegs the gold price to the TIPS yield, it enters the market mostly for speculative reasons. Instead of aiming, e.g., for a gold allocation of 10%, speculators evaluate real rates (TIPS yield) and make a decision to go long or short the yellow metal. At the end of the day, these speculators only care about making profitable bets on price direction. Now, Western investors have shifted from this model, and the gold price is going up. It demonstrates they are changing their views on gold, i.e., from a speculative trade to financial insurance." On the long-term ratio between gold and credit > "The rationale behind this approach is that when too much credit is created, the financial system becomes unstable, and the gold price needs to rise, adding more trust to the financial system and restoring stability." https://lnkd.in/dAqD4RgX

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𝗪𝗵𝗮𝘁 𝗶𝘀 𝘁𝗼𝗽𝗶𝗰𝗮𝗹 𝗶𝗻 𝘁𝗵𝗲 🌍 𝗼𝗳 𝗗𝗖? With many of us about to enter the September meeting season, below are my thoughts on some topics that are influencing how I will advise my clients for the remainder of the year 👍 𝗜𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 🚦Although you won’t see the August performance numbers coming through into monitoring reports for a while, t𝗵𝗲 𝘀𝗲𝗹𝗹 𝗼𝗳𝗳 𝗮𝗻𝗱 𝗿𝗲𝗰𝗼𝘃𝗲𝗿𝘆 𝗮𝘁 𝘁𝗵𝗲 𝘀𝘁𝗮𝗿𝘁 𝗼𝗳 𝗔𝘂𝗴𝘂𝘀𝘁 was notable because of the extreme market volatility it caused. This represented short-term noise for DC members - many won’t have even known it happened. However, speaking to two providers last week, they delayed some asset transitions around the 6-12 August. As such, you should be mindful of this when booking transitions. 👨‍🎓𝗜𝗹𝗹𝗶𝗾𝘂𝗶𝗱 𝗮𝗹𝗹𝗼𝗰𝗮𝘁𝗶𝗼𝗻𝘀 𝗶𝗻 𝗠𝗮𝘀𝘁𝗲𝗿 𝗧𝗿𝘂𝘀𝘁 (“𝗠𝗧”) 𝗱𝗲𝗳𝗮𝘂𝗹𝘁𝘀 – the announcements from Fidelity and L&G that they will a) launch their own LTAF funds and b) incorporate them into their default strategy is interesting. Increasingly we are seeing a divergence in the Master Trust market between investment sophistication and cost; with the allocation to LTAFs in the default offering impacting both criteria. In selections I am undertaking I am increasingly focused on how Master Trust default strategies will evolve in the future rather than doing a selection based on the current offering. Our regular dialogue with providers on developments is key to informing this advice. 🌳𝗥𝗲𝘀𝗽𝗼𝗻𝘀𝗶𝗯𝗹𝗲 𝗜𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 – 𝗡𝗮𝘁𝘂𝗿𝗲 𝗯𝗮𝘀𝗲𝗱 𝘀𝗼𝗹𝘂𝘁𝗶𝗼𝗻𝘀. A significant number of MTs have an ambition to achieve net zero, not just in the portfolio but in the real world. Many have now implemented climate tilting equity allocations and have realised this isn’t enough. As such, there is increasing focus on Nature based solutions and climate solutions. I have spent time over the last 3-6 months delivering training on “what are Nature based solutions?”, expecting this to be much more topical in 2025.  𝗢𝘁𝗵𝗲𝗿  👑 𝗣𝗼𝘀𝘁-𝗿𝗲𝘁𝗶𝗿𝗲𝗺𝗲𝗻𝘁: both the DWP consultation (Nov 23) and the King’s speech (July 24) focused on the duty of Trustees to offer post-retirement option for members soon. Providers are either launching new solutions soon or developing something soon in response to the increased focus. I have written a blog on this topic you can find on my linkedin page.  💰𝗡𝗲𝘄 𝗩𝗮𝗹𝘂𝗲 𝗳𝗼𝗿 𝗠oney 𝗙𝗿𝗮𝗺𝗲𝘄𝗼𝗿𝗸 –the FCA is consulting on a new VFM framework at present, with the consultation closing on 17 October. The framework is expected to be an industry wide initiative with more focus on industry benchmarking. I have concerns that this will drive market herding.   𝗟𝗼𝗼𝗸 𝗼𝘂𝘁 𝗳𝗼𝗿... 🆕The Royal Mail CDC launch will happen soon. This will bring the pension spotlight onto CDC – its suitability, benefits, drawbacks and the differences between the Royal Mail offering and other global CDC solutions.

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In our Cytonn topical this week, we analysed the performance the performance of Unit Trust Funds for the period ended 30th September 2024, following the release of the Capital Markets Authority (CMA) Quarterly CIS Report – Q3’2024. Below are the highlights; i. The industry’s overall Assets under Management (AUM) grew by 24.5% on a quarter-on-quarter basis to Kshs 316.4 bn at the end of Q3’2024, from Kshs 254.1 bn recorded in Q2’2024. On a y/y basis, the total AUM increased by 53.1%, from Kshs 206.7 bn as at the end of Q3’2023. Key to note, Assets under Management of the Unit Trust Funds have registered an upward trajectory over the last five years, growing at a 5-year CAGR of 35.7% from Kshs 68.9 bn recorded in Q3’2019. ii. MMFs remained with the largest investment allocation, coming in at 62.2% in Q3’2024, a decline from 67.4% recorded in Q2’2024. Similarly, the amounts invested in MMFs as of 30th September 2024 recorded a 15.0% increase to Kshs 196.8 bn, from Kshs 171.2 bn recorded at the end of Q2’2024. iii. The overall UTFs portfolio remained predominantly invested in government securities, accounting for the largest share at 41.4% by the end of Q3’2024. This was followed by Fixed deposits at 31.1% allocation, a marginal decrease from 33.4% allocation in Q2’2024 attributable to the lower deposit rates provided by banking institutions during the period. iv. As of the end of Q3’2024, there were 41 Collective Investment Schemes (CISs) in Kenya, up from 36 recorded at the end of Q3’2023 and an increase from the 38 recorded at the end of Q2’2024. Out of the 41 schemes, 35 of them (equivalent to 85.4%) were active while 14 (14.6%) were inactive. Click the link below to read the full topical: https://lnkd.in/daqWArz6

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Investment announcement: Fractory Our latest investment from SmartCap Green Fund in Fractory brings us forward on the way of transition to circular economy in industrial production. Glad to give a push to the green transition of industry as industrial activity accounts for 1/3 of the global energy demand and increasing production volumes lead to growing demand for materials. Fractory is a digital manufacturing tech platform to streamline metal fabrication services from cutting & bending to CNC machining and enables: - enhancing production machinery utilization rates in factories across the supplier network from industry average of 26% up to 80%. So, fewer machines are needed for the same production volumes. - reducing waste of materials by pooling orders and optimizing the use of existing resources.

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Is “fear of floating” Argentina’s Achilles Heel? Argentina’s initial step-deval in December allowed it to generate massive trade surpluses in H1. However, this benign trade backdrop failed to translate into international reserves’ accumulation, which are stuck below $30bn – and the current FX regime is to blame. A big risk is that this setup will create a negative feedback loop – low reserves => more fear of floating => even lower reserves.

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