ISSUE 44 WINTER 2020
MARKET PULSE Themes for the year ahead
OPTIMUM BLEND Science vs. art in manager selection
ESG Theinvestment: way ahead: in store thewhat’s new normal for 2020?
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CONTENTS & WELCOME
CONTENTS 4. Be bold and prepare for binary outcomes in 2020 6. Sanlam: the next steps 10. Outlook 2020: multi-asset 12. Is world production set to rebound? 16. Integrating ESG: the next wave 18. The power of positivity 22. Absolute return funds – failing to deliver
WELCOME
26. CIO outlook: year of change 28. Navigating markets in 2020 34. Neglect ESG at your peril 38. Getting the blend right: the science and art of manager research and selection 40. Infrastructure: a niche with unique potential 42. Talking with… Mike O’Shea, CEO, Premier Miton Investors 44. Square Mile asks fund managers to look to the future
There is a different feel in the air at the start of 2020. Perhaps it is the end of a year when markets have confounded expectations, with bonds and equities seeing sharp rises. Perhaps it is the prospect of meaningful change with new faces at the world’s central banks, progress on Brexit, even a new US president. Either way, it feels like the world may be taking a new direction. In this quarter’s edition of Hub News, sponsors and partners give their views on the likely outlook for the year ahead. After a year in which almost all asset classes have seen strong gains, which can continue to make progress in 2020? There are few supporters for fixed income, but John Riccardi of the Merian Global Dynamic Allocation fund argues that equity valuations aren’t stretched and there are still plenty of opportunities. However, there is still considerable debate on where these opportunities lie. Will the small revival in value shares continue? Will the UK build on its
strength in the final quarter of 2019? Will equity markets continue to be driven by broad macroeconomic considerations or will stockpicking come to the fore? If so, could it finally be the year for Absolute Return funds? Charles Hovenden of Square Mile reserves judgement in his piece on page 22. One trend that is definitely here to stay is the increasing importance of environmental, social and governance factors when managing money. Ben Constable Maxwell explains how M&G are integrating ESG criteria across all their funds. Expect more and more fund managers to follow suit in the year ahead. As always, we hope you find it an illuminating and insightful read. Please send any thoughts or feedback to enquiries@adviser-hub.co.uk. Cherry Reynard Editor www.adviser-hub.co.uk
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MULTI-ASSET INCOME
BE BOLD AND PREPARE FOR BINARY OUTCOMES IN 2020
At a moment of maximum uncertainty and with this strange cycle on the edge, 2020 may see the global economy slide into recession or avoid one altogether. In this Q&A, John Stopford, Head of Multi Asset Income and Portfolio Manager of the Investec Diversified Income Fund, warns investors to be prepared for the black, the white and the grey.
HOW ARE YOU LOOKING TOWARDS 2020? We are at the point of maximum uncertainty. We are still feeling the after-effects of policy tightening last year. We clearly have a huge amount of uncertainty, which is impacting investment and spending decisions, linked to issues ranging from the trade war between the US and China to the Hong Kong riots and Brexit. But some of these issues are showing some slightly more positive signs at the margin and, clearly, policy has been eased significantly. The question now is: will the consumer and services and the labour market hold up long enough for policy easing and the other more positive dynamics to play out, or are they essentially already cracking under the weight of weak manufacturing, weak trade and weak investment? Are we actually already sliding into recession?
SO, IT’S BETWEEN WEAK MANUFACTURING SIGNALS OR ROBUST CONSUMER AND LABOUR SECTOR SIGNALS? It has been an interesting cycle. The labour market is linked to business, because if businesses are struggling, they don’t hire, they fire. It is the same with wages. The labour market is bending, weakening but not yet breaking. If it can continue to hold up, then those more positive dynamics can play out, but it is on the edge. Many of the indicators that we look at which tend to anticipate changes in the unemployment rate, more than half of those are looking quite weak and quite threatening, but not yet decisively so and one or two of them are still looking pretty robust. We are on the edge. We - hopefully and probably - will avoid sliding into recession but it is at the point of maximum uncertainty now. It will be a few months at least before we have greater clarity although, clearly, the equity market is hopeful and maybe the bond market is telling us the reverse; it is fearful. 4
WHAT ARE THE RISKS AND OPPORTUNITIES YOU SEE IN 2020? If we get the all clear, I think the big opportunity is for some rotation. It is an unusual cycle in that normally with most cycles recently the US economy has led and it has been Europe and Asia that have followed to some extent. This time around, the epicentre of the slowdown has been in manufacturing and trade, which is what Europe and Asia are good at. If we get an inflection point there, it’s those economies, those industries that are going to do well. If we avoid recession and have a soft landing and recovery, there is an opportunity for repricing of more cyclical assets, non-US assets, and to some extent probably financials as well. In those circumstances, people will begin to review price expectations and monetary policy. This means bond yields will rise and yield curves might steepen a bit simply because the bond market at the moment is trying to weigh up the odds of further rate cuts from the US Federal Reserve. Is the economy weak, or have the Fed’s actions been a stitch in time? The Fed has cut three times, which is a typical mid-cycle or late-cycle insurance cut or set of cuts. It may not need to do more if the economy soft-lands and ultimately recovers.
“The question now is: will the consumer and services and the labour market hold up long enough for policy easing and the other more positive dynamics to play out, or are they essentially already cracking under the weight of weak manufacturing, weak trade and, weak investment?”
HOW DO YOU PREPARE FOR SUCH BINARY OUTCOMES IN 2020? These two outcomes need a different approach: one way to hedge your bets is to own options. Options give a skewed pay-off. They allow participation in one direction but not the other, so to the upside and not to the downside. There is a cost involved in that but now that cost is not expensive. Given the level of uncertainty, the pricing of options, particularly in things like the equity market, looks cheap to us. It is important to be properly diversified and to run a lower level of risk than normal. We need to look for those opportunities in markets that are already pricing in a lot of bad news. This means some of the more cyclical parts of the market and opportunities in equities outside the US, potentially in financials. There are more opportunities in equities than in other growth-related assets, such as credit. Even if the cycle extends, it is still too late in the cycle to get excited by assets such as high yield. The other thing that is beginning to happen is a slight turn in the dollar. The ‘exceptionalism’ of the US, where the US has outperformed on a serial basis and the Fed has been one of the few central banks able to tighten policy, is changing. The US is now weakening relative to the rest of the world, particularly if we get a soft landing. Also, the Fed is now easing policy potentially more aggressively than other central banks are because they have
less scope to. We are not looking for significant dollar weakness, but the sort of persistent dollar strength which has been a problem for the rest of the world is showing signs of fading.
KEY TAKEAWAYS •
We are at the point of maximum uncertainty, but we still need to generate outcomes for our clients, so we are preparing for the black, the white and the grey.
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We are on the edge of this strange cycle. Will the consumer and labour markets hold up enough for policy easing to work, or will the economy crack under the weight of weak manufacturing and trade leading to a recession?
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If we get the all clear, the big opportunity is for some rotation. If the opposite, investors need to hedge their bets properly which means options, true diversification and having a fundamental understanding that the drivers of investments have shifted from last time – the demise of the dollar is one major trend to watch.
All investments carry the risk of capital loss.
Important information This content is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contains statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual outcomes may differ materially from those stated herein. All rights reserved Investec Asset Management. 5
THE FUTURE OF ADVICE
SANLAM: THE NEXT STEPS
After an active few years, Lawrence Cook, head of UK intermediary distribution, discusses who Sanlam is today, the biggest challenges for the business and how it is looking to help its adviser clients.
SANLAM HAS BEEN THROUGH A LOT OF CHANGE IN RECENT YEARS; WHAT IS YOUR BIGGEST CHALLENGE TODAY? The business as a whole is a broad waterfront to the intermediary market with four component parts: investments, wealth, insurance and our network. We strive for a wider appeal, recognising that high-quality advice and financial planning isn’t the preserve of any particularly grouping. We have a home for any regulatory shape the adviser may choose. The challenge for us as a business today is that customers like to identify an individual brand with certain qualities. This is more difficult to do when a business does everything along the value chain. We believe this gives us real advantages, notably on pricing leverage, but it can dilute the message to
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advisers. We have bought a number of businesses, but it’s now about pulling that together so advisers recognise they can engage with us to bring real value for their clients and their business. My job for 2020 is making sure this message resonates with advisers.
WHAT DO YOU WANT TO BE KNOWN FOR? The brand we use is ‘Wealthsmiths’ and advisers will see that logo and phrase used across all our literature. It’s trying to convey the craftsmanship that goes into our products, our proposition and our service. Today, most advisers have heard of us, but they don’t necessarily know what we can deliver. We really want to spread this message.
HOW HAVE YOU SPREAD THIS THROUGH THE ORGANISATION AND EMBEDDED IT IN THE CULTURE? There is a core set of behaviours that every member of the group is expected to display, built into our personal development plans. Even more important is that everyone within the organisation is held to account on those behaviours. Are they professional, engaged, transparent and everything else we expect? We want to ensure that clients have a good experience, in line with the ‘Wealthsmiths’ values. This means moving away from purely ‘product’ campaigns. We have products, but so does everyone else. For the time being, our investment performance is strong, but we don’t want to sell our products based on performance. I want people to understand the process and investment philosophy. More importantly, I also want them to think of Sanlam as helping them to deliver their business and client objectives. Performance can always come and go. Advisers that have been around a while get tired of people telling them about the performance they could have had.
“It is not about them buying our proposition, but us buying into their proposition. What can we offer to help them achieve what they want to achieve?”
Some advisers won’t want to outsource everything and therefore it is important we find a way to work with advisers. It is not about them buying our proposition, but us buying into their proposition. What can we offer to help them achieve what they want to achieve?
DO YOU HAVE A TYPICAL CLIENT? No, we work with advisers in lots of different ways. We have made some investments into regional adviser businesses and they represent one end of the spectrum. These are firms that are looking to align themselves with us over time and need finance to fund their ambitions. There are some well-known consolidators, but that’s not for everyone. We don’t want to buy and say goodbye. They may want to keep their own brand. For example, we have helped provide finance for younger directors to buy out older directors. We also work with a number of directly-owned, locally-based companies. These businesses are proud of their proposition but need someone to take the administration off their hands. At the moment, they’re the architect and the bricklayer. We will be the bricklayer, so they can get out and find new clients. We find others who don’t want to take on all the aspects of running a business. These people can get the regulatory framework and support from a network through the Sanlam Partnership. That offers them easy access to all the component parts of the Sanlam Group.
WHAT ARE THE KEY CHANGES IN THE INDUSTRY TODAY?
