Brainy Bull - Century Financial

Trading Intelligence Brought to you by TRaDE SECRETS How hasJaCk SCHWagEr accessed the world’s best-known BiLLiOnairE invESTOrS? No:3 Digital and direct The business model changing retail as we know it A paradigm shift Heidi Ridley explains why ESG is crucial to investing Never the same again What does the workforce of the future look like? Long-term growth Meet the author who set up the first Silicon Valley stock exchange Summer 2020 powered by

“Guard against impulsive trades” —Jack Schwager, p40 S Brainy Bull is recreated in Dubai for Century Financial Consultancy by White Fox Publishing, Creative Zone Creative City, Fujairah, UAE License No: 621/2010 ince Brainy Bull last went to press, a great deal has changed, but much is still the same. Global protests against systematic racism gave way to an unprecedented rally, but the virus that wrecked markets globally months ago is still very much present. Governments, businesses and individuals around the world wait with bated breath to see if 2020 will end as it started. But that has not held Brainy Bull back. In this issue, we were fortunate enough to speak to a number of incredibly interesting and hugely knowledgeable market experts. The scribe of Wall Street, Jack Schwager, got on the phone with Brainy Bull and revealed what he has learned from his time interviewing the best- known hedge fund managers and investors in the world (p.40). We also spoke to Heidi Khashabi Ridley, the former global CEO of Rosenberg Equities, who in recent months founded an ESG-focused firm – Radiant ESG. She explained why such principles are essential to investments (p.50). Eric Ries, meanwhile, described his role in establishing the Long-Term Stock Exchange, a new securities exchange set up with the aim of insulating companies from short-termism (p.60). Since markets around the globe were brought to their knees in March, an unstoppable rally brought an end to the shortest bear market in history as stocks and indices hit high after high. Investor euphoria in big tech has helped in no small part, as innovative technological solutions facilitate changes we as a global society have been forced to embrace. We’ve explored several such companies in our report on direct-to-consumer stocks on p.26. As the way we engage with such services changes, so is how businesses provide these services, with many using technology to shake of the shackles off the middleman. It is also technology and innovation that has allowed for a transition in the way we work. This shift, and the stocks involved, are considered on p.16. Despite the uncertainty, we hope that Brainy Bull can provide you with some useful insights, however you choose to invest. As always, we hope you enjoy the magazine. Creative City Media Free Zone CENTURY FINANCIAL is an intermediary services provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. Nothing in the material included within BRAINY BULL magazine constitutes a recommendation by CENTURY FINANCIAL, the author or THE CROWN & CO that any particular investment, trade, security, transaction or investment strategy is suitable for any specific person. CENTURY FINANCIAL and THE CROWN & CO do not endorse or offer opinion on any trading strategies mentioned or used by commentators within BRAINY BULL magazine. Their trading strategies do not guarantee any return and CENTURY FINANCIAL and THE CROWN & CO shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein. All the best, The Brainy Bull team @Century_Fin info@century.ae BRAINY BULL—Issue 03 3

CONTENTS IN FOCUS: The moments that moved markets AUTUMN 2020 The most striking images from behind the headlines Reports 16 How COVID-19 flipped the way we work and the ways in which companies are adapting to the workplace of tomorrow 26 The brands that are smashing bricks and mortar to put the retail sector on course for a major transformation Updates 08 speed with… Cloud computing stocks, ETFs, trade tensions and more People 40 Insights 60 Eric Ries, entrepreneur and author, on the stock exchange that nurtures companies for the long term 64 The father of the fear gauge explains why the VIX is misunderstood 66 With The Wall Street Journal chronicler Gregory Zuckerman Access all areas What is it about Jack Schwager that attracts the biggest hedge fund billionaires and legendary investors? 50 A point on sustainability Heidi Khashabi Ridley explains why sustainable investing is crucial to investment management The cultivator Keep up to A short commute Columnists 55 Steve Cain and Aneet Chachra, Russ Mould, Michele Schneider, David Storm and Perth Tolle Volatility bites Route one Taking five 16 50 40 OKLAHOMA, USA A lone supporter attends a “Make America Great Again!” rally at the BOK Center in Tulsa in June. The US election has polarised sentiment across the country and across Wall Street. The run-up to 3 November has been characterised by rising uncertainty, as investors look to place bets on the outcome of the presidential race. “ The hype around DTC is ultimately about brands getting closer All images via Getty Images to their consumers” 26 — Christian Polman, Ebiquity JABIN BOTSFORD BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 5 5 4

IN FOCUS: Themoments that moved markets LONGYEARBYEN, NORWAY NEW YORK, USA BARCELONA, SPAIN The surface of the Longyearbreen glacier in the Svalbard archipelago melts during a summer heat wave that set a new record in July — haunting news for environmental investors. Fortunately, 2020 has seen the biggest rise in investors looking to align their portfolios with sustainable companies, as more and more ESG funds outperform the broader market. In fact, ESG funds were the most resilient during the March market downturn, Morningstar shows. One of the industries hit hardest by the coronavirus pandemic is health and fitness. Studios and gyms are rising to the challenge though, and have been recreating their services in clever, innovative ways. Felicia Brunner, a fitness instructor in New York, has taken to conducting Zumba classes in the parking lot of Gold’s Gym Islip. Other online options, such as Peloton, have been expanding their presence. Musicians from UceLi Quartet perform for an audience made up of 2,292 plants in late June. Spain's benchmark index, the IBEX 35, fell 28.9% in the first quarter, 5.9% more than the Stoxx Euro 600. Both indices are still in the red for the year-to-date through 1 September, down 27.1% and 12.3%, respectively. SEAN GALLUP AL BELLO JORDI VIDAL BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 7 6

Updates: July — September 2020 Every cloud has a silver lining Despite the IT spending clampdown, other areas of cloud computing have soared so far in 2020. The demand for cloud-based conferencing is so high that Zoom [ZM] has revised its full- year revenue forecast to $1.8bn, up from $623m in 2019. With employers relying on communications software to allow staff to work remotely, Twilio [TWLO] is another cloud communications stock that has seen a surge in sales during the pandemic. Even small-cap cloud computing stocks such as Workiva [WK] and Rapid7 [RPD] have seen an uptick in customers, boosting total revenues 14.1% year-over-year to $83.9m and 25% year-over-year to $98.9m in their respective second quarters. A number of these companies offer products and services on a subscription basis, and their future growth will depend on whether organisations renew or cancel subscriptions as offices start to open up again post-coronavirus. That said it is likely that many businesses will embrace remote working in some form over the longer term. Cloud-based telephony and messaging is expected to be up 8.9% by the end of the year, with cloud-based conferencing expected to rise 24.3% in the same period. Gartner has also suggested that the total cloud spending levels it was forecasting for 2023 and 2024 could be met as early as 2022. Dennis Lynch, head of Counterpoint Global at Morgan Stanley Investment Management, believes that cloud computing requires investors to look to the far- horizon rather than making decisions based on short-term volatility. Counterpoint Global recently added two cloud-based software businesses — Veeva Systems [VEEV] and Amazon — to its top holdings. “We’re going to continue to own the companies we think are the best in class for the next five and 10 years, and that have significant upside from here,” Lynch said. b TRADING THE ROBINHOOD DICHOTOMY Professional fund managers and analysts are stumped at the growing number of bets being made by retail traders OUT OF ALL the retail brokerage firms, the three million new users that signed up to US trading app Robinhood in the first quarter have been attracting the most attention. Amid the boom in retail trading, which was fanned by lockdown measures put in place because of the coronavirus pandemic, there has been a wave of speculative investments. One of the most confusing is car hire group, Hertz. In early June, it was the most bought stock on the app, according to the Financial Times, despite hitting an all-time low of $0.55 a few days earlier and the company filing for bankruptcy weeks before. Similar bets have been made on other debt-stricken companies like J.C. Penney and Whiting Petroleum. Market commentators believe the rationale behind the trades to be that investors are betting on a market recovery that will bring these companies back to life. As more and more independent traders try their luck at the stock markets, the more it looks like the rise of the day trader might be here to stay. b TECHNOLOGY Cash clouds Cloud computing companies have been up recently. But some question whether spending will continue once lockdowns are lifted and wallets start tightening HEDGE FUNDS Clash of the titans for Q1 2020 was $10.22bn, a 33% increase on the $7.67bn posted in Q1 2019. It was, however, slightly down on Q4 2019’s 34% year-over- year rise. Overall, the company’s cloud revenue growth has been slowing since the third quarter of 2018, Statista data shows. It’s a similar story for the second biggest vendor by market share, Microsoft [MSFT]. Revenue from its Intelligent Cloud segment for Q4 2020 rose 17% to $13.4bn, while Azure’s growth rose 47%. Although this beat analyst expectations of $13.11bn, it marked another quarter of reduced cloud computing growth. The slowdown may have continued regardless of the pandemic, but it hasn’t been helped by the fact that 2020 IT budgets have been slashed by 8% globally, according to Gartner. Microsoft does, however, expect spending on public cloud services to grow by 19% in 2020. WHILE DIGITAL TRANSFORMATION has been a business buzzword for a number of years, the COVID-19 crisis has forced it to the top of companies’ agendas. Many businesses have had to fast track their digital strategies in order to adapt to the work-from-home shift. Cloud computing has been one of the big corporate winners of 2020 so far, despite the coronavirus pandemic. Between January and September, the Global X Cloud Computing ETF [CLOU] gained over 64%. In comparison, the S&P 500 Information Technology sector rose 37% during the same period. Amazon [AMZN] leads the cloud computing conversation. According to research published by the Synergy Research Group earlier this year, the company is the industry’s top vendor with the biggest market share of around a third. Revenue for Amazon Web Services Who holds all the cards in the hedge fund manager world? Ray Dalio Bill Ackman Warren Buffett bFirm: Bridgewater Associates bFounded: 1975 bPortfolio value: $5.9bn as of 30 June bFlagship fund: Pure Alpha bStrategy: The fund bases its investments on its predictions for the economy bPerformance: 16.7% (TTM) bHoldings: 383 as of 30 June 13F filing, including: —iShares Gold Trust [IAU] —JD.com [JD] —Snap [SNAP] —Tencent [TME] —Trip.com [TCOM] bFirm: Berkshire Hathaway bDate founded: 1956 bPortfolio value: $202bn as of 30 June bFund vehicle: Berkshire Hathaway bStrategy: Invests in companies that show robust earnings and long-term growth bPerformance: 36.7% (TTM) bHoldings: 44 as of 30 June 13F filing, including: —American Express [AXP] —Bank of America [BAC] —Apple [AAPL] —Coca-Cola [KO] —Kraft Heinz [KHC] bFirm: Pershing Square Capital Management bDate founded: 2003 bPortfolio value: $7.75bn as of 30 June bFund vehicle: Pershing Square Holdings bStrategy: The fund invests in US equities and debt securities bPerformance: 8.6% (TTM) bHoldings: Seven as of 30 June 13F filing, including: —Restaurant Brands Intl [QSR] —Chipotle Mexican Grill [CMG] —Lowes [LOW] —Howard Hughes [HHC] —Agilent [A] Images: © Robinhood; Getty images Sources: SEC 13F filing; TipRanks Sources: SEC 13F filing; TipRanks Sources: SEC 13F filing; TipRanks BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 9 8

b 1 July 2020 $208,000,000,000 Tesla becomes the world's most valuable car company at TIMELINE A wild ride Tesla's stock is up by more than 7,000% since its debut 10 years ago b 30 April 2015 Tesla expands its battery tech to homes with the Powerwall. b 21 November 2019 b 2 October 2011 The Cybertruck is shown on stage. b 4 September 2014 Elon Musk unveils the first fully electric sedan, the Model S beta. b 30 June 2016 Tesla selects a site in Nevada for its Gigafactory. Following a fatal accident, government regulators investigate Autopilot’s role in the tragedy. b 8 May 2013 $15,000,000 In Q1, turns first profit of b 6 February 2018 Musk’s red Tesla Roadster is sent to orbit Mars. b 8 November 2016 Tesla acquires Grohmann Engineering in a bid to automate its factories. b 9 February 2012 A prototype for a crossover SUV — the Model X — is revealed. b 9 October 2014 b 29 September 2015 b 12 June 2014 Musk reveals a semi-autonomous self-driving system called Autopilot. Delivery of the Model X commences. Musk furthers the adoption of electric vehicles by open-sourcing its patents. Images: © Tesla; David Calvert/For The Washington Post via Getty Images; Jeffrey Mayer/WireImage b 22 June 2012 b 29 June 2010 Delivery of the Model S commences. b 8 March 2017 IPO’d on Nasdaq, pricing shares at $17. Raised $226m. Musk tweets that he can solve South Australia’s power woes in 100 days — a feat he accomplishes. b 31 March 2016 b 14 October 2015 Tesla shows off a prototype for the Model 3 selling at $35,000 A 7.0 software update activates Autopilot across vehicles. 2016 2017 2018 2019 2020 2012 2014 2011 2013 2015 BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 11 10

