Morningstar - Q4 2020 - 22

Dispatches

An e-commerce beauty and health platform, The
Hut Group is one of 13 new listings so far in
2020 and the U.K.'s biggest issuance so far this
year, raising GBP 1.8 billion, according to the
London Stock Exchange, where it began trading on
Sept. 15. The Hut Group shares issued at GBP 5
and are now trading around GBP 6.
The U.K. technology unicorn has attracted
investment from BlackRock BLK, Janus Henderson
JHG, and the Qatar sovereign wealth fund. It is
also a significant holding of startup-focused
investment trust Merian Chrysalis MERI:UK, which
has just raised another GBP 50 million from
investors. Hut has a similar business model to
Canadian success story Shopify SHOP:CA, whose
shares have doubled this year amid a lockdowninspired e-commerce boom.
The backdrop to 2020's IPO fever is the
outperformance of U.S. tech stocks, which
inevitably spurred investor interest as people look
for the next Tesla TSLA or Amazon.com AMZN.
Despite the global pandemic and extreme stock
market volatility earlier in the year, investor
appetite for new issues seems as insatiable as
ever: Cloud software company Snowflake SNOW
launched at $120 on Sept. 16 but doubled in
the first few days as a public company.
Airbnb fits the investor narrative in that it operates
a disruptive e-commerce platform and has
an established brand with broad appeal. Airbnb's
IPO was slated to go before the COVID-19 crisis.
While some investors thought the pandemic
would put the IPO on hold, the company filed
to go public in August. U.S. IPOs include software/
surveillance firm Palantir Technologies PLTR,
which was set up by, among others, PayPal
PYPL founder and tech entrepreneur Peter Thiel.
The company's shares went from $7 to more
than $11 on its first day of trading on Sept. 30.
Morningstar analyst Mark Cash initiated coverage
on Palantir with a $13 fair value estimate.
At current prices, Cash says, investors "have an
opportunity to capture upside on this pioneer
in Big Data integration and analytics." Its strong
position in data management and U.S. government
contracts helps. Cash says, "We think the
company is poised for robust growth and margin
expansion in the years ahead."

22

Morningstar Q4 2020

Palantir is unusual in that it went public via
a direct listing-which means the shares were
offered straight to the public without the
roadshows organized by Wall Street banks to drum
up interest from institutional investors.
"Enterprise software maker Asana and Palantir will
provide rare test cases for a host of buzzworthy
startups on the cusp of going public," says James
Thorne of Morningstar subsidiary PitchBook.
"Their success or failure could further reshape the
IPO market by normalizing the direct listing."
The world's biggest IPO by value may not happen
in the U.S. this year. Ant Group is set to become
the biggest issuance of all time when it launches,
potentially eclipsing Saudi Aramco 2222:SA.
(See "Ant Group Has Built a Wide Moat," Page
27.) The fintech company was spun out of
New York-listed Alibaba Group BABA, which is one
of China's biggest Internet names. Alibaba went
public in 2014 in New York to take advantage of
the liquidity and prestige of a U.S. listing. In
contrast, Ant Group will launch in Hong Kong and
on the Shanghai STAR stock market, which only
came into being last year as a rival to the Nasdaq.
Experts say this move reflects a growing
confidence in Chinese stock markets among local
entrepreneurs and is a side effect of U.S.-China
trade tensions. It could come at a cost to
global investors, though, as U.S. listing regulations
are still among the strictest in the world.
James Gard is a content editor for Morningstar U.K.

Emerging-Markets ESG
ETFs Involve Trade-Offs
GREATER EUROPE

European Union

Exchange-traded funds are a transparent and
cost-effective way for socially conscious investors
to manage their environmental, social, and
governance risk profiles. The playing field in Europe
has expanded to emerging-markets offerings.

There are now nine such offerings, and assets
have increased from less than EUR 500 million in
2016 to more than EUR 3.5 billion in mid-2020.
However, emerging markets have traditionally
lagged developed peers on ESG metrics. As these
countries have rapidly industrializing economies
and growing populations, they are also some
of the world's worst environmental polluters. On
the corporate governance front, while some
emerging-markets companies have made strides
in improving financial and operational
disclosures, challenges remain. From Chinese
state-owned enterprises to Korea's chaebols,
serious conflicts of interest continue to be a
feature of emerging-markets firms.
Systematic exclusion of stocks with unfavorable
ESG characteristics can certainly improve the
sustainability profile of many standard index
trackers, but it inevitably adds active risk. Broadly
speaking, there is a positive correlation
between the strength of the sustainability screen
and the active risk taken by the strategy versus
the parent index.
Morningstar's analysts rate the four largest ESG
emerging-markets equity ETFs in Europe.
Collectively, they track the most popular index
strategies. The ESG footprints of these ETFs differ
strikingly. The Morningstar Sustainability
Rating measures how well the companies held
by a fund manage their ESG risks when compared
with both active and passive peers, including
funds without an explicit sustainability mandate.
The scores here range from the highest
Morningstar Sustainability Rating of 5 globes to
an Average Sustainability Rating of 3 globes.
The starting point is the MSCI Emerging Markets
Index. These funds track related benchmarks
that leverage sustainability data provided by the
MSCI ESG Research team. All employ the
same basic controversy screen. Each fund takes
the underlying universe and, based on MSCI ESG
Controversies and Business Involvement Screening,
excludes companies involved in controversial
and nuclear weapons, civilian firearms, thermal
coal, oil sands, and tobacco. This screen
targets the very worst offenders and filters out
around 9% of the parent index weight.
Morningstar - Q4 2020

Table of Contents for the Digital Edition of Morningstar - Q4 2020