WHAT DO YOU FIND ARE THE KEY CHALLENGES FOR ADVISERS TODAY? In general, advisers say they have a huge amount of client demand and are not struggling for work. Instead, they have capacity problems – post MiFID II and PROD, the administrative burden is increasing, they struggle to recruit new advisers and paraplanners are too expensive. Just maintaining the current level of service to clients is a significant challenge. Standing still would be a good result in this environment, but many advisers want to grow their business. Our conversation with advisers will focus on what we can do to unblock one or more of those areas.
Going back 15 years, financial planning wasn’t distinct from finance advice. Today, there is transacting a single piece of advice on a product, and on the other hand, there is holistic financial planning. This change has real consequences for us. Advisers recognise the impact on a client’s life is much more keenly felt as a result of financial planning, rather than a result of the products. If we said to our advisers ‘let me tell you about our products’ that wouldn’t work. Instead, we ask them about the challenges they face in managing their business and their clients. This has far greater resonance.
FIGURE 1: VALUE CHAIN
Investment management
Sanlam Investments
Manufacturing
Sanlam Private Wealth (DFM service)
Distribution
Sanlam Platform
Creation of a product or service. Examples; Unit Trust, SIPP, ISA.
Financial advisers Sanlam Partnerships Sanlam Wealth Planning
Sanlam Life & Pensions Investment management capability.
Sales/ advice
Sales/advice
Provision of market access for sellers, intermediaries and buyers of retail investment products. Example; wrap platform.
The function of engaging with clients to deliver the service or product. Example; adviser.
Delivery and ongoing services
Sanlam investment solutions
A service enabling the transaction of a product sale. Provision of post-sale service. Example; CRM back office systems, wrap platforms.
Sanlam is a trading name of Sanlam Private Investments (UK) Limited (registered in England and Wales 2041819; registered office: 24 Monument Street London EC3R 8AJ). Authorised and regulated by the Financial Conduct Authority. The value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.
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When you work with a Wealthsmith, you’ll forge even stronger relationships with your clients Whether it’s our market-leading products and services or the partnership approach we take to working with you, a Wealthsmith can help you grow. We’ll also help you solve the challenges involved with managing an advisory business in a continuously changing world. We work with financial advisers across the UK — from local firms to large national networks. Everything we do is designed to make your life easier, allowing you to spend more time with your clients.
Talk to us If you’re looking for investment management solutions, regulatory support or business consultancy services, we’re here to help. Please call us on 0117 975 2093 or visit us online at sanlam.co.uk/financial-advisers Financial planning • Investments • Wealth
Sanlam is a trading name of Sanlam Private Investments (UK) Limited (registered in England and Wales 2041819; registered office: 24 Monument Street, London EC3R 8AJ). Authorised and regulated by the Financial Conduct Authority. The value of investments and the income from them can fall and you may get back less than you invested. 8
Bring together your strengths and ours We know the strength of the relationship you have with your clients. But we can also bring powerful global investment resources to help you keep their investments on track. From model or bespoke portfolio services to multi-asset and multi-manager funds, we’re focused on delivering what your clients need. So, play to your strengths by making the most of ours. schroders.co.uk/outsourcing Please remember that the value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.
Important information: Marketing material for professional investors and advisers only. Issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the FinancialConduct Authority. Cazenove Capital is a trading name of Schroder & Co. Limited which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. 9
THE YEAR AHEAD
OUTLOOK 2020: MULTI-ASSET
Bond yields and economic growth are likely to remain subdued in 2020, with equities remaining relatively attractive, according to Johanna Kyrklund, Chief Investment Officer and Global Head of Multi-Asset, Schroders.
Earlier this year, the signal from our analytical models was that the world was entering the “slowdown” phase of the economic cycle. This normally signals danger for risk assets, particularly shares, but we think this cycle is different. The late stage of the economic cycle is usually problematic for shares because companies see their input costs (i.e. materials and labour) and their borrowing costs rising at the same time. Central banks usually need to keep interest rates high to counter the effects of rising inflation. Meanwhile, labour costs (wages) rise as unemployment falls, and stronger growth means greater demand for materials. This environment normally weighs on company shares. However, this time has been rather different. A notable lack of inflation has allowed central banks to cut rates more quickly to support growth. This has benefitted equities, even though corporate earnings have largely disappointed. That said, we are still seeing costs rise in some areas. 10
EQUITY EXPECTATIONS Looking to 2020, we believe equities are attractive relative to so-called safe havens, like government bonds, but earnings growth is required to deliver further gains. We believe that the market’s expectations for US earnings may be optimistic – reflected in higher valuations - as profit margins are likely to be eroded by rising costs. There is the potential for earnings to exceed expectations in the rest of the world, however, leading us to expect high single-digit returns from equities. Our view on emerging markets, for example, has become more optimistic following an improvement in manufacturing surveys.
“We think political risk is likely to remain a feature of the market environment, particularly in a world where growth is scarce and unequally distributed.”
WHAT’S IN STORE FOR BONDS?
POLITICAL RISK REMAINS
We expect both global growth and the US 10-year Treasury yield to remain well below 3% in the coming year. The liquidity provided by central banks, particularly the US Federal Reserve, has reduced the risk of recession, but lending by commercial banks remains subdued. We would need to see evidence of a pick-up on this front for there to be a more pronounced economic recovery. Indeed, we are still more worried about growth disappointing than we are about inflation picking up. As a result, we still believe that government bonds are a potentially attractive hedge for multi-asset investors. An economic slowdown is typically bad for company profits and stock returns; government bonds tend to outperform in such periods. We favour government bonds from the US over other countries because they offer positive yields. The US 10-year Treasury currently yields 1.78%, compared to -0.35% from the equivalent German Bund, for example. US Treasuries also have a higher sensitivity to economic risks; that is, they tend to outperform other bonds during a slowdown. Another reason we think bond yields will remain suppressed is that pension funds continue to de-risk. This means they are reducing exposure to riskier assets such as equities in favour of more stable assets such as bonds that provide a yield. This demand for bonds stops yields from rising significantly. It also narrows the spread (the difference) between corporate and government bond yields.
We think political risk is likely to remain a feature of the market environment, particularly in a world where growth is scarce and unequally distributed. A re-intensification of the trade war is the most significant risk as this could lead global growth to fall below 2%. The impact of a more left-leaning US government would have a muted impact on our growth forecasts but would impact the corporate earnings outlook in the US. Fiscal policy (governments’ use of tax and spending measures) has been much-discussed among investors recently. Our view is that we expect a loosening of fiscal policy in the UK. But fiscal stimulus is waning in the US and the political will for significant fiscal easing in Germany seems to be absent. Overall, we put a low probability on there being a major expansion of fiscal policy globally in 2020. All in all, the absence of a more emphatic global recovery prevents us from significantly rotating our investments. Low cash rates suppress economic and financial volatility and compel us to stay invested. We continue to tread a careful line between benefiting from the liquidity environment without exposing ourselves to too much economic risk.
KEY TAKEAWAYS •
Global growth and US 10-year Treasury yield both to remain below 3%.
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We expect single digit equity returns, with earnings potential stronger in markets outside the US.
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We expect interest rates to remain low, which should keep a lid on market and economic volatility.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.
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ASSET ALLOCATION
IS WORLD PRODUCTION SET TO REBOUND?
Don’t believe the recession hype, a rebound in global production is in sight, argues John Ricciardi, lead fund manager of the Merian Global Dynamic Allocation Fund and head of global asset allocation.
Contrary to recession fears, and the plethora of ‘recession’ news stories, I believe the world economy is on the cusp of a cyclical rebound. Production, prices and exports should accelerate during the next few months. Company stocks of finished goods are low, as are borrowing costs. Central bank support is the highest for six years. The US Federal Reserve will support the US economy in the presidential election year. The chart shows our projections (vertical bars), six months ahead, of world production data, compared to the actual announced data (continuous line). At the right of the chart our projections extend ahead of the actual data in an upwards direction: our models are forecasting a rebound in production.
US dollar is another positive for growth, with the shift from the Chinese yuan to the Mexican peso very evident in US trade figures.
EQUITIES ARE ATTRACTIVELY VALUED Equity markets outside the US have yet to recover to mid-2015 levels and are still down some 10% from their highs of 21 months ago. This includes the major markets in Europe, Australasia and the Far East, with shares in Japan, the UK, France, Switzerland, Germany, and Australia making up most of that market capitalisation. The global cyclical downturn that has been underway since those markets peaked early in 2018 has brought deflationary
25 20 15 10 5 0 5 10 15 20
World Production - Merian Global Investors model projection
01/02/2020
01/09/2019
01/04/2019
01/11/2018
01/06/2018
01/01/2018
01/08/2017
01/03/2017
01/10/2016
01/05/2016
01/12/2015
01/07/2015
01/02/2015
01/09/2014
01/04/2014
01/11/2013
01/06/2013
01/01/2013
01/08/2012
01/03/2012
01/10/2011
01/05/2011
01/12/2010
01/07/2010
01/02/2010
01/09/2009
01/04/2009
01/11/2008
01/06/2008
01/01/2008
01/08/2007
01/03/2007
01/10/2006
01/05/2006
01/12/2005
01/07/2005
01/02/2005
01/09/2004
01/04/2004
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World Production - actual
Source: MGI, as at 31/10/2019.
Over the past year there has been lower inventory accumulation: companies have been holding less excess finished goods in warehouses or storage. With inventory accumulation low, a pickup in orders can have a sharp upwards effect on production. Factor in low costs of capital and nominal and real rates of interest, and the conditions are ripe for production to expand. The relatively stable 12
pressures to bear again on Japanese equity valuations. Meanwhile, headwinds from bank recapitalisations and a hollowing-out of Germany’s industrial base have lowered valuations of continental European shares. In the UK, sharp political dislocations have caused severe constraints on investment and credit growth, which has weighed on UK equity prices.
Equities outside the US stand to benefit significantly from global activity and prices shifting from a downtrend to an uptrend over the coming months. Over a third of the equity market capitalisation across these regions is in financials and industrials, sectors particularly disadvantaged by collapsing yield curves and contracting production during the global economic slowdown. This has meant that equities in Europe, Australasia and the Far East now have trailing price/earnings lower than was the case five years ago. In the current, record-low sovereign yield environment, earnings-yield-to-bond-yield measures, as well as dividendyield-to-bond-yield comparisons for these regional equities are attractive relative to their averages over the past five years. Equities outside the US stand to benefit significantly from global activity and prices shifting from a downtrend to an uptrend over the coming months.