HARD LESSONS The shorts that shocked the markets b November 2000 Enron July, and Wall Street’s most shorted stock hit a new all-time high of $1,643. The stock had been making a string of new all-time highs, supported by leaks of strong second quarter figures, and was further lifted by Musk’s SpaceX successful launch of the Falcon 9. Future demand for electric vehicles is bright as nations seek green travel solutions following the lockdown climate reprieve. Since July, short positions have significantly dropped. As of 6 August, just 8.6% of Tesla’s shares are shorted. Musk, who has previously described short sellers as “value destroyers”, was no doubt pleased with this reduction. However, the short brigade has not run out of gas just yet. “We’ve had to cover some shares as Tesla’s price skyrocketed higher, but will reinstate them on the stock’s fall back down to oblivion,” Mark Spiegel, managing member of Stanphyl Capital, told the Financial Times in July. This led to mass-panic selling, sending Volkswagen’s share price rocketing to an intraday high of almost €1,000 making it, for a moment, the most valuable company in the world. FUNDS ETFS VS MUTUAL FUNDS The friction between popular ETFs and pension-friendly mutual funds has been an ongoing feud Jim Chanos’ Kynikos Associates took a short position in energy giant Enron in November 2000, when the stock’s price sat at $90 and analysts were handing out price targets of $130. Chanos had become sceptical of Enron’s use of the “Mark to Model” and “Mark to Mark” accounting methods, which allowed the company to add the value of future profits to their accounts. Enron’s off-the-book accounting practices soon took centre stage, as reporters began questioning whether or not the company was engaged in fraud. In the glare of the spotlight, Enron filed for bankruptcy on 1 December 2001. Chanos and his team cashed out with a $500m profit. b December 2012 Herbalife The high risk, but potential for huge rewards, have long imbued the practice of short selling with an air of mystery. There are countless stories of traders flexing their investigative muscles to try and make massive gains on companies’ misdeeds and misfortunes — and some of them even pull it off. We’ve identified some of the biggest short selling wins, and hardest losses, of the twenty-first century As chronicled in Netflix's Betting on Zero, Bill Ackman, founder of Pershing Square Capital Management, took a short position to the value of $1bn in supplements firm Herbalife Nutrition in December 2012. He claimed the business was operating a pyramid scheme destined for collapse. The shares sat at $45 at the time, and Herbalife described the claims as “bogus”. Even famed trader Carl Icahn gave the company his backing — taking a 26.2% stake and praising the company’s “good product”. It led to a personal clash between the two investors, with Ackman stating that Icahn was not a “handshake guy” and Icahn informing Ackman that he wouldn’t invest with him even if he were “the last man on Earth”. Herbalife continued to grow revenues, and even after a $200m fine from the Federal Trade Commission following an investigation into its practices, its shares kept rising. In February 2018, Ackman finally quit his position as Herbalife’s shares reached $92. THE BUZZ AROUND ETFs is back. After a dip in February, when investors pulled $6.8bn from mutual funds and high-yield ETFs, sentiment is rising again. On 4 August, assets in US ETFs clocked a record $4.66trn, according to data by Bloomberg. Meanwhile, mutual funds that track popular indexes have lagged behind, with $34bn of outflows in the first half of the year. Among the top performing ETFs are ProShares Online Retail ETF [ONLN], Ark Genomic Revolution ETF [ARKG] and Amplify Online Retail ETF [IBUY], which have all gained 87% YTD through 1 September. In comparison, the top performing mutual funds including Morgan Stanley US Advantage, BGF World Technology and Baillie Gifford Global Discovery are up 40%, 39% and 35%, respectively, in the year to 3 July, according to Morningstar. Whether investors will continue to rotate out of mutual funds and into ETFs in pursuit of higher returns is an open question and one that will be answered over the long term. b b October 2008 Volkswagen b June 2020 Wirecard In October 2008, German carmaker Volkswagen [VOW] was on a roll, with several quarters of forecast- beating earnings behind it and a share price climbing past the €300 mark. But many market experts believed the debt-laden firm was in fact on the road to bankruptcy because it faced a slump in buyer demand as the recession took hold. This confluence of events gave cheer to short sellers, who held 12.8% of Volkswagen’s outstanding shares as of 25 October, and were waiting for the inevitable crash. At the time, funds like Albert Bridge Capital shorted two more tranches, one at €233 and another at €206, according to the Financial Times. However, when rival carmaker Porsche announced a few days later that it had increased its stake in Volkswagen from 31.5% to 42.6% with an intention of increasing its holding to 75% within the next year, short sellers were sent reeling because the true available float went down to just under 6%. On 18 June this year, shares in German payment firm Wirecard [WDI] plummeted 61.8% to €39.90, following auditor EY’s announcement of a $2.1bn hole in the fintech firm’s accounts. At the time, around 16% of its shares were held by short traders. Questions had long been bubbling around the company’s valuation and the state of its finances. As the company delayed its full-year 2019 results, more short sellers piled in. When the shares finally collapsed, short traders made $2.6bn in profits – with one German trader pocketing €750,000 in 30 minutes alone. Short selling dynamo Fahmi Quadir, founder of Safkhet Capital, had also made a bet against the stock. The firm had allocated a quarter of its capital to shorting Wirecard since 2019. Wirecard has subsequently filed for insolvency, and as of 28 July its share price sits at less than €2. b b September 2019 Tesla Last September, Tesla’s [TSLA] share price was languishing at around $220.68. It had dropped, following a string of PR gaffes, including personal misdemeanours on the part of founder Elon Musk, and increasing concerns over the company’s profitability, while rumours of filing for bankruptcy abounded. As the negative headlines mounted, 30% of the company’s shares were in short positions. But those betting against Tesla were unsuccessful. Fast forward to 20 Images: Joe Raedle/Getty Images; Illustration by TC&Co. Leveraged ETFs are complex financial instruments that carry significant risks. Certain leveraged ETFs are only considered appropriate for experienced traders. BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 13 12

cutting equipment, Harbin Xinguang Optic-Electronics Technology [688011], software product manufacturer, and Semiconductor Manufacturing International [688981], China’s leading chipmaker. In the first five months of the year, 66 IPOs and secondary listings on the STAR market raised $14.1bn, Refinitiv data shows, outpacing the 60 — worth $18bn — seen on the Nasdaq in the same period. Owen Lau, senior analyst at Oppenheimer, expects the STAR market to continue to attract more listings this year due to uncertainty around US listing rules. He also believes that the Shenzhen Stock Exchange’s amended IPO rules — companies can list without regulatory approval and there are no price limits during the first five trading days — will attract more interest. “Optimism matters a lot in a relatively new and exuberant market, especially when people STRATEGY Rethinking the 60/40 portfolio THE 60/40 PORTFOLIO has been a firm constant in the investment world’s history. It dates back to 1926, according to Vanguard, and has managed to deliver steady returns during times of both elevated volatility and bull runs. However, the 40% weighted in debt securities like government bonds or high-grade corporate bonds that typically works to mitigate risk during market downturns is no longer producing returns. The bond market has seen yields hit rock- bottom levels, with five- year and 10-year Treasury yields posting record lows in August and March, respectively. The crash has led fund managers and analysts to question whether bonds still serve as an effective hedge for investors, with many now substituting bonds for safe haven assets like gold. But this isn’t financial alchemy and gold prices do fall. Ultimately, the jury is still out on whether the precious metal is the fixed income asset that replaces bonds. b ← Inside the Shenzhen Stock Exchange just moments before the first batch of 18 IPOs debut on the ChiNext board on 23 August 2020 in the Guandong Province of China. “ Optimism matters a lot in a relatively new and exuberant market, especially when people are chasing the next Facebook, Amazon, Netflix and Google in China ” GEOPOLITICS Inside the US-China tech stand-off its impressive expansion efforts. Although Facebook’s international dominance as a social network is unparalleled — the company had more than 2.7 billion monthly active users in the second quarter — Tencent takes the crown as the world’s biggest company when it comes to gaming revenues. It amassed CNY37.3bn in the first three months of 2020, alone. The international success of companies such as Nio [NIO] and Xiaomi [XIACF] — up 92% and 19%, respectively, in H1 — is also a major driver of foreign investment. The stocks are only slightly behind their western counterparts, Tesla [TSLA] and Apple [AAPL], up 158% and 24%, respectively, during the same period. However, the geopolitical rivalry and battle for technological advancement has seen Chinese companies increasingly look closer to home when it comes to listing. The ever-changing relationship between US and Chinese technology firms is reaching fever pitch, powered by a cocktail of competition, geopolitical tension and envy. With formidable tech giants on both sides, where does the investment potential lie? STAR STRUCK China’s answer to bolster more local technological innovation is Shenzhen, a growing tech hub known as the Silicon Valley of the region. One of the most notable milestones in the rise of China’s tech industry came with the launch of the Shanghai Stock Exchange’s Science and Technology Innovation Board, dubbed the STAR last year. Similar to the ChiNext [399006] — a Nasdaq-style subsidiary in the Shenzhen Stock Exchange — the STAR market was developed to bolster IPO’s in the region. Some of the most recent listings include Qingdao Gaoce Technology [88556], a manufacturer of are chasing the next Facebook, Amazon, Netflix and Google in China. I [wouldn’t be] surprised to see if that outperformance continues to the year end, but I will be very cautious about the downside risk,” he tells Brainy Bull. Who will win the tech race is still an open question. As trade tensions continue to boil between the world’s two largest economies, the companies on either side of the divide will need to keep innovating in order to hold the attention of investors. b CHINESE TECH COMPANIES are hot on the heels of their US counterparts. Three of the region’s biggest technology stocks, dubbed the BATs — Baidu [BIDU], Alibaba [BABA] and Tencent [TCEHY] — are collectively up 29.8% in the first half of 2020. The trio had a combined market value of $1.4trn at the end of the second quarter. While shares in Alibaba and Baidu were not able to outperform their western equivalents, Amazon [AMZN] and Alphabet [GOOGL], the 33.3% increase in Tencent’s share price in H1 more than outmatched the 10.6% gain seen by Facebook [FB]. Tencent’s outperformance doesn’t just come down to the fact that it owns China’s largest social network, WeChat, but because of Images: VCG/VCG via Getty Images Leveraged ETFs are complex financial instruments that carry significant risks. Certain leveraged ETFs are only considered appropriate for experienced traders. BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 15 14

_ The global pandemic has brought about remote working en masse and provided added impetus to make changes to century-old working practices. Which companies are leading the change? BEFORE: Early starts, long commutes and extended hours in large-scale offices, working alongside thousands of employees living similar lifestyles _ The companies reimagining your work life Words: Peter Taylor-Whiffen Illustration: Motiejus Vaura BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 BRAINY BULL —Issue 03 17 17 16 16

_Work from Home Report _ The world of work will never be the same again. The coronavirus pandemic and the resulting lockdown measures have caused a profound paradigm shift F proven that good work can take place anywhere. While restrictions on social distancing began easing in July, it's looking like many employees will continue opting to work from home — perhaps not permanently, but at least a bit more often. The accelerated shift to a flexible working model has challenged perceived wisdom that work should take place between the hours of 9am to 5pm, with staff congregating inside a single office. Faced with this existential question, employees, companies and investors are beginning to look for new opportunities. “Businesses switched to working from home to keep operating, but it has been so successful that they've realised this is the new normal. It's the future.” NOW: Making it work in a pandemic – unrushed breakfasts, juggling childcare and, for many people, a more relaxed and happier working environment capital buffer. A happy corporate culture — an intangible metric increasingly considered for responsible investing (see boxout: A new metric for corporate responsibility) — has seen significant correlation with higher profits. It's the businesses that have been able to swiftly send staff home, while still maintaining their usual operational rhythm that are proving most popular. share prices boom. But the shift to remote working won't just benefit the share prices of companies that are providing the right tools. No matter the industry, the pandemic has forced companies to rethink what “business as usual” looks like. Fashion retailers have had to reconsider how they let customers try on clothes, while restaurant operators have had to redesign their spaces to accommodate socially distanced dining. With a greater emphasis on ecommerce, warehouse space is now prime real estate, and logistics companies are finding themselves busier than ever. “COVID-19 has had such an extraordinary impact on us all mentally, physically, emotionally. It was something the western world had never experienced before,” Dave Mazza, managing director and head of product at New York-based fund manager Direxion, tells Brainy Bull. or many around the globe, work and home lives have merged. This has Tracking the rise of home working In June, Direxion launched the world's first remote working ETF. The fund, using the ticker WFH, comprises 40 tech businesses considered to be integral to the delivery of seamless remote working. In its first two weeks, the fund attracted $60m of inflows, according to Mazza — an impressive feat in a market where thematic portfolios across the board have struggled to maintain momentum amid the broader market downturn. The timing may appear a stroke of luck, but the firm had seen the shift coming. “Regulatory restrictions mean you can't just dream up and launch a new fund overnight,” explains Mazza, whose company specialises in leveraged ETFs that allow traders to make outsized bets on the daily moves of market indices. “The trend From boardroom to spare room Naturally, the tech companies providing the digital infrastructure on which working from home practices rely — such as Zoom Video Communications [ZM], Microsoft [MSFT] and Slack [WORK], to name a few — have seen their Businesses that are implementing generous, long-term remote working are also proving more attractive to investors, who interpret the embrace of flexible working as evidence of resilience — not just in terms of a BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 19 19 18

_ Direxion Work From Home ETF holdings _ Direxion Work From Home ETF's top five stocks at launch towards remote working has been coming for a few years and we'd been putting this together for a while. But the COVID-19 pandemic accelerated that trend — and we were well placed to launch.” The Direxion Work From Home ETF tracks the Flexible Office Index, which was created in March by the German-based index provider Solactive. “During the COVID-19 crisis I, like many other people, have tried to set up an office space at home that holds a candle to our regular office environment,” Timo Pfeiffer, Solactive's chief markets officer, says. “Translating this issue to a global perspective, it's obvious companies actively engaging with the set-up of the work-from-home evolution will be the beneficiaries.” The index provides exposure to companies “accelerating the greater adoption of remote work” by offering critical technological infrastructure and services that help enable working remotely through four “pillars”: cloud technologies, cybersecurity, online project and document management, and remote communications. “Some of these technologies — or ones similar to them — may not necessarily be new or ground breaking,” adds Dr Axel Haus, head of qualitative research at Solactive. “However, a greater degree of acceptance towards them from employers and employees alike may further increase their relevance. Even more, better and faster connectivity from — for instance — 5G technologies could exacerbate the shift towards flexible offices all around the world.” Unsurprisingly, tech behemoths are the standout names in both Solactive's and Direxion's trackers, and with good reason. Microsoft's shares have climbed 48% YTD to a record high of $231.65 on 2 September. In the same period, Amazon's [AMZN] stock rose by 91% to $3,531.45. Inseego [INSG] Twilio [TWLO] Okta [OKTA] CrowdStrike [CRWD] Avaya [AVYA] 119.85% [XNET]15% Xunlei 78.78% 53.65% 48.62% 10% Inseego [INSG] 13.91% 7% Vonage Holdings [VG] 6% Source: TradingView 27.07.20 Avaya [AVYA] 6% Infosys [INFY] AUG SEP NOV 2020 MAR APR JUN JUL 5% Hewlett Packard Enterprise [HPE] 5% Plantronics [PLT] Virtually everywhere 4% Box [BOX] “Businesses switched to working from home to keep operating, but it has been so successful that they've realised this is the new normal. It's the future” _Dave Mazza, Direxion Zoom Video Communications is one platform that has become so popular over the past six months that it has entered the general lexicon as a noun, a verb and the poster child of the stock market's COVID-19 resistance. At the end of 2019, the company's stock was languishing below $70. By 10 July, it had hit an all-time high of $275.87, following a steep 70% rise since the pandemic began to bite in mid-March. The reason for the stock’s 272% gain in the first half of the year comes down to the 354% year-over-year uptick in customers it registered in the three months to 30 April. The company's 265,400 users, and 769 customers contributing more than $100,000 in revenue in the past 12 months, helped total revenue for the quarter jump 169% to $328m. “Zoom is the big one everyone talks about — and rightly so,” Mazza says. “But after these immediate standout successes, it's obvious that 4% FireEye [FEYE] 4% 8x8 [EGHT] 3% [ICRF] BNY Mellon Institutional Cash Reserve Fund 3% Cincinnati Bell [CBB] 3% Dropbox [DBX] device-to-cloud company Inseego [INSG], cybersecurity firm CrowdStrike [CRWD], business communications specialists Avaya [AVYA] and cloud software company Okta [OKTA]. Twilio is, according to Mazza, one of the most exciting movers at the moment. “Most people in the street have never heard of [Twilio] — a cloud communications platform service company that allows software developers to make and receive automatic phone calls and text messages,” he explains. However, the company "just won the contract to the general work-from-home trend has longer legs than that. We're looking at the longer term, the emerging companies and those that aren't household names but underpin all the technology that enables successful remote working.” On the 25 June, its first day of trading, the WFH ETF rose 1.4%, outpacing the tech-heavy Nasdaq's 1.2% gain. Over the next two weeks, the WFH fund climbed a further 7%. Twilio [TWLO] — which had seen its share price nearly treble to $222.38 since a mid-March low — was its top holding. This was followed by 5G and 3% Nutanix [NTNX] 3% Ping Indentity [PING] 2% Progress Software [PRGS] 2% Upland Software [UPLD] 2% Slack Technologies [WORK] CrowdStrike Cisco Systems Elastic NV Fortinet LogMeln Oracle Perficient Twilio [CRWD] [CSC] [ESTC] [FTNT] [LOGM] [ORCL] [PRFT] [TWLO] 1% 1% 1% 1% 1% 1% 1% 1% Source: Direxion 20.07.20 BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 21 20