A NON-CONSENSUS VIEW Our current broad asset allocation views are therefore non-consensus: we like risk assets, especially global equities. We think emerging markets and Far East ex-Japan equities could do
well as expectations for global trade improve. Equities in Japan and the UK are particularly attractive on valuation grounds. Sectors we like are energy, materials, and industrials, reflecting our anticipation of a global upturn in economic output and prices. Energy production is expanding at a rapid rate in North America, with the US presently the world’s largest oil and gas producer. We do not find all equity sectors equally attractive, however. Less attractive are counter-cyclical sectors, which are less influenced by broad economic trends because they supply evergreen goods always in steady demand. Counter-cyclical sectors are likely to underperform, in our view. Defensive sectors such as consumer staples such as food and daily household goods have enjoyed very strong returns since July 2018, and have run well ahead of the stock market in general. These and other counter-cyclical sectors, including utilities and telecommunications, are currently very much overvalued on historical measures, and their relative attractiveness will wane, in our view. The US Federal Reserve is intervening actively at present to alleviate short-term liquidity constraints, expanding its balance sheet for the first time in several years and expanding growth in narrow money supply, providing support to US loan growth and eventually to US consumer prices. In such contexts, shares in counter-cyclical sectors tend to underperform their pro-cyclical counterparts. Overall, the outlook for coming months is surprisingly rosy, if you look beyond the headlines and analyse the economic data in detail. Here’s to a Happy New Year!
Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The performance data does not take account of the commissions and costs incurred on the issue and redemption of shares. The value of investments and the income from them may go down as well as up and investors may not get back any of the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rate changes may cause the value of overseas investments to rise or fall. This communication is issued by Merian Global Investors (UK) Limited (“Merian Global Investors”), Millennium Bridge House, 2 Lambeth Hill, London, United Kingdom, EC4P 4WR. Merian Global Investors is registered in England and Wales (number: 02949554) and is authorised and regulated by the Financial Conduct Authority (FRN: 171847). This communication is for information purposes only. Nothing in this communication constitutes financial, professional or investment advice or a personal recommendation. This communication should not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the document. Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or companies within the same group as Merian Global Investors as a result of using different assumptions and criteria. In Hong Kong this communication is issued by Merian Global Investors (Asia Pacific) Limited. Merian Global Investors (Asia Pacific) Limited is licensed to carry out Type 1 and Type 4 regulated activities in Hong Kong. This communication has not been reviewed by the Securities and Futures Commission in Hong Kong. In Singapore this document is issued by Merian Global Investors (Singapore) Pte Limited, which is not licensed or regulated by the Monetary Authority of Singapore (“MAS”) in Singapore. Merian Global Investors (Singapore) Pte Limited is affiliated with Merian Global Investors. Merian Global Investors is not licensed or regulated by the MAS. This document has not been reviewed by the MAS. In Switzerland this communication is issued by Merian Global Investors (Schweiz) GmbH, Schützengasse 4, 8001 Zürich, Switzerland. This communication is for investment professionals only and should not be relied upon by private investors. MGI 2019/12/0014
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BACK IN THE MARKET FOR UK STOCKS? WE CAN HELP YOU LAND THE PICK OF THE CATCH.
LARGE CAPS Merian UK Alpha Fund
Merian UK equity funds
MID CAPS Merian UK Mid Cap Fund
Eventually all storms pass and soon UK shores could be teeming with opportunities again. Whether you’re fishing for large, mid or small caps, few can rival our UK equities team’s deep understanding of the market. Is it time to get back on board?
TO FIND OUT MORE, SEARCH: Merian UK Equities
SMALL CAPS Merian UK Smaller Companies Fund
Investment involves risk. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. This communication is issued by Merian Global Investors (UK) Limited (trading name Merian Global Investors). Merian Global Investors is registered in England and Wales (number: 02949554) and is authorised and regulated by the Financial Conduct Authority (FRN: 171847). Its registered office is at 2 Lambeth Hill, 14 London, United Kingdom, EC4P 4WR. Models constructed with Geomag. MGI 11/19/0157.
For Investment Professionals only
INVESTMENTS THAT SHAPE THE FUTURE BUILT BY M&G
For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776. SEP 19 / 390101
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SUSTAINABLE INVESTMENT
INTEGRATING ESG: THE NEXT WAVE
Ben Constable Maxwell, Head of Sustainable and Impact Investing at M&G Investments, explains why ESG considerations have become such an important part of investing.
WHY HAS THE INTEGRATION OF ENVIRONMENTAL, SOCIAL AND GOVERNANCE FACTORS BECOME A PRIORITY FOR INVESTMENT MANAGERS? Increasingly, all fund managers need to make sure that ESG factors are integrated into the investment decision-making process. Today, it is becoming a pre-requisite for investors. We continue to develop our approach, to ensure we integrate ESG in a disciplined and structured way across our funds. There are numerous drivers for this: developing regulation and societal expectations are playing an important role, but the investment rationale is just as strong. If we go back thirty years, the balance between tangible and intangible assets in the valuations of US, European and UK assets has seen a significant shift. Tangible assets – such as physical property, factories, the installed base - were 80-85% of the overall value of a company. Intangible elements such as reputation, brand, IP and goodwill made up only 15% of the overall value. Today, we have exactly the opposite, with intangibles making up the lion’s share of company valuations. This has clear financial implications. With reputation a far more important part of a company’s value, environmental or social damage has a greater impact on its share price. Markets are less likely to distinguish between financial and non-financial elements and this means investors need to change the way we think about a company’s value. As a result, ESG is being integrated into investment managers’ investment and risk frameworks. This is not just avoiding problem areas, but also about finding new investment opportunities. Going further, considering the ‘impacts’ of our investments is also becoming more important. Dedicated ‘impact funds’ see the way the world is changing and recognise they have a vital role to play in contributing to solving the world’s problems.
DOES IT HELP TO HAVE A LARGE INSTITUTIONAL BUSINESS, WHERE ESG PROCESSES ARE WELL-ESTABLISHED? Institutional investment has certainly driven the responsible investment agenda, but it’s no longer confined to this area. We have fund management teams in equity, fixed income and real assets and our fund managers often run both institutional and retail/wholesale mandates so they apply the same ESG approach irrespective. Certainly, our institutional client base created the 16
momentum behind these issues. Regulators have been improving clarity on the fiduciary responsibility for asset owners and there is an increasing push for clarity and better structures. This has been important in driving change and integration of ESG factors at asset managers like M&G. That said, while demand originally came from institutional asset owners, we are finding more and more interest when talking to financial advisers. Investors from across the spectrum are recognising the risks.
HOW DOES THE STEWARDSHIP TEAM WORK WITH THE INVESTMENT TEAM? As a team, we are responsible for defining and implementing the ESG integration programme for the group and overseeing engagement with companies. But we believe ESG is only really effective when it is embedded into the investment process. So we work with our analyst teams to embed ESG into their research, and support our fund managers in implementing ESG in a way that reflects both our shared ESG principles and the respective investment approaches of individual funds. We need to make sure the fund managers are informed of the relevant issues and have integrated ESG research into their investment decisionmaking. The Stewardship team has recently broadened out to support the fixed income business and is now in a position to serve the whole business.
YOU HAVE LAUNCHED A NUMBER OF IMPACT FUNDS RECENTLY; HOW MUCH CROSS-OVER IS THERE WITH THE ESG SIDE? We consider our impact funds to fit broadly into our ESG range – and it is crucial that these impact funds apply a structured ESG integration and engagement approach. That said, we believe it is important to distinguish between impact products and ESG integration. We currently have two funds with an explicit impact objective, which invest solely in companies that generate measurable positive impacts on environmental or social challenges. It’s a highly resource-intensive and solutions-focused approach. There is a growing pressure for funds in general to consider their societal impacts more effectively, but we are some way from the stage where the market requires all funds to be pure impact funds.
“We need to make sure the fund managers are informed of the relevant issues and have integrated ESG research into their investment decision-making.”
HOW FAR PROGRESSED IS M&G’S ESG INTEGRATION? IS THERE STILL A PROBLEM IN GETTING FUND MANAGER SUPPORT FOR INCLUSION OF ESG CRITERIA? There is a real shift taking place. All investors are cognizant of the effect that environmental and social issues can have on their portfolios; they are also increasingly mindful of the opportunities presented by investing in companies that manage these risks responsibly and sustainably. Moving up the chain, impact investors are focused on the role investment capital can play in directly addressing society’s major challenges. Our ESG integration programme reflects this level of importance: all fund managers and analysts – supported by our ESG/Stewardship team – are responsible for implementing ESG in their investment processes. For long-term, active investors such as M&G, ESG risks and opportunities play a prominent role in our analysis, due diligence, investment and engagement processes. They are increasingly ingrained in our investment approach but this is not a fait accompli. We continue to develop the tools and processes to support our integration of ESG; the aim being to enable fund managers to easily access the information required. Some fund managers have undoubtedly embraced this process more than others, but increasingly we see all fund managers recognising its importance both for risk management and in identifying opportunities.
HOW ARE YOU BUILDING THIS ‘BUY IN’ FROM FUND MANAGERS? We try to recognise the different ESG requirements of different investment strategies. A European value manager will be looking
at companies in a different way to, say, an emerging market manager. We are aware that we will lose our (internal) audience if we simply say; “you need to do it this way”. Instead, we strive to play a supportive educational role focusing on what matters to the fund manager’s investment approach. This is usually met with positivity and interest. Equally, the regulatory landscape is changing materially and ESG has matured from being just being about excluding companies. This means the discussion with fund managers has changed and today will be about helping to manage risk, or finding good investment opportunities. ESG analysis is about finding better long-term outcomes and once the fund manager recognises that, they generally want to understand more. There can be valid pushback on the issues of greenwashing and marketing spin. We aim to build common principles and then provide support and information. Strong backing from senior management is also very important to our ongoing integration programme.
HOW DOES ENGAGEMENT WITH COMPANIES FIT IN? Engagement is a crucial part of the investor toolkit. We want to use our voice to hold companies to account and to encourage them in the right direction. This may mean pushing for stronger board governance and oversight of labour relations. Or it may mean supporting an ‘old world’ energy company to shift its business model towards lower carbon areas. We try to take a systems-level approach. It makes it complex, but interesting. The whole industry needs to do more, but we think we’re doing a decent job integrating ESG into our investment approach and engagement activities. 17
INVESTING IN OPTIMISM
THE POWER OF POSITIVITY Optimism is in short supply in these volatile times, but Baillie Gifford’s Iain McCombie believes the benefits of focusing on the exciting opportunities that pervade the global economy far outweigh the negative news.
AS WITH ANY INVESTMENT, YOUR CLIENTS’ CAPITAL IS AT RISK.