provide the text messaging for New York's track-and-trace programme," Mazza explains. Jeff Lawson, CEO and co-founder of Twilio, has a focus on “digital engagement, software agility and cloud scale” and this has made the platform a permanent fixture in the work-from-home environment. The increased demand for its services — it noted a 23% uptick in accounts in the first quarter — boosted its revenue 57% year-over-year to $364m. The stock climbed 114.7% in the first half of the year. Direxion — which had around $15bn in assets under management at the end of last year — may have launched the first specific remote- working ETF, but other trackers are tapping into the home-working space. The Horizons Industry 4.0 Index ETF [FOUR] holds 50 stocks in cloud computing, cybersecurity, virtual and augmented reality, robotics and the Internet of Things spaces, and returned 9% in the first six months of this year. “The whole idea of digital transformation has been turbocharged by COVID-19,” Hans Albrecht, vice president of Horizons, says. “The need to get on board the _ A new metric for corporate responsibility a report suggesting that how businesses operated in the face of COVID-19 would change the way investors see them. “The coronavirus outbreak will intensify the focus of companies, investors and other stakeholders on environmental, social and governance factors, and increase the credit-relevance of ESG risks,” Matthew Kuchtyak, the firm’s AVP- analyst, said. The report outlines how a company’s preparedness for such global risks could impact its creditworthiness, creating a greater need for a triple bottom line approach to decision making where businesses are not just responsible to shareholders but to people and the planet. A business that can demonstrate that it cares for its people and community — through work-from-home policies or otherwise — can, therefore, sell itself to investors, showing it has the right foundations for resilient growth. We are already seeing this mindset shift take place. Dai-ichi Life, Japan’s third largest life insurer, is now asking the 250 companies in which it holds equity investments in if they are offering their employees permanent home-working arrangements. Meanwhile, equity and credit investors AllianceBernstein, which keenly advocates home working among its own staff, is expecting the same standards of the companies in which it is invested — even going as far as checking up on how quickly companies are installing up-to-date tech at staffs’ homes. “Sustainability is the most important aspect of the investment case for a company,” Michael Nicol, investment manager at Kames Global Capital, affirms. “A close look at the company’s environmental and social impact, as well as its governance polices is vital and intrinsically linked to its strategic competitive positioning.” “The pandemic has already shaped long-term behaviour and, with it, investment trends” _Michael Nicol, Kames Global Capital Keeping staff at home not only makes for happier workers, some argue it makes for greener companies too, with no offices to power and no commutes to take. But beyond these obvious environmental benefits, there is a case to be made that — by examining a company’s response to the pandemic — deductions can be made as to how resilient it is. For ESG investors, this could provide a new metric by which to assess a business. In June, New York financial services firm Moody’s Investor Services published digital train is no longer a nice-to- have,” he told The Globe and Mail. “It may be a must-do to survive.” workers make for a more productive business, as it decreases the amount of lost work by 50%. Since then, an increasing number of surveys have emerged backing up its findings, the most recent being a study by Lenovo in July that found 63% of the global workforce to be more productive at home than in the office. In another survey by research group Hoxby, 52% of UK managers agreed that workers have been more productive than in the office. Meanwhile, a report by CNBC and Survey Monkey released in May, found that 44% of 9,000 US-based workers surveyed were happier in their jobs, mainly because they didn't have to commute to the office. A separate study by Salesforce [CRM] broke down employee’s productivity. It found that 32% started work earlier, 35% worked later and nearly 40% made more business phone calls, according to ZDNet. Unsurprisingly, the tech sector has been quickest to pounce on these benefits and make their staff's remote working arrangements permanent. On 6 July, Fujitsu [6702] announced it would offer “unprecedented” flexibility to its 80,000 workers in Japan in a bid to make working from home "standard" wherever possible. The company (which is up 36% YTD at JPY13,800 on 1 September) said the move would give “a more empowering, productive and creative experience for employees that will boost innovation and deliver new value to its customers and society”. At the same time, it will be able to cut office space costs. Homeworkers are happy workers The work-from-home phenomenon is about far more than software, however. Flexible working policies have been credited with leading to a more motivated workforce, higher staff retention rates and increased levels of diversity. Such policies can also be considered as an indicator that a business is more likely to be able to pivot and adapt to rapidly changing circumstances — as was required with the pandemic. A study from Stanford University on remote working in 2018 came to the conclusion that happy home Growing adoption of home working non-production staff “teleworking” will become “the benchmark”. Among the consumer staples space, Alan Jope, CEO of Unilever [ULVR], is reportedly reviewing permanent mobile work arrangements. from-home waters. Jes Staley, chief executive at Barclays [BARC], said crowded corporate offices with thousands of employees “may be a thing of the past”, while banking peer Goldman Sachs [GS] has mooted a return of no more than 50% of staff to its offices. Morgan Stanley [MS], JPMorgan [JPM] and Capital One [COF] have also extended their flexible working options, according to human resources organisation SHRM. Even automakers, one of the least expected industries to embrace the remote working boom, are considering how they can extend policies. Nicholas Speeks, CEO of Mercedes-Benz, recently told Automotive News that “for the foreseeable future, [work from home] will become the norm”. At the same time, French car manufacturer PSA [UG] — which owns the Peugeot, Citroën and Vauxhall brands — said that for Fujitsu's move to flexibility follows an announcement in May by Jack Dorsey, CEO of Square [SQ] and Twitter [TWTR]. Dorsey promised employees in specific roles could work at home “forever”. Tobias Lütke, CEO of ecommerce platform Shopify [SHOP], has also touted the end of “office centricity” and has outlined plans to make the business a “digital-by- default” operation. Furthermore, Stewart Butterfield, CEO of Slack, has also given employees the option to work from home indefinitely. Facebook [FB] and Google [GOOGL] have extended their remote working initiatives until the end of the year, with the expectation these will likely be made permanent. Seeing these successes, other industries have started to dip their toe in the work- Bucking the trend Zoom outperforms US market 189.37% There is, of course, a possibility that remote working could lose its shine as time goes on. While there is no precedent for the coronavirus, during other catastrophic historical events many sectors have come close to extinction — the travel sector after 9/11, the banking sector after 2008, cryptocurrencies after 2017 — to then suddenly recover. Many industries were able to go back to business as usual. If this pattern were to be repeated in the near future, would the work-from-home trend be reversed, leaving these hot Zoom S&P 500 [SNP] [ZM] Source: TradingView 27.07.20 8.77% AUG SEP NOV 2020 MAR APR JUN JUL BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 23 22

_Work from Home Report The companies making it possible for other companies to work from home “One thing's for sure. We've discovered the joys of remote working and we're not going to give them up. This is here to stay” _Dave Mazza, Direxion Below are the share of jobs that can be done at home in different industries and some of the companies that are enabling these jobs to be done. 83% Education: • K12 [LEARN] stocks out in the cold? “I don't see it,” Mazza says. “Maybe some firms have had significant run-ups, and you’re seeing an elevated price to earnings, but collectively they are at lower valuations than the Nasdaq but with higher growth potential.” In fact, indicators suggest the tide of home working will not be turned. Of the 1,500 UK businesses interviewed by video conferencing platform Whereby, 82% said they are open to the idea of making their COVID-19 flexible working arrangements permanent, while 65% said they intend to downsize their office space as a result of the pandemic. Michael Nicol, an investment manager at Kames Global Capital, agrees the pandemic marks a permanent sea change in the way we work. “The pandemic has already shaped long-term behaviour and, with it, investment trends,” he says. “COVID-19 has fast-forwarded particular themes that are important for a portfolio that will perform well over the next few years. Nicol adds that “tech is the single most obvious driver”. He believes that the increased adoption of software and services that enable remote working will stay a permanent fixture in business. micro-changes along with the macro. For instance, travel may have returned after 9/11, but the industry has permanently changed its security measures. The same could be said for remote working. Certain stocks may be spiking right now, but investors will need to look at the longer term. “Everyone is already looking at where this goes next,” Mazza says. “Zoom is looking at partners to build devices, and Google wants to enter the video-conferencing space. Everyone can now see remote working is the future — but we need to keep looking for exactly how that future will pan out, what new technologies and trends will come out of this.” Mazza is also working on another fund to exploit a post- lockdown new standard — a consumer ETF that tracks companies providing virtual services, such as home entertainment, online education and telemedicine. Another indicator, he says, that the COVID-19 crisis has changed business, working and investing forever. “One thing's for sure. We've turned a corner,” Mazza concludes. “We've discovered the joys of remote working and we're not going to give them up. This is here to stay.” b Tech: • Alphabet [GOOGL] • Amazon [AMZN] 80% Management: • Microsoft [MSFT] • Salesforce [CRM] 79% • Lemonade [LMND] 76% Finance and insurance: Information: • Cisco Systems [CSCO] • Zoom [ZM] 72% 52% Sources: Bloomberg/National Bureau of Economic Research Wholesale trade: • Alibaba [BABA] • Teladoc Health [TDOC] 25% Health care: The future of work *Leveraged ETFs are complex financial instruments that carry significant risks. Certain leveraged ETFs are only considered appropriate for experienced traders. Transportation and warehousing: • Ocado [OCDO] 19% As with every other trend, success for investors is about foreseeing the BEYOND: Your office is wherever you are – and this could be anywhere in the world. Remote working is here to stay, so adapt to new ways of doing things BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 25 25 24

DTC Report Words: Rich McEachran Direct to consumer Retail’s rising stars are showing that simple can often be better. But does the business model have long-term staying power? Illustration: Asillo 3d BRAINY BULL—Issue 03 Brainy Bull — Issue 03 BRAINY BULL—Issue 03 BRAINY BULL — Issue 03 27 27 26 26

DTC Report PA RT 1 Disrupting ecommerce From the moisturiser you use each morning to the gourmet treats you feed your pet and even your favourite tipple, more and more businesses are battling to get consumers to buy directly from them. Ordering online has never been easier or more popular. According to Grand View Research, the global B2C ecommerce market is expected to be worth $6.2trn by 2027, growing at an annual compound growth rate of 7.9%. Global lockdowns have also increased DTC brand exposure. Take online pet product specialist Chewy [CHWY]. It added 1.6 million new active customers in the first quarter of fiscal 2020, which ended 3 May, taking the total number to 15 million. Initial orders were up 11%, and new customers were adding more to their carts than pre-pandemic customers. Overall, sales were up 46% year-over-year. Peloton [PTON], one of the most renowned brands in the interactive fitness category, is another DTC brand that has seen an uptick in sales. When gyms closed and people were looking for ways to keep fit while working from home, sales of smart exercise bikes and workout streaming subscriptions rose. The company reported a 66% year-over-year increase in total revenue for the third quarter of fiscal 2020. Sales of its connected fitness products — bikes and treadmills — were up 61%, while subscription sales were up 92% year-on-year for the three months to the end of March. Chewy and Peloton have seen FOR EVERY DTC unicorn attracting private investors and raising venture capital, there are many more public DTC brands that manufacture, market, sell and ship their own products. While their primary objective will be to sell products directly to their customers, some will use online marketplaces like Amazon [AMZN] to drive additional sales and to widen distribution. all started around the time of the dotcom bubble, when the internet was young and a new land of opportunity. Webvan, founded in 1996, promised to deliver grocery shopping to your door within a 30-minute window. After just a few years in operation — and after raising $375m through its 1999 IPO — it collapsed. The business model was too expensive to operate. Now, more than two decades later, forecasts suggest direct-to-consumer (DTC) sales to account for $17.75bn of the total US ecommerce market by the end of 2020, which would represent a 24.3% rise on the previous year, according to market research company eMarketer. Despite overall growth being strong in the space, research indicates that momentum is slowing due to intensifying competition. Unlike their early predecessor Webvan, today’s wave of DTC companies are trying to do things differently. When apparel ecommerce company Bonobos — now considered the first major DTC brand — launched in 2007, it did so with a single product: a pair of men’s trousers. The company’s ambition was to give consumers that didn’t like to go shopping a way of buying jeans without leaving their home, using a process that was designed to be convenient and hassle-free. Walmart [WMT] acquired the company for $310m in June 2017. An army of businesses have followed in the footsteps of Bonobos. One of the most talked about names on investors’ lips is Glossier. The darling of the DTC cosmetics world was spun out from founder Emily Weiss’s blog, Into The Gloss, and received its first capital investment in 2014. The company has leveraged the blog’s readership and social media following to build a loyal customer base. To date, Glossier has resisted acquisition or the urge to go public, despite it achieving a billion-dollar valuation and unicorn status last year. The surge of interest from companies expanding their traditional distribution channels to incorporate online has, itself, disrupted traditional ecommerce. Despite DTC’s relative youth, the increased complications it poses to brick-and- mortar companies has raised the importance of building a dynamic ecommerce infrastructure. Like so many other markets, the DTC trend was amplified earlier this year with the arrival of COVID-19, which made the ability to deliver products directly to consumers more relevant than ever. As a result, the coronavirus pandemic has created a massive tailwind for DTC brands. It has reshaped the way companies do business online, while also opening up the market to all types of retail brands looking to tap into the DTC boom. PELOTON has made Image: © Peleton itself a genuine fitness phenomenon through its clever branding — its instructors have a sort of cult status among followers. “Rio il ipsandita volum etus sum ut minus sime parum, adicit ventin cum, expelicidit ommo lor emquatur saerfer aturiberum ari voluptae commolut a doluptas que dio” BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 29 28