From climate change to trade tensions, it’s not difficult to find reasons to be gloomy in the current environment. Iain McCombie, manager of the Baillie Gifford Managed Fund, believes optimism is important, suggesting positive long-term trends often go unreported and investors shouldn’t bet against human ingenuity. He says: “It’s very easy to tell everyone that there are risks. What that approach misses is that good things are happening. These stories are slow moving and not dramatic enough to make headlines, but they are important. The continued growth of the Asian middle class, for example, is not new news, but every week people are being taking out of poverty. That is very valuable.” McCombie says that as a firm, Baillie Gifford “invests in optimism”. That means trying to be on the right side of change: “Things change, new services appear. Investors have got to take note – it’s disastrous for the companies that don’t adapt. The High Street in the UK is a good example.” Being optimistic rather than pessimistic makes sound financial sense. In equity markets, the worst-case scenario is to lose all the initial capital invested. However, the upside is, in theory, unlimited. While there will always be a few ‘misses’, investors would hope the big winners in their portfolios should make many multiples of the initial sum. He adds: “This is why we are long term in our thinking. We can’t predict what influences short-term volatility in share prices, but the real risk is permanent loss of capital. Our style is not always going to be flavour of the month, but if our stocks are still growing, the share prices will eventually follow.” This leads to the fund’s long-term structural preference for equities, which still account for around three-quarters of the portfolio’s holdings. The equity portion blends regional equities from the UK, North America, Europe, as well as developed Asia together with emerging markets. Those areas are roughly equal in the portfolio as it stands, giving a spread of exposure to markets. 18
These geographic mandates are parcelled out to individual teams within Baillie Gifford and populated with their best ideas. As such, holdings reflect the firm’s long-term growth philosophy. This emphasis on the long term allows the fund managers to look through short-term noise: “On Netflix, for example, everyone has an opinion and many people are looking at quarterly subscriber growth. We want to step back from that and look at what is happening more broadly – the disruption to the way we watch television.” The team seeks to add value through finding such opportunities rather than asset allocation. McCombie says: “The policy-setting group meets once a quarter, but we try not to tinker too much with the equity portfolio. Of our outperformance over the longer term, around 90 per cent comes from the bottom-up approach rather than through asset allocation. Even our asset allocation is bottom up. We ask the fund managers whether they are finding good ideas and, if so, we will give them more money to support that. We try to play to our strengths.” That said, the fund will also hold a structural weighting to fixed income. It has become more difficult to find fixed income opportunities as yields have fallen, and McCombie says that the cash weighting has risen to 11 per cent: “We are pretty cautious on bonds. Around 20 per cent of developed market government bonds have a negative yield. They appear to be working on the greater fool theory, so we need to approach them with caution. As such, that part has come down.” The fund, however, doesn’t hold any bonds with a negative yield. The bond managers can be flexible and are not committed to hold a certain percentage in individual markets. They can look across the globe to find the best opportunities. That means considering areas where bond yields are positive, such as emerging markets or Canada, and finding corporate bonds trading on more compelling valuations. As McCombie points out, not all companies with the same rating will perform the same. Discernment is vital.
However, this shouldn’t create the impression that McCombie is anticipating significant change in the portfolio. Turnover is currently around 10 per cent and the managers try to align their time horizon with the businesses in which they invest. He believes people who frequently buy and sell shares don’t think enough about the drag on investor returns from trading costs.
His is a patient approach: “The fund has been around for over 30 years. We’ve been through a variety of economic conditions. We don’t see anything particularly unusual today. In general, we want to find good companies with good growth prospects and back them for the long term.”
FIGURE 1: BAILLIE GIFFORD MANAGED FUND ANNUAL PAST PERFORMANCE TO 30 SEPTEMBER EACH YEAR (%) 2015
2016
2017
2018
2019
Baillie Gifford Managed Fund
2.4
22.6
13.0
13.1
3.8
Investment Association Mixed Investment 40-85% Shares sector median (net)
0.4
15.6
9.1
5.4
4.5
Source: StatPro. Class B income shares. Returns reflect the annual charges but exclude any initial charge paid. The manager believes this is an appropriate benchmark given the investment policy of the Fund and the approach taken by the manager when investing.
Past performance is not a guide to future returns.
“We can’t predict what influences short-term volatility in share prices, but the real risk is permanent loss of capital. Our style is not always going to be flavour of the month, but if our stocks are still growing, the share prices will eventually follow.”
For financial advisers only, not retail investors. All data is as at 30 September 2019, unless otherwise stated. The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research. Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions. The Fund’s share price can be volatile due to movements in the prices of the underlying holdings and the basis on which the Fund is priced. Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority. Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs. All data is sourced from Baillie Gifford & Co unless otherwise stated. 19
BAILLIE GIFFORD MANAGED FUND
OFFERING OUR BEST IDEAS AT A LOW COST SINCE 1987 – THE ONGOING CHARGE IS JUST 0.43%*.
THINK OF IT AS A ONE-STOP SHOP. For over three decades the Baillie Gifford Managed Fund has aimed to offer equity-like returns with lower volatility than stock markets. The management team is drawn from our regional investment desks, complemented by our fixed interest experts. They seek to fill the portfolio with the best ideas from Baillie Gifford. They invest with no reference to any index and expect outperformance to be driven by companies, not markets. The Baillie Gifford Managed Fund has an equity bias but a place for the individual attractions of bonds and cash. With a strategic asset allocation of around 75% equity, 20% bonds and 5% cash it could be the only investment your clients will ever need. Performance to 30 September 2019**:
5 years
10 years
Managed Fund
67.1%
171.2%
IA Mixed Investment 40%–85% Shares Sector Median
39.5%
94.2%
As with any investment, your clients’ capital is at risk. Past performance is not a guide to future returns. For financial advisers only, not retail investors. The manager believes the IA Mixed Investment benchmark above is appropriate given the investment policy of the Fund and the approach taken by the manager when investing.
To start one-stop shopping please call 0800 917 2112 or visit us at www.bailliegifford.com/intermedaries
Long-term investment partners
*As at 31 January 2019, based on B Acc shares. **Source: FE, B Acc shares, single pricing basis, total return. Your call may be recorded for training or monitoring purposes. Baillie Gifford & Co Limited is the Authorised Corporate Director of the Baillie Gifford ICVCs. Baillie Gifford & Co Limited is wholly owned by Baillie Gifford & Co. Both companies are authorised and regulated by the Financial Conduct Authority.
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GSAMFUNDS.com
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Sust aina bility
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Ma ch ine
Dem ogra phic s Na tur al La ng ua ge Pro ce ssi ng
w ies rro log mo hno To Tec ed anc Adv
tion Diversifica
ent nm o r i ty Env ili at l Vo
Risk Management
Flexibility
We believe investors today are faced with a series of trends that are likely to redefine the investment landscape over the next five years. While trends evolve over time, we think that investors are able to position themselves in anticipation of many of these today. Contact your GSAM representative for more information on the key trends that we believe investors should consider when constructing their portfolios.
For Third Party Distributors Use Only – Not For Distribution to your clients or the General Public. This material is provided at your request for informational purposes only. It is not an offer or solicitation to buy or sell any securities. In the United Kingdom, this material is a financial promotion and has been approved by Goldman Sachs Asset Management International, which is authorized and regulated in the United Kingdom by the Financial Conduct Authority. THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO. Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice. Confidentiality: No part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not 21 an employee, officer, director, or authorized agent of the recipient. © 2019 Goldman Sachs. All rights reserved. 163557-OTU-952840
ABSOLUTE RETURN
ABSOLUTE RETURN FUNDS – FAILING TO DELIVER
Charles Hovenden, Portfolio Manager at Square Mile, discusses the IA Targeted Absolute Return sector and whether it can deliver for investors.
A return of cash plus 3% is hardly worth bothering with, right? After all, the FTSE All Share Index (including gross dividends) has returned more than 11% p.a. since the end of the financial crisis in 2009. And that is despite the tortuous Brexit shenanigans and the stock market’s painful 10% decline in 2018. Since the beginning of the century, however, a return of cash plus 3% p.a. would have beaten the return of the same FTSE All Share Index by a whopping 62%. Indeed, since the beginning of 2000 (and up to the end of October 2019), The FTSE index has delivered an annualised return of just 4.6% p.a. including dividends. The difference, of course, is that stock markets have enjoyed an unprecedented, smooth ascent over the last ten years, fuelled by QE and negligible interest rates which have left investors with nowhere else to go in search of any kind of return. A virtuous circle based on weight of money has been created. In contrast, the previous ten-year period included two bear markets with their epicentres in 2002 and 2008. The power of compounding in long-term investment success therefore cannot be understated, and minimising losses when share prices are tumbling is every bit as important as making money when markets are going up. Perhaps this time it really is different and central banks can and will continue to manipulate markets to protect investors from the forces of gravity. But hundreds of years of financial history suggest otherwise. The virtuous circle could easily morph into a vicious one. Retail absolute return funds and the IA Targeted Absolute Return sector were really born in the ashes of the financial crisis. Unsurprisingly, the lure of capital protection and steady, absolute returns met a receptive audience following the wake of the devastation of investment portfolios in 2008. At the end of 2008, the IA Targeted Absolute Return sector comprised only 30 funds with an aggregate size of £2.6bn. By the end of October 2019, the sector had swelled to 120 funds with an aggregate value of more than £84bn. This growth is all the more remarkable considering that it has coincided with liquidity-fuelled and soaring equity markets. As a reminder, the IA Targeted Return sector contains a wide spectrum of funds with different investment strategies, performance profiles and return objectives. At Square Mile, we have categorised the main investment strategies as: Global Macro, Long/Short Equity, Long-bias Multi-Asset and Unconstrained Bond. The sector also includes a range of more specialist strategies including merger 22
arbitrage, short-dated bonds, emerging market debt and CTAs (commodity trading advisers). The five largest funds in the sector as at 31st October 2019, together with Square Mile’s sub-strategy classifications and their launch dates, are shown in the table below. Fund Name
Size as at 31-Oct-19 (£bn)
Strategy
Launch Date
Invesco Global Targeted Returns
10.3
Global Macro
Sep 2013
Baillie Gifford Diversified Growth
7.1
Long-bias Multi-Asset
Dec 2008
ASI Global Absolute Return Strategies (‘GARS”)
6.9
Global Macro
Jan 2008
BNY Mellon Real Return
6.4
Long-bias Multi-Asset
Oct 2000
Aviva Investors Multi Strategy Target Return
4.2
Global Macro
Jul 2014
While assets under management of £84bn still make Targeted Absolute Return the fifth-biggest IA sector, this is a precipitous decline from peak assets of just under £114bn in July 2018. The exodus of money clearly shows that investor enthusiasm for the sector has been replaced with widespread disillusionment and it is not hard to see why. First, the total-return FTSE All Share Index is again up by more than 10% so far in 2019, whilst many overseas markets are up by much more. Given the uncertain outlooks for economies and corporate profits, we could argue that investors should be taking profits and increasing their allocations to absolute return funds, but it is human nature to do the opposite. Fear Of Missing Out (“FOMO”) is a powerful influence. Second, two of the sector’s Big Beasts, ASI Global Absolute Return Strategies (“GARS”) and Merian Global Equity Absolute Return (“GEAR”), have suffered extended periods of poor performance.