DTC Report CHEWY’s stock is rallying as pet adoptions and ecommerce sales surge amid the coronavirus pandemic. who have this focus on user experience, that is where we looked for inspiration,” Tom Cortese, co-founder of the fitness brand, told CNBC last year. PA RT 2 Directing the economy A perfect fit AS LOCKDOWNS AND shelter-in-place orders rendered shops unappealing, or unavail- able, many ended up turning to subscriptions to get hold of their everyday essentials. Meal kits and recipe boxes were gobbled up and companies such as HelloFresh [HFG] and Blue Apron [APRN] performed well since lockdown restrictions came into force. The former hit an all-time high of €52 in July, while Blue Apron reached a 52-week high of $28.84 in March. Meanwhile, major players in the food and drink space have rushed to adapt their business models. Bidfood, part of a subsidiary of BidCorp [BID] (one of the UK’s largest wholesalers and food service providers) set up a DTC option on its website in March. By April, food and bever- age industry stalwart Kraft Heinz Company [KHC] had launched Heinz to Home, a service that delivers bundles of Heinz- branded soups and condiments to people’s doors. Cutting-edge design and an innovative user experience are key to a long and fruitful customer relationship. If you build it, they will not only come, but also stick around. That is evident in the resilient customer growth of brands like Stitch Fix [SFIX]. The online personal styling service company sends its customers clothes on a one-off or subscription basis. What sets it apart from similar DTC fashion businesses is the technology that powers it — algorithms and machine learning are used to inform the personal styling service it offers. Stitch Fix can recommend items to customers based on past purchases, behaviours, preferences and measurements. Dozens of data scientists have been hired to better understand customers and to deliver personalisation at scale. Stitch Fix did not benefit [APPL] of fitness’, its founders consider it to be more akin to Netflix [NFLX] or Amazon, in that users can curate their own fitness plans right down to the playlist they exercise to, similar to Amazon curating personalised homepages and allowing shoppers to create wish lists. “When you think about the game-changer companies their share prices hit all-time highs since the market selloff. Both stocks are up 54% and 103% respectively in the first half of the year, outpacing the S&P 500’s decline of 4%. Barron’s, Jill Woodworth, chief financial officer at Peloton, acknowledged as much, saying the company was looking to reduce the cost of its treadmill. While she added that the company’s equipment would certainly never be cheap, reducing the price will help to make it more attainable. Although Peloton has been discussed in the news as the ‘Apple directly from lockdown as much as other DTC companies, however, reporting a sales decline of 9% and a net loss of $0.33 per share on $371.7m revenue for the third quarter of fiscal 2020. The pullback was blamed on supply chains being hit by the pandemic, resulting in a backlog of orders. Nevertheless the stock has outperformed the broader apparel market by 3.2% in the first half of 2020 amid a growing customer base. Stitch Fix’s active user base grew by 9% year-over-year in the three months ending 2 May. Shifting consumer behaviours While the DTC model is very much in vogue, the question for many businesses that have seen sales and revenues surge in recent months is whether customers will keep coming back as lockdown restrictions around the world ease. Pelotons’ products are not cheap. The company’s bikes cost $2,245 and treadmills are $4,295 a pop, making each product a high-end statement. If the owner wants to access the full suite of online exercise classes, they will need to take out a subscription to the tune of $39 a month. This seems like an eye- watering amount to be paying compared to a gym membership. In a July conference call with The rise of DTC How some DTC brands have performed 236.45% against the US retail market 173.49% Shopify [SHOP] Peloton [PTON] Chewy [CHWY] SPDR S&P Retail ETF [XRT] 80.36% Stitch Fix [SIFX] “ We continue to see an expansion in Efficient and effective delivery 23.44% ecommerce transactions even -2.84% Images: © Chewy, Stitchfix Such unprecedented demand for food and drink, which was being driven by panic buying and stockpiling, has highlighted the as COVID-19’s impact tapers off” SEP NOV 2020 MAR APR JUN JUL AUG —Moshe Katri, Wedbush Securities BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 31 30

DTC Report online, and were looking for a digital alternative to traditional business bank accounts that could be opened quickly and easily. Towards the end of June, Square launched an on-demand delivery service called Square Online Store in partnership with Postmates. It allows sellers to dispatch delivery drivers for orders placed directly through their website. Unlike third-party services like DoorDash and Uber Eats [UBER], which handle the ordering, payment and delivery, Square Online Store puts control of the fulfilment process in the hands of the seller. As a result, they have the ability to pass delivery charges on to the consumer, reducing the commission they have to pay. The model has been popular with small restaurants and food service businesses that were already operating on slim margins and being crippled by the costs charged by third parties before the coronavirus pandemic even began. For the first quarter of 2020 ending 31 March, Square posted a “ User experience is going SHOPIFY has built its platform to make it simple to overtake price as the for brands to promote products, manage sales ” and fulfilment. key differentiator — Ciaran Bollard, Kooomo by the likes of Umbro and Morrisons [MRW] to build online stores, “user experience is going to overtake price as the key differentiator”. Companies are realising as a result of the pandemic that they need to find ways to “provide a frictionless UX and customer journey across every touchpoint”, he tells Brainy Bull. DTC brands need to be investing in the right tools and techniques to help them deliver this to stand out against the rest. Unlike the early pioneers of home delivery that failed to survive the dotcom crash, today’s DTC brands can use technology to improve their offering and gain a competitive advantage. One example is integrating smarter payment systems into the ecommerce experience. net loss of $16m, or $0.24 per share, compared with a loss of $38.15m, or $0.09 per share, in the first quarter of 2019. Revenue jumped 44% year-over-year from $959m to $1.38bn — analysts had expected $1.29bn — and gross payment volume (the total amount of payments handled) rose 14% to $25.7bn. The mixed results were largely down to the fact that Square has previously derived a major chunk of its income from traditional brick-and-mortar businesses. rally since the mid-March sell-off. The former gained more than 20% in the second quarter, while the latter rose 16%. need for efficient and effective logistics. Even traditional retailers in the UK, including Tesco [TSCO] and Sainsbury’s, [SBRY] were having to add thousands more home delivery slots to cope with the number of online orders. Normally, delays to a delivery would be a test of patience. But these aren’t normal times. The global pandemic has not just led to a major shift in consumer purchasing decisions, but also to consumer expectations. Some surveys have suggested that consumers have been sympathetic to the impact COVID-19 has had on supply chains. One survey conducted by logistics technology company Convey in April — when panic buying and stockpiling was at its peak — revealed 60% of consumers didn’t expect companies to have all the products they want in stock, while 94% were happy to wait longer for orders to be delivered. The caveat is that seven in 10 also said that they wouldn’t buy from a company again if they weren’t informed about delays. Although demand for transportation hit rock bottom in April, since then, logistic firms have been benefitting from the rise in ecommerce sales. Notably, United Parcel Service [UPS] and FedEx [FDX] have seen their share prices Designing the consumer experience Consumers may have been happy to give couriers some leeway during lockdown, but what many will be less forgiving about is the problems that arise when navigating and purchasing through a website. A seamless user experience (UX) is crucial for converting web traffic and one-off purchases into recurring sales and subscriptions. Lynsey Thornton (pictured above, speaking at the company’s annual partner conference), vice president of UX at Shopify [SHOP], believes that keeping a close connection to users “is one of the surest ways I know to build empathy for them, and gain a deep understanding of our products and the problems they solve”. With more people shopping online directly from businesses and the growing competition, it’s becoming more and more important for companies to prevent customer numbers from dropping out before checkout. According to Ciaran Bollard, CEO at Kooomo, a cloud commerce platform that has been used SQUARE’sOnline Store is an enablement platform that is helping DTC brands scale. Square competes for a piece of the DTC pie Rethinking business There are certain industries that haven’t really changed the way they conduct their business for decades. For example, car manufacturers will mass produce and assemble vehicles before selling them on to dealerships, which then go on to sell them to consumers. Yet, there are signs that some traditional industries are rethinking their business models. Electric vehicle maker Tesla [TSLA] has become the first automaker to adopt a DTC approach. In a move that could mark the beginning of the end for the humble car salesmen, Tesla is allowing customers to purchase vehicles online and have them delivered straight to their door. However, some industry experts have argued that automakers could see sales of vehicles drop without the presence of physical showrooms. Banking is another industry that is changing its ways by borrowing from the playbook of DTC companies. Although this is arguably out of necessity. People have long relied on high street branches where they can cash cheques and withdraw money. But with the use of cash declining and card payments on the up — accelerated more recently by pandemic-related restrictions — more banks are shutting branches and starting to prioritise app-driven, branchless services. Unlike traditional banks, digital- first banks such as Monzo, Revolut and Starling focus on creating a seamless, app-driven service that does not require a high street presence. In February, RBC [RY] said it would launch a digital bank targeting affluent customers. Research by FIS [FIS], published last year, indicated that digital-only banks have a higher rate of customer satisfaction than traditional banks do, as well as a lower rate of customer deflections. It might come as no surprise that Square [SQ] saw its share price more than double between April and July this year, reaching a new all-time high and outpacing the computer and technology sectors. The payment processor provides products for merchant sellers and consumers. Its Cash App product, which facilitates peer-to-peer transactions, had 24 million monthly active customers in December 2019. In March, the company said it welcomed its largest number of new users — many of these were DTC businesses that found themselves quickly having to transition from offline retail to Images: © Shopify, Square BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 33 32

DTC Report $29.763 $28.472 $27.243 Wedbush Securities, believes Square’s seller segment will gradually improve when lockdown restrictions ease in the US. He also expects the increased growth in companies looking to adopt the DTC model to be sustainable. “We continue to see an expansion in ecommerce transactions even as COVID-19’s impact tapers off,” Katri tells Brainy Bull. Understandably, COVID-19 led to a slowdown in its seller ecosystem. Revenue from the Cash App offset the slowing demand, though. In the first quarter, the app’s revenue accounted for more than a third of the company’s total revenue — $528m — up 197% year-over- year. Gross profit, meanwhile, was up 115% year-over-year at $183m. Moshe Katri, managing director at Omnichannel commerce Ecommerce as a share of global retail sales $26.074 $25.038 $23.956 $22.974 In the long term, Square is likely to be propelled forward by the tailwind that the pandemic has provided digital payments. Shops may reopen and people may return to the high streets, but even the brick-and-mortar businesses that were forced to transition to online selling will likely have realised how convenient Square’s technology is. In theory, this should lead to an uptick in more companies adopting an omnichannel approach and integrating payment technology into offline, online and DTC channels. The total transaction value in the global digital payments space is set to be worth $4.7trn this year and is predicted to be worth $8.3trn by 2024, according to data from Statista and research by Learnbonds.com. Similar to Square, Shopify has seen accelerated growth recently, given that its ecommerce technology can be integrated into any website. Essentially, this allows a DTC brand to receive and handle orders itself, without having to rely on online marketplaces such as Amazon. According to Statista, Shopify accounts for 30% of the ecommerce platform market in the US. Its market dominance in the online space made the company’s stock one of the best performers in the aftermath of the market sell-off. It more than doubled in value between April and July, with shares pushing past the $1,000 mark for the first time in June. For the first quarter of 2020, Shopify reported revenue of $470m — up 47% from the year- ago period — surpassing Wall Street expectations of $443.1m. In the six weeks from 16 March to 24 April, Shopify saw The coronavirus pandemic has accelerated a shift to online shopping that is set to grow. $6.542 $5.695 $4.927 $4.206 $3.535 $2.928 $2.382 2017 2018 2019 2020 2021 2022 2023 Tempur-Pedic [TPX] Yeti [YETI] Frontdoor [FTDR] Wingstop [WING] Freshpet [FRPT] Joe Kunkle’s commentary Share price performance over last 52 weeks to 1/9/20 101.12% -11.26% 70.08% 137.14% 18.11% Joe Kunkle, head research analyst and portfolio manager at Options Hawk, tells Brainy Bull his five small-cap DTC picks that are primed for growth. “Tempur-Pedic International, now known as Tempur Sealy International, is a $4.4bn leader in mattresses that has been posting fantastic numbers, driven by its omnichannel focus and rapid expansion in the direct channel. The Kentucky- based company saw online growth climb 125% in Q2 2020 amid a strong housing market and shifting consumer behaviours.” “Yeti Holdings is a $4.5bn high-end brand famous for its coolers and drinkware, but it also has a number of other emerging consumer businesses. The Texas- based company has seen solid growth in its DTC channel that’s resulted in a better margin mix. Yeti also has a thriving personalisation business through its website and a very loyal customer base.” “Frontdoor is a $3.78bn provider of home service plans, covering repair and replacement of household systems. Customers have been renewing via the Tennessee-based company’s DTC-channels at a rate of over 2.5 times than those acquired through the real estate channel. The company has said that they have a higher lifetime value.” “A long-time favourite of mine, Wingstop is nearing a $5bn market cap after coming off another impressive quarter with plenty of room for further growth through location expansion. The company was able to pivot quickly from in-store dining with an easy transition to delivery and pick-up models. It has seen a lot of success from its DoorDash partnership.” “Freshpet is a $4bn maker of pet food and treats in what has been a very resilient pet industry. The New Jersey- based company posted 200% growth in its ecommerce business in Q2 2020. While its own DTC business is small, it makes a lot of sense as an acquisition target as most of the other leading pet food brands are owned by large packaged goods companies.” Images: © Tempur-Pedic, Yeti, Frontdoor, Wingstop, Freshpet Source: Yahoo Finance 06.08.20 13.77 21.01 2.97 4.72 1.38 Price to sales (TTM) $4.26m $28.59m $14m $56.75m $203.1m Net income (TTM) 1.21% 19.63% 21.35% 10.45% 7.59% Return on assets BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 35 34