“While assets under management of £84bn still make Targeted Absolute Return the fifth-biggest IA sector, this is a precipitous decline from peak assets of just under £114bn in July 2018. The exodus of money clearly shows that investor enthusiasm for the sector has been replaced with widespread disillusionment.” Following some poor performance, outflows from just these two funds account for about 60% of the overall decline in assets under management in the IA Targeted Absolute Return sector from its peak. However, the cause of investor disillusionment with the sector is more general and widespread. As noted above, 2018 was the first calendar year in which stock markets indices declined since 2011. The quantum of the decline, however, was hardly calamitous. The FTSE All Share Index (including dividends) fell by 9.5% and global stock markets indices were down by a little less in local currency terms. Against this backdrop, it was surely not unreasonable for investors in absolute return funds to expect their capital to be preserved or close to it. However, just 15 of the 109 constituent funds in which were in the IA Targeted Absolute Return sector made money in 2018. The median fund lost 3.2% and the mean return was down by 2.9%. As depicted in the histogram below, the skew in the distribution of fund returns in 2018 was horrible. No wonder investors are losing faith in the sector.
FIGURE 1: IA TARGETED ABSOLUTE RETURN IA Targeted -Absolute Return sector -FUND constituent fund returnsIN in 2018 SECTOR CONSTITUENT RETURNS 2018 30
Number of Funds
25
20
15
10
5
0 <(12)%
(12) - (10)% (10) - (8)% (8) - (6)% (6) - (4)% (4) - (2)% (2) - 0%
0-2%
2-4%
4-6%
6-8%
8-10%
10-12%
> 12%
Return (%)
Without passing judgement and for the record only, the three best- and worst-performing funds in the IA Targeted Absolute Return sector in 2018 were: Best in 2018
Worst in 2018
Fund
2018 Return %
Fund
2018 Return %
BlackRock Emerging Markets Absolute Alpha
+12.3
VT iFunds Absolute Return Green
(13.5)
Wellington Global Total Return Unhedged US$ in GBP
+11.3
VT iFunds Absolute Return Orange
(12.8)
Natixis H2O MultiReturns
+10.4
FP Argonaut Absolute Return
(11.7)
In terms of peak-to-trough performance of the FTSE All Share Index, the drawdown (15.0%) in the UK stock market in the fourth quarter of 2018 was only the fourth worst since the end of the financial crisis. The biggest decline (18.7%) occurred between May 2015 and February 2016 and again the sector delivered disappointing results. Indeed, in its “Asset Management Market Study – Interim Report”, published in November 2016, the FCA rightly heaped criticism on the absolute return fund sector and commented that investors faced a ‘high likelihood of negative performance’. Just a handful of the funds in the IA Targeted Absolute Return sector existed at the beginning of the financial crisis in 2007 and most of the funds in the sector are therefore still to be tested in a full-blown bear market. However, the results in both 2015/16 and 2018 do not bode well. Stock markets go up on escalators but go down in elevators. Coined in the US, it’s a favourite phrase of mine and it’s true. In just 16 months between 31st October 2007 and 3rd March 2009, the total return of the FTSE All Share index (including gross dividends) dropped by 45.6%, erasing all of the gains made since October 2003. It is a simple fact of compounding that if you lose 45.6% you then need to make 83.6% just to get back to where you started. It was not until July 2012, and with a lot of help from central banks, that the October 2007 peak was finally left behind. It was much the same in 2000 to 2003 as the dotcom bust ravaged global stock markets. In the 30 months between September 2000 and March 2003, the total return FTSE All Share Index tumbled by 47.7%, wiping out all of its gains since August 1996. The September 2000 peak was not exceeded until November 2005. We suspect that funds in the sector which either meet their return or their capital preservation objectives in the next proper bear market will therefore be in a tiny minority. The evidence that the majority of funds in the sector have inherent directional equity and/or credit beta is irrefutable. For these funds the absolute return moniker is only really appropriate if prices continue to rise or are at least stable. However, it would be wrong to dismiss the whole sector. There are a few funds, particularly in the long/short equity sub-category, which have very low directional market exposure, and have consistently generated mid single-digit and lowlycorrelated returns and which are most likely to protect capital when it really matters. This, for us, is the holy grail. With bonds so expensive they are unlikely to provide the protection they have in the past, an allocation to a handful of absolute return funds is a vital component of any diversified portfolio. However, with so much dross in the sector the funds in that cluster need to be chosen with the utmost care.
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The return of the Wellington Fund above is boosted by the US dollar’s 5.9% appreciation against the pound in 2018. If this favourable factor is excluded, then the third-best performing fund in 2018 was Thesis TM Sanditon European Select (+9.5%).
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Important Information This communication is for the use of professional advisers and other regulated firms only. It is published by, and remains the copyright of, Square Mile Investment Consulting and Research Ltd (“SM”). SM makes no warranties or representations regarding the accuracy or completeness of the information contained herein. This information represents the views and forecasts of SM at the date of issue but may be subject to change without reference or notification to you. SM does not offer investment advice or make recommendations regarding investments and nothing in this communication shall be deemed to constitute financial or investment advice in any way and shall not constitute a regulated activity for the purposes of the Financial Services and Markets Act 2000. This communication shall not constitute or be deemed to constitute an invitation or inducement to any person to engage in investment activity. Should you undertake any investment activity based on information contained herein, you do so entirely at your own risk and SM shall have no liability whatsoever for any loss, damage, costs or expenses incurred or suffered by you as a result. SM does not accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance is not a guide to future returns. 24
25
BUILDING RESILIENCE
CIO OUTLOOK: YEAR OF CHANGE
2020 should be an extraordinary year for investors. It will be a year of both change – from the holders of key posts at major central banks to the EU leadership and the US presidency – and continuation, as significant downside risks remain and geopolitical tensions will in all likelihood still command investors’ attention. LGIM’s 2020 CIO Outlook finds that building portfolio resilience in this context will be essential.
LGIM America Head of Global Credit Strategy Jason Shoup, Head of Investment Advisory Tim Dougall, and Head of Solutions Research John Southall examine some of the opportunities and risks with which investors are presented in this context. First, Jason argues that the many ways in which the US election could disrupt markets may be under-priced. Tim and John then outline how the application of our principles of portfolio construction can help investors manage risks such as these.
Without, of course, taking a view as to their merits, we believe the following policies advanced by progressive Democrats could prove the most disruptive to markets: 1. Higher corporate taxes: Expect a significant contraction in earnings in the event of a reversion to pre-tax-reform levels, or beyond. 2. Fracking ban: This would affect the entire US energy industry, from exploration, to pipelines, to refiners and service companies.
THE US ELECTION AND MARKET COMPLACENCY The race to the White House in 2020 may be firmly on the radar of anyone with a Twitter account or who is the recipient of investment research. But there is scant sign of it in market pricing. Yes, managed-care stocks in the US underperformed following a number of Democratic contenders’ recent support for a ‘Medicare for all’ policy. But elsewhere, from the broader equity market to rates and credit, it is difficult to find evidence that the chances of a dramatic shift in policy are being factored into valuations. We believe the election, set to be held on 3 November, is likely to impact US and global assets – possibly to an extreme degree if there is a ‘wave’ election, in which the Democrats make major gains. While Donald Trump may stand the best chance of beating a Democrat who seeks to disrupt the status quo, such as Bernie Sanders or Elizabeth Warren, versus a centrist like Joe Biden, this does not mean his re-election is a foregone conclusion.
3. Medicare for all: This could result in the creation of something akin to the UK’s National Health Service, severely damaging the managed care/health insurance sector in the US. 4. Lower pharmaceutical drug prices: Under one proposal, the government could engage in direct price negotiations with pharma companies. 5. Break up the banks, increase regulation: Deposit-taking banks could be separated from investmentbanking activity, transforming the sector, amid a far more burdensome regulatory environment. 6. Clampdown on tech ‘monopolies’: Amazon, Google, Facebook and other large tech companies could be prohibited from certain acquisitions and even broken up. Many of these policies would require Congressional approval. But there is a chance that the Democrats could gain control of the Senate as well as the presidency – a possibility investors may be underappreciating. And in the event that Trump is re-elected, political volatility may still remain elevated. His administration has been less obviously positive for markets of late, as attention has turned to trade and foreign policy. A second term for Trump might just be more of the same. Jason Shoup, Head of Global Credit Strategy at LGIMA Fixed Income
26
EIGHT STEPS TO A MORE ROBUST PORTFOLIO
5. Protect against unrewarded risks:
“Obey the principles without being bound by them” – Bruce Lee
When faced with macro risks – such as those described above – and the sheer volume of unknowable factors, constructing an investment strategy can sometimes feel like entering a battle. Among other things, investors need to find a decent array of weapons, or investment opportunities; guard against attacks, or shield against unrewarded risks; and, as no plan survives contact with the enemy, adapt to changing market circumstances. To help clients win their battles, we in LGIM’s Solutions team have established a set of eight steps: 1. Establish investment beliefs: We believe clarity and consistency of investment beliefs across a portfolio are important to ensure that all activity has a clear purpose and that conflicting decisions are not taken. 2. Clarify objectives and constraints:
Return target, risk tolerance, liquidity requirements, asset class constraints, environmental, social, and governance (ESG) criteria, and required performance in particular scenarios should all be considered, in our view.
3. Identify investment opportunities:
Constant innovation is required to find the most attractive and efficiently expressed opportunities. Clearly identifiable economic, behavioural or structural reasons as to why a return should be generated are key.
4. Diversify rewarded risks:
In order to maximise efficiency, we believe exposures should be diversified by risk factors, return drivers, asset class, currency, region and anticipated correlations, as well as taking into account conviction level for different opportunities.
Residual unrewarded, or poorly rewarded, risks to which a portfolio is exposed should be identified and hedged, managed, or otherwise mitigated where possible, in our view.
6. Manage liquidity:
Comparing the scope for both predictable and unpredictable requirements against expected and potential liquidity availability allows investors to stress-test portfolios.
7. Mitigate tail risks:
Scenario thinking can help portfolios to cope with more extreme events, allowing for particular attention to be paid to those eventualities that are important for a given investor or for associated stakeholders.
8. Adapt to market conditions:
A portfolio is never static; adjusting for the latest economic and market conditions, while seeking to capture new investment opportunities as they arise, should help to ensure it remains appropriate. These steps are based on our principles of portfolio construction, which can help us to identify gaps in a strategy that may have been missed. Various models can assist throughout this process, particularly in sizing positions; however, care is needed – qualitative matters and common sense are just as important as quantitative methods – and we are cognisant of model risk and assumption risk. Our whole process is iterative, as decisions made at one stage will have knock-on implications for other stages. We view an overall portfolio, modelling it holistically as we seek to ensure it is well diversified, risks are controlled, and efficiency is improved. Expect to see more research from us in 2020 on how we can use these principles to help our clients win their investment battles. Tim Dougall, Head of Investment Advisory, and John Southall, Head of Solutions Research
Important notice: Past performance is no guarantee of future results. The value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. The Information in this document (a) is for information purposes only and we are not soliciting any action based on it, and (b) is not a recommendation to buy or sell securities or pursue a particular investment strategy; and (c) is not investment, legal, regulatory or tax advice. Legal & General Investment Management Limited. Registered in England and Wales No. 02091894. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and Regulated by the Financial Conduct Authority, No. 119272. 27
FUNDAMENTALS VS. VALUATIONS
NAVIGATING MARKETS IN 2020
The good news for investors over the last year is that absolute returns have been positive, but the bad news is that valuations have been pushed up as fundamentals have moved in the opposite direction. Chris Forgan, Portfolio Manager, Fidelity Multi Asset, discusses how this divergence might be resolved in 2020.
The recovery in global growth that many investors were hoping for in 2019 did not materialise. On top of this, investors had to contend with significant uncertainty caused by geopolitics. But the promise of easier monetary support from the world’s central banks has helped push down bond yields and force investors up the risk spectrum in search of higher returns. How will this divergence be resolved in 2020 given that central banks have delivered? A ‘bull rotation’ could see this divergence narrow with data improving, yield curves steepening and more cyclical areas performing strongly. However, investors shouldn’t rule out the possibility of a ‘bear rotation’ driven by a further US slowdown and the realisation that technology companies’ earnings may indeed be cyclical too. The balance between these two scenarios is likely to be tipped by the path of the US consumer. Although US manufacturing is still weak - and non-manufacturing data has ‘caught down’ too - the labour market remains tight and this has helped prop up the consumer. However, we have recently seen retail sales return to trend after a very strong run. Surveys of CFOs across industries continue to point to weakness in capital expenditures and confidence over the industry outlook is also precarious. Meanwhile, the Chinese economy has shown improvement from Q4 2018 lows, but the targeted stimulus from Chinese policymakers this time around is unlikely to spur the rest of the world forward.
THE BENEFITS OF A DIVERSIFIED TOOLKIT So what does this uncertainty mean for portfolio positioning heading into 2020? One of the key ways we are dealing with this backdrop at Fidelity Multi Asset is ensuring that our portfolios are truly diversified. Traditional balanced portfolios have certainly been strong performers in recent years, but we believe that as we get further into the late-cycle and volatility picks up, it is important to have the ability to broaden out portfolio holdings beyond equities and bonds. Alternatives have an important role to play here - from loans, to infrastructure, to aircraft leasing, to renewables, to specialist investment approaches. This universe is highly heterogenous 28
and research is critical: our dedicated analysts are a vital part of understanding the characteristics of these distinct strategies and the role they can play in an overall portfolio. Our team uses a range of strategies from this broad universe to access opportunities, including hedge funds designed to take advantage of rising volatility. As we move into next year, these volatility-focused strategies may be an important part of our toolkit in responding to a changing investment landscape.
WILL GOLD CONTINUE TO GLITTER? The benefits of gold may also come to the fore in 2020. It is another asset which offers defensiveness, whether expressed through direct physical exposure or gold-related equities. We have seen heightened valuations in recent months and strong price appreciation year-to-date, but based on our thesis, we think gold is still attractive. The gold price will likely be driven by three main factors: overall risk sentiment, the strength of the US dollar and the level of real rates. We believe the first two of these factors have not yet come into play this year, with gold primarily driven by lower real rates after the Federal Reserve ‘pivot’ in early 2019. As we have seen markets push ahead of the fundamental backdrop, our team remains focused on being prepared for either a ‘bull rotation’ or ‘bear rotation.’ In this environment, large and well-resourced research teams can make a big difference in finding opportunities across regions and the capital structure. We will remain focused on identifying the assets most mispriced for an upside surprise in global growth, as well as the best defensive assets to hedge against uncertainty.
“As we have seen markets push ahead of the fundamental backdrop, our team remains focused on being prepared for either a bull or bear rotation.”
Important information This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in small and emerging markets can also be more volatile than other more developed markets. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates fall and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Fidelityâ&#x20AC;&#x2122;s Multi Asset funds use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM1219/25172/SSO/NA
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Fidelity’s Multi Asset solutions
For investment professionals only
Because no two clients are the same, you need solutions that can help meet a variety of needs. Fidelity’s Multi Asset Allocator, Open and Income ranges offer something that could suit everyone. The value of investments can go down as well as up and clients may get back less than they invest. The funds can invest in overseas markets and so the value can be affected by changes in currency exchange rates. They may also use derivatives for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger-than-average price fluctuations. Whether your clients are looking for income, total return or simply low-cost access to global markets, we can help you put the person into personal portfolios.
No such thing as
average. Visit professionals.fidelity.co.uk
IInvestments nvestments should should b be e made made on on the the basis basis of of the the current current prospectus p ro s p e c t u s , w which hich is is available available along along with with the the Key Key Inve Investor Information Document and annual and semi-annual reports, free of charg ge on request by 30 0800 368 1732. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F calling symbols are trademarks of FIL Limited. UKM0819/24711/SSO/0220
For investment professionals only and should not be relied upon by private investors.
Tax year end support built around you and your business Our dedicated web hub provides comprehensive support to help you at this time of the year. Visit fundsnetwork.co.uk/taxyearend
Client reporting To help you prepare for client meetings, our reports highlight where allowances haven’t yet been utilised:
Campaign support
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Technical matters There’s an array of resources and material available highlighting the important considerations around pension and ISA contributions. Areas included:
Email and letter templates designed to support your marketing initiatives Client-facing materials including our ‘Guide to pension and ISA tax allowances’
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The value of investments and the income from them can go down as well as up so your client may get back less than they invest. The value of tax savings and eligibility to invest in an ISA depend on personal circumstances. The value of pension benefits depends on individual circumstances. Withdrawals from a pension will not normally be possible until age 55.
To find everything you need for tax year end, simply visit fundsnetwork.co.uk/taxyearend
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In uncertain markets, a solid foundation is paramount. BNY Mellon global equity funds can act as a keystone, aiming to provide long term stability for any portfolio, to better withstand the market forces that may come its way.
BNY Mellon Global Income Fund managed by:
BNY Mellon Long-Term Global Equity Fund managed by:
The value of investments can fall. Investors may not get back the amount invested. Important Information For Professional Clients only. This is a financial promotion and is not investment advice. For a full list of risks applicable to this fund, please refer to the Prospectus or other offering documents. Before subscribing, investors should read the most recent Prospectus and KIID for each fund in which they want to invest. Go to www.bnymellonim.com. The Prospectus and KIID are available in English and in an official language of the jurisdictions in which the Fund is registered for public sale. These Funds are sub-funds of BNY Mellon Investment Funds, plc, an open-ended investment company with variable capital (ICVC), with segregated liability between sub-funds. Incorporated with limited liability under the laws of Ireland and authorised by the Central Bank of Ireland as a UCITS Fund. Incorporated in England and Wales: registered number IC27. The Authorised Corporate Director (ACD) is BNY Mellon Fund Managers Limited (BNY MFM), incorporated in England and Wales: No. 1998251. Registered address: BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Authorised and regulated by the Financial Conduct Authority. Issued in UK by BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England 321118580. Authorised and regulated by the Financial Conduct Authority. MAR000141. T8380 11/19 No.
For professional clients only
Invest in a cleaner tomorrow
The Clean Economy is set to be worth $3 trillion by 2025* The global demand for resources continues to rise. Meeting it in a sustainable way is a substantial investing opportunity. The AXA IM Clean Economy Strategy aims to take full advantage by investing in companies who are pioneering responsible nutrition – along with smart energy, sustainable transport and waste management. Our diversified, long-term approach taps into a broad universe of possibilities, to help you make more of making our world better. Investment involves risks, including the loss of capital. Find out more about the AXA IM Clean Economy Strategy: ADVISER.AXA-IM.CO.UK/CLEANTECH
*ClimateAction.org, as at 13/09/2012 This is for professional clients only and must not be circulated or distributed to retail clients. This communication is for informational purposes only and does not constitute an offer to buy or sell any investments, products or services and should not be considered as a solicitation or as investment advice. This communication is issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 7 Newgate Street, London EC1A 7NX. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries. © AXA Investment Managers 2019. All rights reserved. 33
EQUITY INCOME
NEGLECT ESG AT YOUR PERIL
ESG analysis is part and parcel of finding good sustainable businesses, says Chris Murphy of Aviva Investors. It’s in the firm’s DNA.
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“With the growing awareness of the climate crisis, some shares are viewed as more vulnerable. More investors are sensitive about owning them.”
As a UK equity income fund manager, Chris Murphy has two priorities for his investors: consistent yield and long-term capital growth. This means finding companies with long-term business models and strategic barriers to entry, so they can stand the test of time, sustaining and growing over many years. To do this increasingly requires an analysis of environmental, social and governance factors. Issues such as climate change and labour practices have become headline news in recent years. From Greta Thunberg to Extinction Rebellion, there is increasing pressure on policymakers, companies and asset managers to act. There are also sound economic reasons: consumers are increasingly ethical in the way they shop. Companies that neglect ESG risks could face a perfect storm of regulatory fines, consumer boycotts and financial disruption. Such pressures influence share prices. Murphy, who manages the Aviva Investors UK Equity Income fund says: “With the growing awareness of the climate crisis, some shares are viewed as more vulnerable. More investors are sensitive about owning them.” As more investors work within an ESG framework, there are fewer buyers for companies that score poorly on ESG factors. With this in mind, Murphy says ESG analysis is integral to finding companies that are well run and sustainable: “We want companies in which we invest to be efficient. If we’re investing in a mining company, of course we want it to have a good health and safety record. To do otherwise would introduce considerable risks. For us, sustainability is part and parcel of a good business model. It reduces the risk of stocks blowing up, or long-term structural weakness. We always want to invest in best-in-class companies.” Sustainability and an income mandate haven’t always been easy bedfellows, with much of the income from the UK market coming from large oil companies. Murphy takes an unconstrained, non-benchmark approach and has been consistently underweight this part of the market. That said, he emphasises that engagement is vital in encouraging these companies to do the right thing. He points out that these companies are now leading the way in electrification. He says: “The fund currently yields around 4.75%. This is a premium to the market and we are not forced to own any business on yield grounds. There are plenty of places to find income. There are plenty of opportunities at the bottom end of the FTSE 100 for example.” Today he holds as much in Greencoat Wind Farms as he does in BP.