DTC Report DTC IPOs: Ones to Watch Earlier this year, mattress-in-a-box company Casper’s [CSPR] debut on the stock exchange was a disaster. Its IPO has become a cautionary tale, highlighting the fact that going public isn’t always the right path for DTC brands. But not all DTC brands are expected to flop when going public. Following its 2017 reverse merger, Purple Innovation [PRPL] has seen its share price increase sharply in recent months. The stock rose 336% between 3 April and 10 July. Below are some other DTC companies that are rumoured to be considering an IPO. set to include clothing in 2021. converting their 90-day trials into subscriptions was lower than the pre-pandemic rate, but the company expects stronger retention going forward. Nevertheless, new stores grew 71% in the quarter and the total value of merchandise sold on the platform rose 119% year-over-year to $30.1bn. an acceleration in new sign-ups. Almost two-thirds more stores were created on its platform during the period than a year ago. The company did warn, however, that this could be attributed to the extension of the free trial period on standard plans from 14 days to 90 days. It was for this reason that all eyes were on the second quarter earnings report at the end of July. Would those taking out free trials convert into paying subscriptions? While monthly recurring revenue was up 21% year-over-year to $57m for the three months to the end of June, the level of growth was impacted slightly by the number of free trials taken out. Shopify indicated that the rate at which merchants were Poshmark — The online marketplace for second-hand clothes reportedly postponed a potential IPO at the end of 2019 to focus on increasing its sales. It’s likely to revisit the idea soon. Allbirds — The digitally native trainer company reached a $1bn valuation after just four years of trading, and has also started to expand into physical retail. 23andMe — Although the DNA home-testing kit company, last valued at $2.5bn, cut 14% of its staff in January due to declining sales, the pandemic may have presented new opportunities to analyse genomes. Away — The on-trend luggage brand is another $1bn-valued DTC company. Its product line-up of suitcases, bags and organisers are also AWAY is a trendy DTC luggage brand valued at $1bn. The company could debut soon. at one point Wendy’s [WEN] restaurants in the US even ran out of hamburgers — hungry shoppers snapped up meat-free and vegan substitutes. Furthermore, according to one survey of 2,000 British people conducted by Mintel, 25% of young millennials (aged 21 to 30) are of the opinion that a vegan diet has become more appealing since the start of the outbreak. The Very Good Food Company [VERY] became only the second plant-based food purveyor to be listed — the other being Beyond Meat [BYND] — when it joined the Canadian Securities Exchange in June. The British Columbia-based firm is behind The Very Good Butchers brand, which as well as selling through retailers, delivers boxes of plant-based meat direct to consumers’ doors through a monthly subscription. and creates differentiation and competitive advantage. Polman points to one brand — Warby Parker. In its early years, the innovative eyewear company had huge success experimenting with showrooms that were offline. “In itself, DTC doesn’t build brand affinity. For many established DTC companies, success came when they built live [retail] experiences that brought the brand to life,” Polman explains. Adapting the DTC model PA RT 3 Determining the future “ The hype around DTC is ultimately Will other businesses look to the likes of The Very Good Company and try to replicate its success? Will more companies pivot to the DTC model in the future? It’s possible. Afterall, the model does have many appealing aspects. However, it’s not for everyone. “The primary challenge is that it’s not necessarily the solution to every brand’s woes. It can be expensive, logistically challenging, and distracting,” Christian Polman, chief strategy officer at brand consultancy Ebiquity, tells Brainy Bull. “The hype around DTC is ultimately about brands getting closer to their consumers. Many brands can achieve similar outcomes by building great customer experiences, backed by good relevant content that builds brand engagement, loyalty about brands getting closer to their consumers” RECENT RESEARCH published by PipeCandy, a company that analyses business and consumer perception metrics about DTC brands, found that food and drink, pet food and fitness verticals had been faring better compared to their past performance. On the other hand, apparel, fashion and furniture saw a year-over-year decline in web traffic during April. Within the verticals that performed well, there were some unexpected additions. For example, while slaughterhouses were shuttered and meat production ground to a halt — — Christian Polman, Ebiquity Harry’s markets itself to customers. The following month it was announced that Edgewell Personal Care [EPC], owner of the Wilkinson Sword brand, would be acquiring Harry’s for $1.37bn. Edgewell’s shares dropped around 17% on news of the deal, reaching a 52-week low at the time. This was due to the possibility that the company would have to take on more debt to fund the acquisition. Then, in February of this year, the deal was blocked on the grounds that it would harm competition in the US shaving market. Following the announcement of the Federal Trade Commission’s (FTC) decision, Edgewell’s shares rose more than 27% in intraday trading. Despite the botched deal, other big companies are vying for a slice of the DTC pie. In July, Constellation Brands announced that it would acquire the DTC wine business Empathy Wines, Industry stalwarts look to acquire brand affinity It’s this blend of offline retail and ecommerce that has piqued the interest of large multinationals. In April 2019, digital-first razor blade company Harry’s struck a deal with Boots to sell its products in 300 stores — a move designed to change the way Image: © Away BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 37 36

DTC Report “ Competition authorities are They will have to read carefully though, Taylor warns. Many of these stalwarts often acquire DTC brands and startups for their innovative approach to ecommerce. But an acquisition is no cast-iron guarantee of success in the DTC market. Unilever bought Harry’s biggest competitor, Dollar Shave Club, for $1bn back in 2016, despite the business not being profitable. At the time, the deal raised eyebrows and since then the company has admitted that the acquisition hasn’t made much sense financially, a source close to the matter told The Wall Street Journal last December. Taylor adds that health and beauty, and household products, are likely to be more vulnerable to CMA or FTC intervention and face more regulatory hurdles than those in other verticals, such as food and drink. “Competition authorities are increasingly sensitive to the possibility of killer acquisitions — established suppliers snuffing out the competitive threat posed by digital startups,” Taylor says. co-founded by entrepreneur and investor Gary Vaynerchuk in 2019. “Key to our strategy is being consumer obsessed,” Bill Newlands, CEO of Constellation Brands, said in a press release. “We believe Empathy Wines is the right strategic partner to help us deliver exceptional brands and experiences to our consumers.” With the coronavirus pandemic creating lasting uncertainty in the retail and grocery industries around the world, there is the possibility that we will see major fast-moving consumer goods (FMCG) businesses, like Unilever [ULVR], move into the DTC space through acquisitions. “As we come out the other side of the pandemic, DTC businesses may look like attractive opportunities for FMCG players that are wanting to diversify their route to market and reduce their reliance on brick-and-mortar retailers,” Andrew Taylor, co-founder of Aldwych Partners, a consultancy that advises on Competition and Markets Authority (CMA) investigations, tells Brainy Bull. DTC brands have been disrupting traditional retail now for more than a decade, and its likely that they will continue to do so in the future. However, it’s unlikely that we’ll be seeing a seismic shift to online-only retail anytime soon. “There’s no doubt this [DTC] category will continue to grow. However, as long as we see lockdowns continuing to ease, the importance of live retail environments will return,” Polman says. “Until we’re stuck in a chair with virtual goggles on, there’s a long life left in live experiences.” b The DTC brands that could breakout increasingly sensitive to the It’s clear that food and drink brands will continue to profit post-pandemic, but will other verticals that haven’t fared as well during the downturn, such as clothing, bounce back? The indications are that this will be the case. For example, Canadian athletic apparel retailer Lululemon [LULU] will be one to watch in the future. DTC has been the firm’s fastest-growing segment and the company has made significant investment in its checkout process and digital marketing to help attract and retain customers. The first quarter of the fiscal year, ending 3 May, saw ecommerce sales rise 70% year-over-year. Another company that could go from strength-to-strength post- pandemic is iRobot [IRBT]. The bulk of its sales are from its autonomous vacuum cleaners and mops. Revenue possibility of killer acquisitions [in the DTC space]” — Andrew Taylor, Aldwych Partners cleanliness and hygiene having taken an important role during the pandemic, especially as more people were spending more time at home, the company is hoping this will be a springboard for the DTC side of its business. for the second quarter of 2020, ending 27 June, was $279.9m, an 8% increase compared to the year-ago period. Although DTC revenue was a relatively small $33m, it roughly saw a 160% year-over-year increase. With Image: © LuluLemon LULULEMON’s fastest growing segment is DTC. DTC breakouts How some DTC brands have 118.12% performed against the S&P 500 90.06% Square [SQ] Lululemon [LULU] S&P 500 [SNP] iRobot [IRBT] 13.43% 5.47% SEP NOV 2020 MAR APR JUN JUL JUL BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 39 38

Profile: Jack Schwager I n S I D E M A n : L E g E n D a r Y i n v E S T O r S T a L k S H O P What is it about Jack Schwager that encourages investing legends and hedge fund billionaires to open up? Brainy Bull meets the man behind the words Words: Amelia Schwanke Photography: Matt Nager BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 41 41 40 40

Profile: Jack Schwager There’s no shortage of epic tales on Wall Street. It’s not only the high-stakes gambles with the potential for massive gains or huge losses that steal people’s attention, but the idiosyncratic personalities of some of the community’s most influential traders that make for compelling reading… n E v E R T H E L E S S, It’s this assuredness — not to mention his innate understanding of the mechanics of the markets — which has helped Schwager to get unfettered access to the habits and customs of renowned investors such as Ray Dalio, Stanley Druckenmiller and Monroe Trout. In his best-selling book series, Market Wizards, Schwager talks to some of the world’s best traders and distils their secrets to success. Interviewees are chosen for their extraordinary outperformance and exceptional trading skill. But the appeal really lies in how Schwager tells their stories. He has a way of humanising them that makes you feel as if you’re the one asking Jamie Mai, the co-founder of Cornwall Capital — featured in Michael Lewis’ The Big Short — how he discovered the subprime mortgage scandal that led to the 2008 financial crisis. Throughout his books, Schwager captures not only the essence of each trader’s investment style and market focus, but also their backgrounds and initial attraction to the financial markets. While the conversations with hedge fund billionaires Dalio and Cohen are of course another major draw, it’s Schwager’s enthralling style that keeps you hooked. Without him, the stories behind some of the most epic trades — and not just the bets that paid off — wouldn’t have been exposed. the world of trading and investing, to those on the outside, can often seem hugely secretive. There is one person who has been able to penetrate this world and gain the trust of these enigmatic individuals — Jack Schwager. The biggest names in the business have fallen under his spell and — after a thoroughly engaging interview — it’s easy to understand why. Who is the man that the world’s most influential investors consider their confidant? The trader’s hall of fame There’s a tranquility to Schwager that instils calmness. Like the majestic mountains that frame his home in Winter Park, Colorado, his warm, considered tone creates an open space for sharing ideas and opinions. BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 43 43 42

Profile: Jack Schwager “ MY ECOnOMiCS EDUCaTiOn inCLUDED VErY LiTTLE OF anYTHinG On MarKETS… Fortunately, Schwager personally knew some phenomenal traders. He recruited Michael Marcus — who he met while interviewing to fill the research position Marcus was vacating. Through Marcus, he met Bruce Kovner, the founder of Caxton Associates, and also Ed Seykota, who had developed one of the first computer programs for testing and trading systems. Schwager’s circle continued to grow till he had 17 interviewees. Some of the biggest names in the business were in the book, including Kovner, Jim Rogers, co-founder of the Quantum Fund, Paul Tudor Jones, chief investment officer at Tudor Group, Michael Steinhardt, the founder of Steinhardt Partners, and Richard Dennis, a celebrated commodities trader who famously believed that successful trading could be taught and so recruited 23 novice traders, who became millionaires, to prove his point. The philosophy of a trading savant When Schwager was just stepping onto the career ladder in 1971, he had no interest in the markets. He was more curious about understanding how the global economy behaved. Born in Belgium and raised in Brooklyn, he had just graduated from Brown University with a Masters in economics, and by chance landed an interview for the role of commodity research analyst in New York. “I actually knew nothing about futures at the time,” he says. “My economics education included very little of anything on markets and certainly nothing on anything like futures,” Schwager tells Brainy Bull. It was around this time that Schwager began writing for Futures — then called Commodities Magazine. His articles gained him some recognition in the industry and, in two short years, he went from being an analyst to a research director — a role he held at a number of firms for the next 20 years. Among the more recognisable were Smith Barney (now co-owned by Citigroup and Morgan Stanley), Paine Webber (now UBS) and Prudential Securities (now Prudential Financial), Schwager notes. Schwager was strictly a fundamentalist until he met Steve Chronowitz — who, at the time, was the technical analyst who worked for him at Loeb Rhoades Hornblower. Schwager noticed that out of all his analysts, Chronowitz was the only one who was significantly “more right than wrong”. “I got to understand [from Chronowitz] that there was a good rationale for why technical analysis worked and that’s simply because the market price reflects all the other information in the market. It’s not like you’re ignoring fundamentals, you’re basically seeing the impact of fundamentals and psychology in the price.” Ever since, he’s been a firm believer in the value of charts and technical analysis. He also appreciated that technical analysis was far more compatible with risk management than fundamental analysis. Once he switched from trading based on fundamental analysis to using technical analysis instead, Schwager said he went from consistently losing to becoming net profitable. Building a bespoke strategy “The personalities of the traders I interviewed are as diverse as any random group of people you want to pick,” Schwager says. However, there are commonalities. Each of them tend to have a very clear trading method that matches their personality. Randy McKay — a veteran trader who turned $10,000 into over $10m over 20 years — noted in his Market Wizards interview that this was common among virtually every successful trader he knew. From his time spent with these investing icons, Schwager was also able to determine that they were all “very, very disciplined people”, who were hard workers but had tremendously different trading methodologies. Schwager explains that each individual hones in on a unique factor that they believe is critical, and that works for them. “So by definition that’s always going to be something different,” he says. Their approaches can range from purely fundamental to purely technical, from short-term to long-term, and from the intuitive trading style that made Tudor Jones so attuned to the markets to the smart asymmetric bets that epitomise Mai’s approach. Even individual traders may significantly change their methodologies over time. As Colm O’Shea of COMAC Capital explained to Schwager: “Traders who are successful over the long run adapt. If they do use rules, and you meet them 10 years later, they will have broken those rules. Why? Because the world changed”. “The closest thing to a single common denominator — but even that has its rare years later, another publisher invited Schwager to lunch to pitch him on the idea of doing a series of analytical books. Schwager told him that he had no interest in doing another analytical book and that, if he were to write another book, he wanted it to be for a larger audience. He went on to tell the publisher about his concept for the book that was to become Market Wizards. “I had thought that a book of interviewing these great traders was a good idea. I also thought it would be a good excuse to meet these people and pick their brains,” he explains. “It gave me an excuse to delve into what they were doing and learn.” ... anD CErTainLY nOTHinG On anYTHinG LiKE FUTUrES” The first market wizards The publication of A Complete Guide To The Futures Markets — a compact 800-page analytical guide to the futures markets — in 1984 (a revised version was published in 2017) acted as a catalyst for the first of the Market Wizards books. Several BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 45 44