ESG is firmly embedded in the heritage of Aviva Investors and the wider Aviva group. There is an in-house global responsible investment team, with whom Murphy works closely. It has 22 members in a range of roles. “They may work on specific projects or do high-level sector work. Others will be focused on governance and engagement. They will come to our meetings with companies to discuss specific issues,” he says. This ensures he has all the ESG data he needs at his fingertips. He can understand if a business is deteriorating or improving and is quickly alerted to potential problems at individual companies. While he is not forced to sell, it means he can look at why a company might be having problems. It can also help direct him to companies with stronger prospects. He says: “Those companies with better management will be ahead. This is not a fad and it’s not going away so companies need to manage it. Look at companies such as National Grid. If we move into sustainable storage through batteries, there will be more investment in the grid and network. In this environment, National Grid can deliver long-term steady returns.” There are other challenges facing UK investors, including the political backdrop. Murphy has moved back into a number of UK companies in recent months, including Ibstock, DFS and Tesco, but this is on valuation grounds, not because he was taking a view on the election. “These are simply cheap and attractive assets.” He aims not to be exposed to a binary outcome. “If you’re right, you may look like a hero, but if you’re wrong, it’s very painful. However, the continued outflows from the UK market have left UK equities on a yield of around 4.5% and a price-toearnings ratio below the long-term average. There is a case that the UK is now the cheapest developed market.” Murphy notes M&A activity is picking up, which should help support the UK market from here. There are risks, however. There have been a number of high-profile dividend cuts, including Vodafone. There are also well-documented problems on the high street. “From a retail standpoint, if a company can’t compete in the online environment, they won’t survive. We own DFS, simply because it is tough to buy a sofa online. You need to sit on it to make an informed decision.” Judicious stock-picking is key, he says, and a flexible approach to avoid these under-pressure businesses. “Regardless of the backdrop, we are long-term investors, looking for companies generating strong cash flow and growing dividends. We’re not making sudden decisions. It’s in our DNA. We’re here to support good business and responsible capitalism,” he adds. 35
AVIVA INVESTORS EQUITIES
Freedom has its own style Change is the only constant. So we make sure we have the freedom to plan, act and react in the way that works best for you. Investing without style constraint, wherever the opportunity arises. And with responsibility at the heart of our investment process. This is our freedom. This is our style. This is how we work to keep you on the right side of change. avivainvestors.com/equities
Capital at risk.
For professional clients and advisers only. Issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office Helenâ&#x20AC;&#x2122;s, 1 Undershaft, LondonEC3P 3DQ. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. RA19/1143/13092020
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Our Model Portfolio Service Delivering your investment solution The much-anticipated Invesco Model Portfolio Service is now available to Intelliflo users, providing risk-targed portfolios focused on income or growth and offering a combination of benefits that you won’t find anywhere else: – Access our expertise in research, asset allocation and portfolio construction – Partnered with Intelliflo to streamline advisory portfolio management and give you more time to focus on your clients – Only £1 per client per month to access the portfolios*, with no portfolio management costs for your clients Get started at invesco.co.uk/modelps Capital at risk.
This ad is for Professional Clients only and is not for consumer use. Invesco Asset Management Limited is authorised and regulated by Financial Conduct Authority. *Up to a maximum of £70 ex. VAT per firm per month. 37
MANAGER SELECTION
GETTING THE BLEND RIGHT: THE SCIENCE AND ART OF MANAGER RESEARCH AND SELECTION
Against an increasingly complex market backdrop fuelled by shifts in technology, regulation and global events, we believe that it’s more important than ever to implement a diversified portfolio that is consistent with your clients’ financial goals and risk profile. The Invesco Investment Solutions team explain their approach to portfolio management.
THIS ARTICLE IS FOR PROFESSIONAL CLIENTS ONLY AND IS NOT FOR CONSUMER USE.
Some investors may choose to invest only in self-selected individual securities, such as stocks, bonds, properties and cash instruments for example. More often, however, investors may choose to diversify their investments in funds (mutual funds or index funds). This approach often requires dealing with one or more fund manager, and how these fund managers perform their job goes a long way to determine how an investor’s diversified portfolio may grow in value over time. Recognising the importance of this aspect of the investment process, at Invesco we have launched our Model Portfolio Service, managed by the 60+ strong Invesco Investment Solutions team. Our range of multi-manager portfolios have the potential to offer investors a more rewarding investment experience, employing a disciplined, repeatable and scaleable investment process designed to achieve specific objectives like diversification and improved risk-adjusted returns. As such, the team aims to identify the fund managers who, in their view, are most likely to perform well in the future. The team believes that the breadth and depth of their process to evaluate fund managers represents a blend of science and art. Here we examine the science and art of manager analysis, selection, blending and even ‘de-selecting’.
THE DUAL AIMS OF ASSET ALLOCATION AND IMPLEMENTATION Building a portfolio for a client that is likely to achieve their financial goals requires getting two things right: identifying the right asset allocation and then implementing it in the right way. For many advisers, implementing an asset allocation involves selecting fund managers to help them build and maintain a desired exposure. However, the process of manager selection is rarely well understood. We all know that a manager’s past performance record is no guarantee of future performance. So how does the Invesco Investment Solutions team form a view on likely future performance?
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Like science, the team’s process is formal, structured and repeatable. Like art, it is informed by a philosophy that guides their collective judgement. This means applying their many years of collective experience (15+ years of average experience across the leadership team) to integrate their findings in a creative way. The combined approach gives the team confidence to recommend portfolios that represent the best blend of risk and return for a stated objective.
LOOKING TO ACHIEVE THE OPTIMAL BLEND OF RISK AND RETURN Sometimes discussions about fund manager selection turn into a debate over whether active fund managers can add value over an index. The Invesco Investment Solutions team believes that, whether investors are looking for income or growth, there is a place for both investment approaches in portfolios. At Invesco, although we are firm believers in active management, we think that passive management has a role to play when cost and simplicity are key considerations. Our multi-manager portfolios invest in diversified asset classes globally, and can include equities, fixed income, alternatives and cash. The range of asset classes, and the proportion in which they are invested, will vary according to the risk requirement of each individual portfolio: as the portfolios increase in risk, allocation to equities increases and the potential return should also increase. The risk targets are relative to global equity market volatility. This ensures that the team has the flexibility to focus on achieving the optimal blend of risk and return, regardless of the market environment. As a financial adviser you will be able to help your clients decide what level of risk is appropriate for them by taking into account financial objectives, diversification, risk management, and the need for appropriate long-term risk adjusted returns.
â&#x20AC;&#x153;Building a portfolio for a client that is likely to achieve their financial goals requires getting two things right: identifying the right asset allocation and then implementing it in the right way.â&#x20AC;?
Find out more For more information on the Invesco Model Portfolio Service, including the investment team, their process, the portfolios and platform availability, please visit invesco.co.uk/mpsscience
Investment risks The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Important information This article is for Professional Clients only and is not for consumer use. Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. Issued by Invesco Asset Management Limited Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.
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INFRASTRUCTURE
INFRASTRUCTURE: A NICHE WITH UNIQUE POTENTIAL Infrastructure isn’t just another type of equity. The asset class exhibits unique behaviour – with unique potential for portfolio diversification. Many investors assume that listed infrastructure companies, because they’re publicly traded, must behave like any other stock. And it’s true that, in the short term, listed infrastructure does tend to correlate more closely to the broader equity market than to direct infrastructure investments. But don’t be fooled. Listed infrastructure is still infrastructure, with its own risk/return profile and structural drivers distinct from those of stocks. Not just another equity subsector The confusion, we believe, arises from a difference in time horizon. Over short time frames – days, months – equities and listed infrastructure tend to move alike. Over longer periods, however, listed infrastructure tends to revert to the patterns typical of its asset class. Consider the fifteen years ending December 2018. Global listed infrastructure delivered higher returns than global equities as a whole, and even most stock subsectors - and, notably, it did so with lower volatility. Infrastructure’s unique behaviour makes intuitive sense, since these companies provide the essential services that consumers just can’t go without, including highways, electric grids, water utilities, even sanitation. Demand for these services tends to be immune to economic cycle, while prices are often heavily regulated or set by contracts to possess a built-in inflation hedge. Thus, infrastructure as an asset class tends to be less affected by economic growth, or lack thereof. What’s more, infrastructure can also better weather both inflationary and deflationary pressures that would wreak havoc on other markets. Infrastructure companies possess such strong pricing power in their space that they can both raise prices to keep pace with inflation and hold them steady in deflationary markets, either way without sacrificing much in the way of customer demand. Yields in the space have historically ranged between 3% and 4% per annum, with mid-to-high single digit earnings growth – no matter what the stock market is doing. Unique, big-picture growth drivers In a macro sense, what drives growth in infrastructure is not the same as what drives growth in equities. Economic trajectory matters far less than structural, societal change. Infrastructure is a big-picture asset, driven by big-picture ideas: society’s increasing urbanisation, the globalisation of commerce, the fight against climate change – even the digital revolution. These themes are long-lived and persistent. Infrastructure’s most potent growth driver, however, will likely be a replacement story. From bridges to water systems, much of the world’s infrastructure will need to be repaired and restored as it comes to the end of its projected lifetime. At the same time, capacity must be expanded and upgraded to handle the demands of the 21st century.