Profile: Jack Schwager “ THE CLOSEST THinG TO a SinGLE COMMOn DEnOMinaTOr... exception — is that almost all of them are pretty rigorous about risk management,” Schwager says. Often, their strict adherence to risk management has its roots in a painful experience. For example, Paul Tudor Jones’s most memorable and influential market experience was a cotton trade in 1979 that saw his accounts lose 60% to 70%. Ever since, risk control has become the essence of his trading style. In Jones’ own words: “I have a very short-term horizon to pain.” 13F filing still showed $138bn at the end of April, making it the world’s biggest hedge fund. For Schwager, Dalio is “a student of history”. The superiority of his hedge fund is its fundamentally based computer model that incorporates historical analysis going back hundreds of years. “Having that perspective of how markets work in all different types of situations, over broad periods of history, I think is where the edge of his whole overall approach is. Dalio also places a very strong emphasis on learning from mistakes.” Hedge Fund Legends Given Schwager’s expertise in the futures market, his transition to the hedge fund industry was a natural fit. At the turn of the millennium, he landed a job as a partner at Fortune Group, a London-based hedge fund advisory firm that was later acquired by Close Brothers Group. After leaving Fortune, Schwager wrote Hedge Fund Market Wizards, in which he explored each manager’s edge — something that is critical to anyone who is trying to identify which trades to focus on. The book profiled legends such as Ray Dalio of Bridgewater Associates and Edward Thorp of Princeton-Newport Partners. Perhaps no hedge fund manager has been more innovative than Thorp. Among his accolades are the first successful quant fund, the first market neutral fund, the first implementation of statistical arbitrage, the first implementation of convertible arbitrage, and the first formulation of an option-pricing model that was equivalent to — and preceded — the famous Black-Scholes model. Thorp’s performance flies in the face of the theory that it is impossible to consistently win in the markets. Between 1969 and 1988, his first hedge fund had a track record of 227 winning months and only three losing months, a 98.7% winning percentage. Dalio’s remarkable achievement has been his ability to generate attractive returns on enormous assets. Even taking into account the 15% drop in assets under management during March and April, Bridgewater Associates’ May Discovering Unknown Market Wizards Through his work at Fortune Group, Schwager met Emanuel Balarie, who engaged him as a consultant to construct a multimanager portfolio for ADM Capital. Balarie would later come to Schwager with an idea for a platform through which traders could link their personal trading accounts and be discovered by institutional money looking for fresh talent. Schwager was on board. With a long-term vision of disrupting Wall Street and democratising the capital allocation process, the pair founded FundSeeder in ... aLMOST aLL OF THEM arE PrETTY riGOrOUS aBOUT riSK ManaGEMEnT” BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 47 47 46

Profile: Jack Schwager Every recognition is a testimony of our compelling desire for excellence our compelling desire for excellence Every recognition is a testimony of “ iF YOU’rE On THE riGHT SiDE OF EUPHOria Or PaniC, LiQUiDaTE Or LiGHTEn UP... 2014. In the ensuing years, they launched FundSeeder.com, which provided traders with performance metrics and analytics. It also allowed traders to create “verified” track records by linking their account. In his upcoming book, Unknown Market Wizards: The Best Traders You’ve Never Heard Of, published by Harriman House in November, Schwager focuses on solo traders that were not only operating in complete obscurity but, amazingly, had some of the “best performance records I have ever encountered”. Several of these traders were discovered via FundSeeder.com. One of the traders profiled, Amrit Sall, a futures trader, has averaged annual returns of 337% over 13 years, using a strategy that Schwager had never seen before. On a basic level, Sall traded market-moving events. “Essentially, what he was doing was using the influx of new information and being very, very prepared on how the market should react to that information. He had a precise game plan,” Schwager recalls. Daljit Dhaliwal, another trader in the book, also used a “macro, event-driven” trading approach. Dhaliwal averaged annual gains of 298% over a nine-year period, and while he has an average annualised volatility of an extremely high 84%, his maximum drawdown is under 20%. Global Banking & Finance Review Finance Review International Finance Finance Global Banking & International The secrets to successful trading To conclude each book, Schwager compiles the wisdom he has learnt from each trader into epigrams. Some memorable examples of these include the advice to “guard against impulsive trades” or to “choose meaningful stop points”. Perhaps the most expressive, however, is “if you’re on the right side of euphoria or panic, liquidate or lighten up”. As each individual is unique, the lessons can always be adapted in a distinctive way, making Schwager’s tomes timeless resources. It is these lessons that also inform his personal trading. “I have a rule, whenever I start trading I always risk a small amount and if I happen to lose that small amount then I’ll stop, and I’ll come back at a later time,” he says. Like the mountains that surround Schwager, the grandeur of the Market Wizards series and the lessons he imparts about how investing giants reached their peaks will stand the test of time. b We are delighted to be recognized with two prestigious awards this year. These accolades are a tribute to our customers, whose trust and confidence is our core objective and it further motivates us to serve them better. +971 4 3562800 | info@century.ae | www.century.ae Regulated by SCA Disclaimer: Century Financial Consultancy LLC (CFC) is Limited Liability Company incorporated under the Laws of UAE and is duly licensed and regulated by the Emirates Securities and Commodities Authority of UAE (SCA). Services ofered by CFC include financial market products that are traded on margin and can result in losses that exceed deposits. Transactions or trades in the financial markets are very risky, and you should trade only with the capital you can aford to risk or lose. Before deciding to trade on leveraged products, you should consider your investment objectives, risk tolerance and your level of experience with these products. Trading with leverage carries significant risk of losses and as such margin products are not suitable for every investor, and you should ensure that you understand the risks involved and seek independent advice from professionals and experts if necessary. CFC is not responsible or liable for any result, gain or loss, based on this information, in whole or in part. Refer to risk disclosure on our website. BRAINY BULL—Issue 03 48

Perspectives: “ESG is probably the single most important change to asset management” Heidi Khashabi Ridley has for a long time championed the importance of ESG principles in investing. Having recently established her own firm, Radiant ESG, she tells Brainy Bull why considering strong ESG principles is crucial to any investment decision DESPITE BEING JUST 08:00, it had already been an action-packed morning for Heidi Khashabi Ridley on the day she picked up the phone to Brainy Bull in early August. That morning, Ridley had spent hours speaking to those involved in a panel about gender pay disparity that she was to moderate. It’s a subject that — as you might expect from the co-founder of an ESG-focused firm — is close to Ridley’s heart. She has spent much of her career advocating for diversity and inclusion alongside broader ESG issues. “We're now in a world where we're making a very strong economic argument [when it comes to diversity and inclusion], and one might wonder why we need to work so hard to defend [it],” she says, reflecting on the morning's discussion. "I find that perplexing, but at the same time, I'm not sure there are many excuses left.” When considering the topic of diversity and inclusion, Ridley says that a shift in focus started to take place in the past two years, as business leaders began to realise the positive benefits that investing along these themes can bring. “People were coming at it more from an equity, an equality [and] a fairness angle — you're giving people equal opportunity,” Ridley explains. “More recently, you've seen it starting to dovetail with ESG,” she continues, saying that the discussion has now shifted to one about “good governance and good business practice and that it’s just the right way to run a business”. However, Ridley says there is still a common fallacy at the heart of investing — despite more and more studies debunking such notions — that returns need to be sacrificed in order to advance social and environmental agendas. In starting Radiant ESG, Ridley is challenging this train of thought. “If we can [get good returns] with a diverse and minority-led firm, because we think we can actually make better decisions that better reflect our client base, then why wouldn’t we do that? Why is there push back there?” Having spent three years as global CEO of Rosenberg Equities — the famed quant arm of AXA Investment Managers — Ridley decided to go her own way and with fellow Rosenberg Equities alumni Kathryn McDonald, formerly head of sustainable investing at the firm, founded Radiant ESG in June 2020. The company, which at the time of writing is in the process of finding a partner to launch its asset management business, runs ESG and impact consulting for institutional clients. Ridley says the co-founders see both asset management and consulting as important ways to continue to push the dialogue on ESG. Information leading insights Ridley says that she learnt some important lessons about company culture during her time leading Rosenberg Equities that she wants to instil at Radiant ESG. Chief among these concepts was that of remaining Words: Danny McCance Photography: Carlos Chavvaria BRAINY BULL—Issue 03 BRAINY BULL — Issue 03 BRAINY BULL—Issue 03 51 50

Perspectives Perspectives authentic. “I want us to walk the talk just like we did at Rosenberg Equities,” Ridley says. “There's still too many efforts to mould yourself into what you think the client wants or where the flows will go in a way that I think starts to get people into trouble.” She says that when speaking to clients it is important to talk about what you believe in and ideas that you practice. Furthermore, at Radiant ESG she wants to augment what the firm is doing from an investment perspective — as investments results have to be the “guiding compass” — with a culture and community that is doing all it can be doing to progress ESG issues. that certain company features have proven to deliver better risk-adjusted returns than a market cap index, so Radiant ESG’s flagship will look to extract the strong characteristics of these companies. Named Sustainable Future — the first of two key strategies Radiant ESG will launch with — this flagship is what Ridley describes as a combined integrated, adaptive, quality ESG strategy. This will focus on identifying companies that will create and sustain value over a long horizon. The strategy, Ridley says, is inherently high capacity, which will make it an attractive proposition for large institutional investors and sub-advisory and wealth management platforms. This, she thinks, will help drive scalable growth. The second key strategy, named Sustainable World, is more targeted and thematic. It focuses on companies with exceptional green credentials and that align with the UN Sustainable Development Goals. Specifically, Radiant ESG is looking for companies that are prioritising Goals 7 — ensuring access to affordable, reliable, sustainable and modern energy for all — and 13 — the need to take action to combat climate change and its impacts. One such example is Vestas Wind Systems [VWS]. The company has favourable ESG ratings that include good gender representation in leadership roles. It is attractive to Radiant ESG because it has done well in capturing market share while maintaining margins, even as competition adds pressure. “There’s certainly a fair share of greenwashing. Let’s just call it out” retain workers and their resilience in the face of competitive forces,” Heidi Khashabi Ridley, co-founder of Radiant ESG, says. “With the emergence of social media and the immediate access to information, you’ve started to see very quickly the impact on companies' stock prices for those running afoul of ESG- related issues.” She points to issues such as labour practices, which through social media “get spread like wildfire”. The situation with Facebook in June exemplifies this market dynamic. The company’s share price slumped after a number of big-name brands, including Coca-Cola [KO], Levi Strauss [LEVI] and Unilever [UL] boycotted the company in solidarity with Black Lives Matter. This was illustrative of what running afoul of what Radiant ESG refers to as a “social licence to operate” can do to share price. In the Facebook case, investors could "draw a those of its competitor, now the import is of a company “in relation to other companies, to society, to its natural and social resources” — what Ridley calls “philosophical orientation”. Understanding and analysing these “short-horizon insights” is useful as investors can “increasingly see the influence of shareholders and other constituents through social media”. straight-line relationship between the boycott and earnings”, but it also showed “a new sensitivity on the part of consumers to the role of the corporation in society”. The social media information landscape is crucial, Ridley says, because companies “do not operate in a vacuum, but rather in an ecosystem”. Whereas the process in the past was to focus on a company’s financials in comparison to Seeing the wood and the trees SOCIAL MEDIA’S IMPACT ON INVESTING Fundamental to both approaches is how Radiant ESG assesses the impact of ESG issues on investing. “We think that companies face threats and opportunities related to ESG and that needs to be a core part of a sound investment decision and investment practice,” Ridley says. There is a lurking hazard at the heart of ESG integrated strategies, however. “There’s certainly a fair Another crucial factor to Ridley’s ethos that she has brought to Radiant ESG is the understanding that having data is not the same as having information. “Anyone can have data,” she says. “But interpreting it and extracting actionable insights is where we believe we have the advantage.” This has helped inform Radiant ESG’s strategic focus. Ridley says that by virtue of the fact she believes Social media is a critical development in the investing landscape — particularly when it comes to ESG. “It's patently clear that environmental, social and governance criteria affect company brands, their ability to BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 53 52

Perspectives The COLUMNISTS best to capture the opportunities that are inherent in ESG ideas, and direct investments toward companies that are using their resources wisely and demonstrating a commitment to change,” Ridley explains. Brainy Bull’s expert columnists from the world of trading The fate of ESG A lack of uniformity across the industry when it comes to assessing a company's ESG credentials makes for a complex picture. Some companies that may be rated highly in one aspect of E, S or G may fail miserably in another. The multitudinous issues to address when it comes to the environment, society and governance make for a long list. Crucial to Radiant ESG’s approach is the mechanisms it has in place to ensure firstly that it does not fall foul to greenwashing, but also that it does not miss the mark on assessing those companies that are on the right path to incorporating worthwhile ESG principles. “You absolutely have to get into the nitty gritty, granular level of detail and dig into the facts, and not just rely on published scores by third-party providers,” Ridley explains. There is no cookie-cutter approach and the simplest notion, she says, is that the individual must understand the details as they relate to their investment strategy. This also puts the onus on asset owners, Ridley states, who should understand who they’re investing with and how they incorporate ESG principles. But this doesn't mean Ridley is against a common convention. “We have to advocate for required timely standardised information from companies. Just like there are financial accounting standards, there needs to be sustainability standards.” After all, this information is important to investors. In turn it is these investors that can ultimately decide the direction of the companies in which they’re investing. “People wonder how you really can engage and influence companies. You can, through voting with the capital that is in your hands,” Ridley says. b MICHELE SCHNEIDER On the direction of the US market FOLLOW @marketminute RUSS MOULD A focus on cyclical growth FOLLOW @russmould1 Shifting US election odds Global financial markets are beginning to price in November’s US presidential election, but uncertainty remains over what a Democratic or Republican White House will mean for investors T presidential election. At the time of writing, Joe Biden, the Democratic presidential candidate, has a lead in the polls, but the race could tighten as we near the finishing line. One reason Biden has polled better than president Donald Trump is because of COVID-19 and the surge in cases that the US has experienced. Ultimately though, that will not be a factor for the presidential election, as the market will assume the worst is behind us. Traditional wisdom is that a Biden victory will be bad for the market. In ANEET CHACHRA & STEVE CAIN Risk mitigation and bonds @JHIAdvisorsUS away from tobacco products. The company sees Altria as representing undercompensated risks and that it has baggage that other more attractive defensive stocks do not. Attention, Ridley says, should be paid to companies making a genuine commitment to progress. These companies need support to encourage the transition to better practices. She points to some big utility companies that, despite still being net users of fossil fuels, are making positive moves towards alternative energies. To exclude such companies to invest only in top-rated ESG names runs the risk of investment firms forsaking their chance to bring about the change they strive for — not to mention missing out on opportunities. “We want to take an evolutionary view because we want to position ourselves share of greenwashing. Let’s just call it out,” Ridley acknowledges. Although there may be a “heavy temptation on the part of fund providers to do a little window dressing”, Ridley says funds that do this aren't really “considering ESG through a true investment lens”. Furthermore, heavy-handed, exclusion-based standards also need to be avoided. Such approaches can have “binary outcomes” that can often fail to recognise the potential of some companies. “You could penalise them today for what they’re doing, or you could look at ESG momentum — how we expect them to evolve and how quickly.” Ridley wants to avoid the “dyed-in-the-wool” types that won’t change. One such example given is Altria [MO], which Radiant ESG thinks has shown an inability or unwillingness to diversify MICHELE SCHNEIDER here’s no doubt that the next big test for the stock market is the upcoming US Michele ‘Mish’ Schneider is director of trading education at MarketGauge. com. She is an expert on swing trading, making returns of up to 50% per year. Her book, Plant Your Money Tree: A Guide to Growing Your Wealth, was published in 2019. PERTH TOLLE Emerging market ETFs FOLLOW @Perth_Tolle DAVID STORM Why now might be the time for ESG Portraits: Eoin Coveney, Getty images Portraits: Eoin Coveney, Getty images BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 55 55 54

The COLUMNISTS The COLUMNISTS 0.80 Are we in a new market cycle? S&P 500/10-Year Treasury Correlation general, Biden’s likely actions and policies will be less favourable to the broader market (though there will inevitably be winners and losers). The market will anticipate higher overall taxes — as there’s potential for the Tax Cuts and Jobs Act of 2017 to be rolled back — plus, an increase in environmental regulation. Furthermore, the market will price in a potential for greater government involvement in healthcare, while tensions with China under a Biden administration should ease. Sectors that could prosper are clean energy, healthcare, utilities, and cannabis. Those that may not do as well are oil and gas, banks and possibly pockets of technology with the advent of more regulations. Should Trump win, oil and gas, manufacturing, mining, and gun stocks will prosper. Chinese stocks, cannabis, and pockets of biotechnology could suffer setbacks. A Trump win might not concern the markets regarding the same economic issues as under a Biden presidency, but there are other societal factors that Wall Street could consider a risk. The biggest concern is a continuation of protests and social uprising. With growing income and wealth inequality, can a rally in the Dow Jones index appease those who have lost their jobs and businesses in the wake of COVID-19? Additionally, Trump has readily employed the National Guard and other law enforcement agencies to quell protests. This in turn could give rise to even more protests, just like it did between the late 1960s and mid 1970s. In terms of what impact this will have on the markets, it’s not about who wins the presidency, but whether the government is divided or not. If an opposite party holds Congress, it will greatly hamper any aggressive agenda or legislative efforts from either president. b ingly negative over the last 25 years. This offsetting relationship is valuable. In practice, a bond buyer receives an equity put option in addition to interest payments. When stocks have fallen sharply, bonds have risen. We estimated the value of this embedded option using observed bond moves during stock market sell-offs. As a result, we estimate that replicating the implicit hedge provided by Treasuries held in a 50% stock and 50% bond portfolio through S&P 500 put options would have otherwise cost around 2.5% per year. Bondholders not only received a decent coupon — the 10-year yield has averaged 3.75% since 1995 — but also got “free” protection against stock market drops. Historically, during corrections, bond gains offset approximately 40% of con- current equity losses. 0.60 US Stock/Bond daily correlation (trailing 1-year) Trend 0.40 0.20 If history is anything to go by, the next cycle of the market could be characterised by intensifying inflation 0.00 RUSS MOULD -0.20 -0.40 Russ Mould has been the investment director at AJ Bell since 2014. Prior to that, he was a fund manager at Scottish Equitable and an equity analyst at UBS Investment Bank. -0.60 -0.80 The burden of bonds The risk mitigation benefits of buying bonds are fading away, but why? E occur at bad times, affecting careers, house prices and even relationships. We can’t easily diversify our jobs or homes, making it even more important to diversify our investment portfolio. Bonds have been the natural choice, given they provide income and diversification. Indeed, the adverse effect of lower interest rates was made up by the growing hedging benefits of bonds. Notably, the correlation between stock and bond price moves has turned increas- ANEET CHACHRA Why diversify equities? However, during the drawdown earlier this year, between 19 February and 23 March, 10-year Treasuries returned 7%, while the S&P 500 dropped 34%. Treasuries hedged only about 20% of the equity drop, as low starting yields in February reduced the upside from the bond rally. Bonds are mathematically much less attractive now with the 10-year yield at 0.55%, reducing both income and upside. Barring negative rates, we estimate that the embedded put option is only worth about 1% per year, even if the stock and bond correlation stays quite negative. The yield and diversification benefits of bonds have shrunk, while the risks of higher rates or correlations have risen. Instead of relying primarily on bonds, investors could add absolute return strategies or other investments that are uncorrelated to stocks, both in theory and in practice. Diversifying with equities can reduce portfolio risk, as well as helping against other risks that investors may face. b A performance charts. However, history suggests that it is rarely wise to expect the winners from one decade to provide the best returns in the next. For instance, Japanese stocks were all the rage at the end of the 1980s, but then fell from grace as the economy stagnated at the turn of the decade. We saw it again when tech stocks bossed the 1990s, only to immediately run into a major bear market that took over a decade to shake off. The early 2000s saw investors favour commodity stocks and ways to play the Chinese economy — themes that did badly in the 2010s when tech ruled the roost once more. At the time, investors looked for secular growth stories almost regardless of price, thanks to an extended period of low GDP growth, quities have historically outperformed over the long run. However, big losses often low inflation and low interest rates. Growth stock valuations are looking lofty once more, especially for tech stocks. But the question remains: what could persuade investors to shift from secular growth to cyclical value? Usually, share prices are upset by earnings disappointments that result from the arrival of a disruptive competitor or regulatory pressure. But this time around, the biggest challenge might come from a different source — inflation. Investors warm to growth stocks, and pay high multiples for them, because there is little reliable growth around. If government and central bank stimulus programmes designed to fight the virus do lead to an unexpected bout of inflation, cyclical growth will be just as easy to find as secular growth, if not easier. In addition, it will come at a fraction of the price. b t the time of writing, growth and momentum plays dominate the stock STEVE CAIN Aneet Chachra and Steve Cain are both portfolio managers at Janus Henderson Investors. Before Chachra joined the firm in 2012, he was an equity analyst at Citigroup and a strategist at Outpost Investment Group. Cain has been at the firm since 2010 and previously founded Kurtosis Capital Partners and Nylon Capital. “The yield and diversification benefits of bonds have shrunk, while the risks of higher rates or correlations have risen” BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 BRAINY BULL — Issue 03 BRAINY BULL—Issue 03 57 57 56 56

The COLUMNISTS The COLUMNISTS Why 2020 is a seminal moment for ESG ESG funds are no different. Both the iShares ESG MSCI EM ETF [ESGE] and Nuveen ESG EM Equity ETF [NUEM] — two of the world’s largest EM ESG ETFs — have 37% and 40%, respectively, allocated to China. ESG is an empty notion if we only exclude companies involved in unsustainable practises, but have a 40% exposure to a country that has detained between one and three million people in modern day concentration camps. As China’s human rights practices become more widely known, investors can no longer ignore the elephant in the room. By using a freedom-aligned strategy, there is a way for investors who believe in the long-term benefits of freedom to express those preferences, while having more consideration about their emerging markets allocations. In the Freedom 100 Emerging Markets ETF [FRDM], country selection and weights are based on quantitative third-party personal and economic freedom metrics. Top holdings include Taiwan Semiconductor [TSM] — in July the company helped the TAIEX rally to an all-time high — and Samsung Electronics [005930.KS], which has ended manufacturing in mainland China. Other main holdings include Polish video game developer CD Projekt [OTGLY] and Taiwanese chipmaker MediaTek [2454.TW] — which is set to benefit from US-China tensions as a key technology provider. As a result of freedom-weight- ing, there is currently no allocation to China, Russia, or Saudi Arabia. Securities are chosen based on size and liquidity, and state-owned enterprises are excluded. It’s our way of providing an alternative for investors who want to invest in emerging markets without directing capital to the world’s most autocratic regimes. b characteristics are more resilient during bear markets. Most outperformed the market in February and March, Morningstar analysis shows. Between mid-February and mid-March, 66% of ESG funds ranked in the top half of their categories. DAVID STORM The influential younger generation The younger generation’s focus on sustainability is becoming an increasingly common topic in client conversations. One client, for instance, told us they were interested in ensuring their entire portfolio had an ESG stance at the insistence of their younger daughter. According to research from The Economist Intelligence Unit, commissioned by RBC, 76% of the UK’s younger demographics say it’s increasingly important to consider ESG factors when investing, compared to 37% of older generations. The elephant in the room The coronavirus pandemic is undoubtedly a tragedy of epic proportions, but it has also highlighted the importance of maintaining investment exposure to companies that pursue sustainable goals W downturn, environmental, social and governance (ESG) investments did better than most. The ESG investment theme isn’t new. Even before the virus crisis hit, sustainable investing was becoming a hot topic among investors. It is something that’s been in the RBC ethos for a long time. But recent experience shows that ESG stocks with stronger ESG David Storm is the head of multi-asset portfolio strategy at RBC Wealth Management. Based in London, he joined the firm in 2008 and has held positions as director of investment solutions and head of portfolio consulting. What problems does China’s record on human rights pose for emerging markets funds? U industry complicit in Uighur labour, say rights groups, my first thought was: “wait until you see the fund industry”. You may spend $40 on a t-shirt or $400 on a pair of shoes, but what about the $40,000 that’s allocated to Chinese companies in your broad emerging markets ETF? Three of the biggest emerging markets ETFs — Vanguard Emerging Markets Stock Index [VWO], iShares Core MSCI Emerging Markets [IEMG] and iShares MSCI Emerging Markets Index [EEM] — have between 37% and 42% direct exposure to China with $140bn in combined assets under management. On the day Luckin Coffee’s fraud became public and the stock crashed, it wasn’t Chinese funds that were most exposed, but the emerging markets funds that had high allocations to the region. China’s economic heft seemingly gives it impunity to commit human rights atrocities. We are unintentionally funding that every time we invest in a broad emerging markets fund with 40% exposure to the region. pon reading an article in The Guardian titled “Virtually entire” fashion hile most assets took a beating during the initial COVID-19 market Sustainability is cheaper for long-term investing goals Until the pandemic hit, stocks with good ESG credentials were considered expensive. However, the recent market pullback has left these stocks at a much better price for long-term investors, such as those around health, clean energy, water, waste and food. Indeed, across the ten-year investment horizon, these stocks are now relatively cheap, so this could be a perfect moment to add some quality ESG companies to a portfolio. Embracing investments in these forthcoming trends is a way of readying a portfolio for the coming changes in the global economy. Obvious long- term themes include the move away from fossil fuels to renewable energy, but there’s also the increased use of artificial intelligence and new technology to help care for both an ageing population and the environment. Investors can benefit from these trends, and use them to future-proof their portfolios. b PERTH TOLLE Perth Tolle is the founder of Life + Liberty Indexes, which specialises in freedom-weighted equity index strategies based on human rights and economic freedom. Her company launched the world’s first freedom-weighted emerging markets ETF in partnership with Alpha Architect in 2019. Images: Getty Images *Leveraged ETFs are complex financial instruments that carry significant risks. Certain leveraged ETFs are only consid- BRAINY BULL—Issue 03 BRAINY BULL —Issue 03 BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 59 59 58 58

Mindset: “ Operating with a long-term philosophy is necessary for sustained growth and success” While writing his New York Times bestseller The Lean Startup, entrepreneur and author Eric Ries formulated the concept for a stock exchange that nurtures companies for the long term. He talks mindset with Brainy Bull shortly made it onto the New York Times bestseller list. In the aftermath of the global financial crisis, the concept of a lean business was clearly appealing. However, when Ries started discussing the theories that formed the basis of his book, the response was extreme. “Some companies practically threw me out of their conference rooms because here was some kid challenging the way technology companies had operated. “It took some time to figure out how to talk about my theories, but the book has since become something of a baseline for how to build products and companies.” This planted the seed for something that was much more all-encompassing. In the almost- decade since The Lean Startup was published, Ries has been focusing on developing a new national securities exchange, the Long-Term Stock Exchange (LTSE). Ries explains to Brainy Bull how he came up with the idea. ERIC RIES IS something of a cultivator in technology circles. During his early days as a software engineer in Silicon Valley, he co-founded social network IMVU and then spent some time at venture capital firm Kleiner Perkins, before striking out on his own as a startup advisor. “I had been programming since I was a kid, but when I became an entrepreneur I was finding over and over again that the conventional approach to building products and companies simply didn’t work,” Ries explains. “I spent a lot of time in the wilderness trying to find solutions to this problem, reading voraciously and talking to people in business.” The lessons learned from these experiences — combined with an appreciation of how shorter development cycles could be applied to companies in the seed funding stages — coalesced in his book, The Lean Startup. Published in 2011, it Words: Paul Golden Illustration: Ryan Inzana "The idea for the LTSE came from the questions I was asking while trying to help venture-backed startups build long-term profitable public companies. I didn’t appreciate just how polarising the concept of a long-term stock exchange would prove to be. But the great thing about BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 61 60