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Consider that: • More cell towers will be needed to accommodate society’s greater reliance on data streaming over smart phones and the “internet of things”. • To accommodate autonomous vehicles, highways will need better lighting, brighter lane markers, and machine-readable signage. • The switch to clean power will necessitate an upgraded electric grid, with additional peaking plant capacity and extensive build-out of transmission/distribution networks. Yet for years, infrastructure investment has languished in developed countries, whose governments have struggled to bring in enough revenue to adequately fund projects. Increasingly, developed nations are turning to private infrastructure companies to fill the gap, in large part through public-private partnerships. Infrastructure providers, of course, stand poised to potentially benefit from such proposals. Unique risks Infrastructure also carries with it a set of risks differentiated from those that drive equity sectors or markets. Three of the biggest risks include: • Regulatory risk: Regulatory regimes are complex and ever-changing. They differ not just by country, state, and municipality, but also by political administration and specific legislative initiatives. • Interest rate risk: Infrastructure projects are enormously expensive and often financed through significant levels of debt. Rising interest rates can put pressure on revenues, making it harder for operators to satisfy their debt obligations long-term. • Event risk: Dramatic events like terrorist attacks or natural disasters can move stock markets. Long after the market corrects, the infrastructure asset impacted by the event can languish. Using infrastructure in a portfolio If infrastructure is its own asset, then it should have its own place in a diversified portfolio. What, then, should it replace? Our answer: Whatever you need it to. Infrastructure is a versatile asset that can complement many different exposures. First State Investment’s Global Listed Infrastructure team Past performance is not a guide to future performance. This information is directed at professional clients only and is not intended for, and should not be relied upon by, other clients. The value of investments and any income from them may go down as well as up. Investors may get back less than the original amount invested and past performance information is not a guide to future performance. Changes in exchange rates between currencies may also cause the value of the investments to go down or up. For further information on risks, please refer to the Risk Factors section in the Company’s prospectus. Issued by First State Investments (UK) Limited which is authorised and regulated by the Financial Conduct Authority (registration number 143359). Registered office Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number 2294743. Telephone calls with First State Investments.
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Mike O’Shea
CEO Premier Miton Investors
Talking the perfect company marriage, life as a CEO and guitars
HOW DID YOU GET INTO THE INDUSTRY? It was so long ago. I left university in 1984 with a degree in economics and wanted to go to London. I responded to an advert for what I thought would be an investment job but which turned out to be a sales role at Porchester Group. I learned lots but it wasn’t for me. In 1986 I joined Premier, which was then an IFA firm - and I have been at the same business ever since. In 1988 we started to market a unit trust portfolio management service to financial advisers and it soon became clear that having an adviser business and a growing asset management business in the same group was difficult, so we parted company with the IFA. In the mid 1990s we reversed the company into an AIM-listed company, and subsequently bought Brewin Dolphin’s unit trust company. How things change.
DID YOU SET OUT TO BE THE CEO? I have always had a hankering to be in charge of my own destiny - though I never thought I would be Chief Executive. You have a different career path when you grow with something, rather than by joining a big company. It was more of an evolution reaching this role. When we started, we were very small with £35m under management. That had grown to £6.5bn before the merger with Miton and is now over £11bn. I have worked with David Hambidge since 1987 there aren’t many work partnerships that have lasted that long.
WHAT DOES YOUR ROLE AS CEO OF AN ASSET MANAGER INVOLVE? There are lots of parts to my role. I’m a great believer in delegating and allowing people to do their jobs and deliver - interfering or being a control freak is not my style. I try to get the best out of the team and don’t have to be involved in everything - we couldn’t grow in that environment. I have to set the culture, tone and allow good people to deliver against their objectives. As an independent, UK client-focused business, we are close to the coalface and to our clients - including financial advisers and wealth managers - and we are always trying hard or trying harder to win and retain business. It’s brilliant and exciting. For us, the next opportunity ahead is to take the business from £11bn to £20bn whilst focussing on delivering for clients and attracting new talent.
December 2019 – 059
WHAT ARE THE PROS AND CONS OF PRIVATE AND PUBLIC OWNERSHIP? We have been both - twice. There are pluses and minuses to both. On balance, coming back to the public market in 2016 after ten years in private hands was transformational. We were lucky enough to have supportive shareholders as we grew from £4.5bn to £7bn of assets under management. Private companies are more internally focussed and are able to concentrate on their plans without the requirement of reporting to shareholders every quarter. They are more insular - although with the discipline of reporting to a board. In public companies, there is greater access to the capital markets and the helpful views shareholders can bring to the business. The deal we have just completed with Miton would have been more or less impossible had we been a private company. Being public also helps with a culture of equity ownership, in which I am a big believer, as there is a market and value for the shares.
WHAT MAKES THE PERFECT MARRIAGE OF COMPANIES? It’s all about a cultural fit. I was hugely impressed as we got to know Miton - their culture is very strong and not dissimilar to ours. Beyond that, a strategic fit is important. The fund management and distribution teams were broadly complementary, with little overlap, and there is the opportunity to harmonise the operations side of the business. The people in each business recognised fellow travellers on the same journey. This all helped result in a rather swift merger. The advisers to the business were good, and we all recognised that these things can be demanding and take up a huge amount of time, which could damage the business if drawn out. It was a case of do it quickly or not at all.
Square Mile 42
Talking With To read more Talking Withs visit squaremileresearch.com/Insights/Talking-With
WHAT ARE THE ESSENTIAL STRANDS OF CULTURE? The focus on clients, the pursuit of delivering good investor outcomes and service and the recognition people don’t have to buy our funds. The desire to work harder and smarter and to deliver over and above the competition. The entrepreneurial nature of our business is forged in the heat of battle, through knockbacks in, for example, bad markets or periods of under-performance. Our business is intermediated and we must enable our clients to realise what we can achieve for them. Equity ownership is important it encourages people and teams to will each other to succeed.
WHAT DO ACTIVE MANAGERS NEED TO DO TO SURVIVE AND THRIVE?
YOU ARE ON THE BOARD OF THE IA WHAT’S THE VERDICT? It has done a fantastic job over the last four or five years. It has raised the profile of the industry and made good connections with the regulator, policymakers, politicians and other industries.
WHAT’S THE MOST EXTRAORDINARY THING YOU HAVE SEEN?
ESG is a massive opportunity, and one where active fund managers have a big part to play in providing good outcomes for customers in a way that’s durable and sustainable. Investors will expect their money not only to give the outcomes they hope for, but to have a positive impact. I fear for investors who have bought cheap products where it may well be harder to achieve attractive returns over the next five to seven years, particularly by the time you have added in platform and other charges. Active fund management needs to stand up and be counted, with the right credentials and competitive pricing.
HOW SHOULD PEOPLE REACT TO A MARKET SHOCK?
WHAT’S YOUR APPROACH TO MANAGING A BUSINESS OF FUND MANAGERS?
Stick to the fundamentals - it’s the only thing you can do. The alternative is all bets are off. As investors, we were lucky as we did stick to our beliefs and bought some fantastically priced assets which turned out to be great investments for our clients over the subsequent three, five, seven years or so.
Allow them the freedom to invest as they want to invest. It’s like creating a canvas - the edges are the risk, regulatory and compliance framework within which they operate and they should be allowed to portray what they want to. Command and control does not work. Such constraints are largely unhelpful in a genuinely active management business. It takes many years of experience to be a good fund manager. You need to live through the good times without believing it is all down to you. And you need to pull yourself through the tough times to really gain the perspective you need. Good fund managers come from different backgrounds and I’m a huge believer in the importance of diversity, which brings a wider knowledge of the world.
I’m old enough to remember the 1987 stock market collapse, but the financial crisis was remarkable. It really did look on some occasions like the whole thing was going to go down the tubes. People were wondering if the banks would open. Nothing seemed to have a value and most, if not all, metrics were not working. On reflection, such times are interesting to live through.
WHAT ADVICE WOULD YOU GIVE TO SOMEONE STARTING OUT TODAY? There are no easy answers. You have to work hard. When I see youngsters going the extra mile, I find it really satisfying. It’s unbelievably depressing seeing people doing the bare minimum. Of course, it’s also important to remember that there’s more to life than work.
WHAT DO YOU DO OUTSIDE WORK? Guitars - you can never have too many. If I buy any more, I think my wife is going to leave me. I play blues. I play golf, badly, but I enjoy it. And my wine cellar is becoming an obsession for me. Plus the family.
Square Mile
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SQUARE MILE ASKED SOME OF THE FUND MANAGERS THEY KNOW ONE THING THAT WILL BE DIFFERENT IN 20 YEARS, AND THIS IS WHAT THEY SAID…. ACTIVE FUND MANAGEMENT WILL BE A VERY SMALL PART OF A VERY DIFFERENT INDUSTRY – Richard Buxton, Merian Global Investors
MOST OF THE PLANETARY, ECONOMIC OR SOCIAL BOUNDARIES WE FACE WILL BE REACHED IN 20 YEARS AS WE HIT HARD LIMITS ON CLIMATE, RESOURCE CONSUMPTION AND SOCIAL DEVELOPMENT; EVERYTHING WILL BE DIFFERENT, FOR BETTER OR WORSE - Neil Brown, Liontrust
EMPLOYMENT AND EDUCATION WILL BECOME MUCH MORE FLEXIBLE THROUGHOUT LIFE – Simon Edelsten, Artemis
TECHNOLOGICAL IMPROVEMENT IS INCREASING THE PACE OF CHANGE; I THINK THAT PRODUCERS AND CONSUMERS WILL FIND A WAY TO EMBRACE THIS POSITIVELY – Marty Dropkin, Fidelity International
WE’LL HAVE A ‘CURE’ FOR MOST CANCERS DRIVEN BY GENOMICS – Andy Warwick, Newton Investment Management
LIFE EXPECTANCY WILL BE LONGER – Richard Woolnough, M&G Investments
ROBOTS DOING OUR DAILY TASKS – Mark Barnett, Invesco 44
SEA LEVEL RISES WILL THREATEN GLOBAL POPULATION CONCENTRATIONS – Stephen Jones, Kames Capital
DIVERSITY WILL NO LONGER BE A CHALLENGE FOR THE INDUSTRY – Jennifer Anderson, Lazard Asset Management
EVERY ASSET MANAGER WILL BE AN ESG MANAGER – Gareth Davies, Columbia Threadneedle Investments
UNIVERSAL BASIC INCOME CONCEPT WILL BECOME MAINSTREAM AND A VIABLE POLICY OPTION – Joe Wiggins, Aberdeen Standard Investment
THE WAY WE PRODUCE, DISTRIBUTE AND CONSUME POWER. THE ENTIRE ENERGY SYSTEM WILL HAVE RADICALLY CHANGED. – Alex Monk, Schroders
FEWER PEOPLE LIVING IN CITIES – Jason Borbora-Sheen, Investec Asset Management
NEWS SERVICES WILL CHANGE RADICALLY – Stephen Macklow-Smith, J.P Morgan Asset Management
THE POLITICAL SYSTEM. INEQUALITY IS TOO LARGE BETWEEN GENERATIONS, BETWEEN SOCIODEMOGRAPHIC GROUPS AND BETWEEN COUNTRIES – John Roe, Legal & General Investment Management
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