Mindset Mindset The LTSE’s five core listing principles listing standards, the LTSE offers companies in every industry a public market option designed to shift the narrative and metrics of success from a quarterly drumbeat to a long-term perspective, while still providing flexibility and full liquidity. Based on the LTSE’s listing standards, a company needs to develop and publish a policy that meets certain specified parameters, while also being in line with the listing principles (see How does the LTSE make money?, below). The exchange then verifies that each policy is consistent with the underlying principle. These standards also allow investors to know which companies are making binding commitments for the long term. “The LTSE offers companies a public market option designed to shift the narrative from a quarterly drumbeat to a long-term perspective” bLong-term focused companies should consider a broader group of stakeholders and the critical role they play in one another’s success. changes to the business model to ensure compliance with securities laws. It took about five years just to figure out how it could be built. We canvassed views from both established companies and startups. The people who are building businesses know me from The Lean Startup, and some of these companies are now listed. I also do some consultancy work with public companies so I was a known quantity. However, the desire for a new capital market option has been stronger among private companies, because they have to go public eventually, and therefore have the greatest need for change. The concept of a long-term stock exchange has run into opposition. For example, in a letter to the US Securities and Exchange Commission (SEC) in January 2019, the Council of Institutional Investors (CII) expressed concern about the LTSE’s proposed corporate governance requirements permitting newly public companies to have multi-class share structures with unequal voting rights. One of the most seismic events in the LTSE’s development, and one that has been largely unremarked upon, is that when we submit rule fillings with the SEC, there is a public comment period and a range of institutions have commented favourably. In the filling we submitted last year in relation to our listing standards, for example, we received a favourable letter from the CII. That was the culmination of years spent working with the association to find common ground. We don’t have a strong opinion about how companies go public. We have worked with companies that have done very traditional IPOs, and others that have adopted much more unconventional strategies. We only care what the company’s experience will be after it goes public. Our focus is on the corporate governance reality of their partnership with the capital markets. If the structural details are not right, it doesn’t matter how much money they save on the first day of trading. LTSE protects the mission and long-term mindset that all early stage company builders have. For those companies not yet ready to go public, we built a software suite, LTSE Bridge, to help formalise those governance protections early on. Bridge is a suite of free software tools that help founders manage their capitalisation table, hire without bias, plan their runway and take all the small governance actions that, when conducted together, can help set up a company for long-term success. bLong-term focused companies should measure success in years and decades, and prioritise long- term decision making. bLong-term focused companies should align executive compensation and board compensation with long-term performance. Truly great and transformative companies are already run with a long-term time horizon — just think of Amazon in 1997. All company builders understand that operating with a long-term philosophy is necessary for sustained growth and success. However, the current landscape of public capital markets doesn’t reward this type of thinking. We designed the LTSE to allow company builders to take their businesses public, reward their stakeholders and collect new capital without having to give up their identity or mission. A public market focused on long-term value creation is attractive to both companies that are currently private and those that are already public. Companies can undertake a dual listing on the LTSE and an existing exchange, but when they list on the LTSE they get the long-term focus that our market offers. The LTSE has the same financial requirements for listing as the incumbent exchanges. But we still believe every company can be long-term focused from its very earliest days, and we are here to help. The LTSE family of companies includes not only the exchange, but also our software business, which helps companies operate for the long term from the time they launch. The a polarising idea, as opposed to one that is simply ignored, is that some of the people I spoke to thought that it was amazing. The first Lean Startup Conference was almost like a TED revival meeting — there were only about 300 people in attendance, but the energy in the room was electric. In the period immediately after 2008, old models were being discredited and people were looking for something new. I knew nothing about stock exchanges or capital markets at the time, I was just thinking about how to make companies more effective and profitable. It made no sense to me that companies were run on a quarter-to- quarter basis, since companies that are distracted from their mission are worthless and no investor wants to lose money. I saw it as a coordination issue. We needed a social contract between long-term investors and good companies, whereby everyone would change their behaviour to make more money together. It then occurred to me that the mechanism for regulating the behaviour of managers and investors was a stock exchange — so why not a long-term stock exchange? Obviously, the coronavirus pandemic has impacted our launch date. However, we are confident in the technology and have sell-side members signed up. We delayed our debut at the request of a number of member firms and regulators who felt that the market volatility would be challenging. The pandemic has been a negative development, but we were fortunate to have raised finance last year, especially considering that fundraising in the current environment would clearly be challenging." b There is certainly a place in the LTSE for special purpose acquisition companies. All of a sudden, this is the hottest trend in the capital markets universe. Direct listings were the flavour of the month last year — now special purpose acquisition companies (SPACs) are all the rage. SPACs have been around for a while, and it is hard to say why they are making a comeback now. For every method of going public, there are pros and cons, depending on the company and the circumstances. bBoards of directors of long-term focused companies should be engaged in and have explicit oversight of the long-term strategy. bLong-term focused companies should engage with their long-term shareholders. How does the LTSE make money? The charges imposed by bourses can include entry fees, costs for access to data and fees for trading transactions. The LTSE has decided to forgo those and will instead charge initial and annual listing fees that are based purely on market cap, as opposed to a tier of fees based on the number of outstanding shares. The exchange's primary revenue generator will be its software services — LTSE Horizon and Bridge. The former will enable public companies to manage partnerships with investors by helping to identify and rate a company’s investor base. The latter will give small businesses the resources and planning tools to go public. It is through these that the LTSE’s aims to further its mission to empower long- term value creation. Most major stock exchanges have become very wealthy institutions by setting listing requirements and charging various fees. The LTSE wants to break that pattern. The LTSE has a variety of mechanisms to insulate its listed companies from short-term stock market pressures, and an enforced commitment to long-term value creation. With our long-term focused We have had to make numerous BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 63 62

Tools of the Trade: GaUging FEAR “getting a clean bet on volatility, as opposed to S&P put options, which are really two bets”. Consequently, the VIX futures market took off among corporate investors. Because of the index’s reliance on puts for computation, the VIX acts as a sort of “bias predictor”, according to Whaley. It represents the expected future volatility over the next 30 days. He likes to think of it as an insurance contract. “When things broke loose was January 2009,” Whaley recalls, just after the financial crash. It was then that Barclays introduced the first VIX exchange-traded note, ultimately taking the index out of the derivatives market. Given that the CBOE had a monopoly on index option trading through its S&P products at the time, Whaley was able to take data on the entire history of trades and invert the option pricing formula to determine the projected short- term volatility. Institutional investors — those that the index is basing its expected volatility on in the futures market — use S&P 500 options (mainly puts) as a way to hedge risk. When an unexpected macro event like the coronavirus pandemic earlier this year occurs, they rush out to buy them. “As a result, since the VIX depends on those index puts and its computation, if the price of S&P 500 index puts goes up, the VIX goes up. That’s the reason it’s called the fear gauge,” Whaley tells Brainy Bull. The index has since grown to become one of the most watched on the markets, but it wasn’t long until speculative stock players started to utilise it to place bets on fear. A growing number of investors have been wagering billions of dollars on investor anxiety using the CBOE Volatility Index. Robert Whaley, the father of the fear gauge, explains to Brainy Bull how the metric might be misunderstood The unstoppable rise of volatility trading The transition from the futures market to the retail market was fast, especially given the latter’s size and how easy it is to open a trading account. “There are something like 100 times more security trading accounts than futures trading accounts,” Whaley notes. Jason Miller, an independent trader speaking to The Wall Street Journal, best summed up its growing popularity as a trading strategy when he stated that “one person’s fear is another person’s opportunity”. The fear of future market shocks spurred many independent investors to start including products like the VIX, that rise during a steep sell-off, in their portfolios There were teething issues, of course, and the VIX presented a bit of a riddle for those who didn’t properly understand it. Many outside the options industry projected meaning onto it that simply wasn’t there, such as the idea that trading on expected market moves can itself move markets. When Credit Suisse introduced its own VIX futures products — including the TVIX, which allowed investors to double their bets on VIX futures “It’s not as if you’re buying anything that is socially constructive in any way. In essence, you’re just reading from the person on the other side of the trade” — considerably more risky bets were being placed. The firm was forced to remove the product this year after it rose by 206% in H1. The closure raised concerns that the bank would not be able to adequately hedge its clients’ positions, the Financial Times noted. Despite that, and to this day, VIX products are among the 20 most actively-traded securities on the US stock exchange. That’s a worrying development, Whaley suggests, as all an investor is doing is taking a directional bet on an index. “It’s not as if you’re buying anything that is socially constructive in any way. In essence, you’re just reading from the person on the other side of the trade.” AS MARKETS PLUMMETED in March, the so-called fear gauge reached a record high. The index has in the past been described as a sort of misery barometer, but it is not entirely as it sounds. The Chicago Board Options Exchange (CBOE) first unveiled the Volatility Index [VIX] — also commonly referred to as the VIX — in January 1993. Its creation was to be used as a way to measure expected future volatility in the markets. It was also to be used as an index on which futures and options contracts on volatility could be written, as trading volatility had long been considered beneficial. Known as the father of the fear gauge, Robert Whaley, a professor of management and head of the Financial Markets Research Center at Vanderbilt University, was commissioned by the exchange in the fall of 1992 to develop a formula that could measure volatility based on option prices. From a simple tracker to a giant trading ecosystem When the VIX was first released, it was mainly used as a metric for driving buying and selling decisions. However, the CBOE had intended it to be used as an asset. “They wanted volatility in play,” Whaley recalls. It took the exchange’s product development committee 11 years to finally be able to launch the VIX on the futures market in 2004. Then in February 2006, VIX options were introduced. These securities were a more attractive proposition, as it allowed people to buy the VIX as another form of portfolio insurance. By buying put options, investors could hedge their portfolio against a sudden downturn. “[Investors sought] protection against black swan events, which are essentially like spikes upward in the level of VIX,” Whaley says. He explains that buying VIX options effectively meant investors were – Robert Whaley, Vanderbilt University about the pace of an economic recovery and how quickly a vaccine might be found, but the dispersion around these projected rates, which the VIX measures, is getting lower,” Whaley explains. While the VIX’s recovery has not been linear, market confidence has grown since March and the index will keep falling. But this isn’t a given. “The wild card for me is the US election. This is where the rationality argument loses its wheels, and why it will probably take until 2021 to get below the 20 level,” Whaley says. Trading complicated derivatives is not easy, but if volatility-related products are used as a mechanism for placing short-term directional bets, it can sometimes prove to be an effective hedging tool. b fresh interest in volatility bets. Around the same time that the S&P 500 was tumbling to $2,398 on 18 March, the VIX index was fresh off a record high of 82.69, achieved on 16 March. As a result, tail-risk volatility strategies outperformed the market. The CBOE Eurekahedge Long Volatility Hedge Fund Index and the CBOE Eurekahedge Tail Risk Hedge Fund Index returned 39.7% and 44.3%, respectively, in the first quarter of the year. Since its inception, the VIX index has averaged around the 18 mark, however, Whaley doesn’t expect it go back to that level until well into next year. In late August, the index was around 22.5. “There is ongoing uncertainty Volatility players pounce on a market tailspin The popularity of trading volatility was exacerbated earlier this year with the arrival of COVID-19 and the ensuing market panic. The sell- off in March — the most volatile month in the stock market’s history — ballooned uncertainty and attracted BRAINY BULL—Issue 03 BRAINY BULL—Issue 03 65 64

Take with: Gregory Zuckerman The Wall Street Journal writer and three-time winner of the Gerald Loeb Award for distinguished business journalism has broken some of the juiciest stories in the world of finance developing a different take than most. He’s not always right, but he’s an original thinker. GREGORY ZUCKERMAN HAS been writing about the markets for more than 25 years. During his time at The Wall Street Journal, he’s authored more than 260 articles. From the trader who cost JPMorgan $6bn to the 2014 clash between upper management at the world’s largest bond firm, Pimco, Zuckerman has been there to chronicle the standout moments in recent market history. He is the author of The New York Times bestseller The Greatest Trade Ever: the Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History. In his most recent book, The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution, Zuckerman explores the career of the enigmatic investor. 1: What’s your favourite bet that you’ve written about? The greatest trade ever! John Paulson’s bet against risky mortgage loans that made him $20bn in profits over two years. I first covered the story in a 2008 article titled Trader made billions on subprime. It even led to a book. I also enjoyed breaking news about the “London Whale”, the trader at JPMorgan who ended up costing the bank $6bn. Trades that don’t work out can be more fun to write about than those that do, as there is a lot of drama and lessons for readers (and writers). 3: What’s your favourite finance-related book? Indecent Exposure: A True Story of Hollywood and Wall Street by David McClintick. A brilliant, behind-the- scenes look at Hollywood, Wall Street and scandals of the 1980s. The outsized personalities on Hollywood’s business side, their strategising and backstabbing makes the book an overlooked classic. 4: If you weren’t a journalist, what do you think you’d be doing? I’m entrepreneurial and have a history of always coming up with business ideas. Some day I might even pursue one or two of them, if I get the time. O view Making a good investment call is your responsibility. Arming you with a 360 of the market is ours. Which is why, we guide you with in-depth market briefings, around-the-clock alerts and investment options. So you are confident of making the right call, time after time. 2: Who do you turn to for market insights? One thing I’ve learned is how super-smart, well-connected finance executives are just as clueless as the rest of us about predicting the future. However, David Tepper, the hedge fund investor and founder of Appaloosa Management, continually impresses me by You are Independent. But never alone. You are Independent. But never alone. 5: What’s your top tip for your younger self? Be less wary of new technologies. I was sceptical of Facebook and Amazon at first. b +971 4 3562800 | info@century.ae www.century.ae www.century.ae +971 4 3562800 | info@century.ae Disclaimer: Century Financial Consultancy LLC (CFC) is Limited Liability Company incorporated under the Laws of UAE and is duly licensed and regulated by the Emirates Securities and Commodities Authority of UAE (SCA). Services offered by CFC include financial market products that are traded on margin and can result in losses that exceed deposits. Transactions or trades in the financial markets are very risky, and you should trade only with the capital you can afford to risk or lose. Before deciding to trade on leveraged products, you should consider your investment objectives, risk tolerance and your level of experience with these products. Trading with leverage carries significant risk of losses and as such margin products are not suitable for every investor, and you should ensure that you understand the risks involved and seek independent advice from professionals and experts if necessary. CFC is not responsible or liable for any result, gain or loss, based on this information, in whole or in part. Refer to risk disclosure on our website. advice from professionals and experts if necessary. CFC is not responsible or liable for any result, gain or loss, based on this information, in whole or in part. Refer to risk disclosure on our website. Disclaimer: Century Financial Consultancy LLC (CFC) is Limited Liability Company incorporated under the Laws of UAE and is duly licensed and regulated by the Emirates Securities and Commodities Authority of UAE (SCA). Services offered by CFC include financial market products that are traded on margin and can result in losses that exceed deposits. Transactions or trades in the financial markets are very risky, and you should trade only with the capital you can afford to risk or lose. Before deciding to trade on leveraged products, you should consider your investment objectives, risk tolerance and your level of experience with these products. Trading with leverage carries significant risk of losses and as such margin products are not suitable for every investor, and you should ensure that you understand the risks involved and seek independent BRAINY BULL—Issue 03 66

Brainy Bull - Century Financial

Brainy Bull - Century Financial

Presentation Transcript

BULL EQUITY-LINKED INVESTMENT (“Bull ELI”)

Bull Sharks

Rob Bull bull@crxnet

Sitting Bull

Red Bull

Red Bull

Red Bull

RED BULL

Bull shark

Red Bull

Getting Brainy

Red Bull

BULL SHARKS

Bull race

Bull fighting

Bull shark

BRAINY HRMS

Sitting Bull

BRAINY LAB. PTE. LTD. SINGAPURA

Bull Fighting

Bull Run

JELS-Brainy Kids School