Divided politics surrounding ESG investing have not deterred managers from pursuing an integration approach.
96% of asset managers have or plan to have (2%) an ESG integration approach and are using material ESG information when evaluating underlying investment portfolio companies to identify risks and opportunities, according to The Cerulli Report—U.S. Environmental, Social, and Governance Investing 2022: Social Issues Come to the Forefront.
The U.S. political environment has become increasingly polarized, with disparate views on timely environmental and social-related issues, in particular on climate change.
“On one hand, institutional investors and asset managers often feel the heat from moving too slowly on divesting fossil fuel assets, coupled with pressure from radical divestment campaigns,” says Michele Giuditta, director. “On the other hand, pension plans and asset managers, addressing the risk of climate change, could fear penalization by states and politicians who view ESG practices as ideologically driven.” The responsibility of navigating the complexities of these demands falls on asset managers and plan fiduciaries, as these asks do not typically consider the challenges of managing the assets.
Three-quarters of asset managers cite that clients believing that environmental, social, and governance (ESG) investing is driven by political views is at least a moderate challenge to increasing client receptivity of ESG issues, up from 49% in 2021. The political polarization is also impacting distribution, with 46% of financial advisors citing the perception that ESG investing is politically motivated as a significant deterrent to ESG adoption, compared to just 16% in 2021.
These recent pressures faced by investors have not impacted asset managers’ responsible investing plans, with climate change remaining a top strategic focus. According to the research, 83% of managers are making climate-related factors a top priority for new product development, ESG integration (93%), and active ownership activities (94%). Climate change and other environmental issues are also top themes asset owners seek to address when allocating to responsible investment strategies. Climate change/carbon reduction (71%), environmental sector (65%), and sustainable natural resources/agriculture (55%) are top areas of focus.
To alleviate near-term skepticism from investors caused by recent political backlash, Cerulli believes that asset managers need to discuss the merits of ESG and sustainable investing with their clients and reinforce how and why they are using relevant ESG data to drive long-term economic value. Transparency and reporting that validates how ESG information is additive will also be key.
Morningstar published its inaugural Global Investor Portfolio Study, which examines how individual investors in 14 markets construct portfolios. The study finds there is a wide divergence in portfolio preferences based on where an investor is located.
“Our inaugural global study of portfolio construction shows that there is no such thing as an average investor,” said Wing Chan, lead author of the study and head of manager research for Europe and Asia Pacific. “As investors around the world demand more personalized portfolios, it’s important to understand the factors that drive investing behaviors in order to improve the investing experience and empower investors’ financial success.”
The study analyzes how local market practices and investment culture, retirement safety net, and regulatory landscape drive investors’ financial needs and their appetite to take risks in their portfolios. It also considers the availability of financial products, how investors approach portfolio construction, the overall asset allocation of portfolios, and the magnitude of home-market bias – when a portfolio’s geographic exposure is skewed towards the investor’s home market.
Investors are more willing to take risks in their portfolios when they begin investing early in life. This is seen in markets with a higher prevalence of defined-contribution retirement schemes, where investors tend to build or are defaulted into more aggressive portfolios with higher equity weightings and less bond and cash exposure. This includes markets such as Australia, New Zealand, the United Kingdom, and the United States.
In contrast, in markets such as France, Germany, and Japan, which have defined-benefit schemes and, in some cases, are supported by universal healthcare and a comprehensive social security net, there is less incentive for investors to make their own financial planning decisions. As a result, these investors tend to have conservative portfolios.
Real estate makes up most non-financial asset wealth globally and is the primary reason investors take on significant debt, especially in highly indebted markets such as Australia, Canada, China, Hong Kong, and New Zealand.
Home-market bias is prevalent in all markets, though there are often additional drivers beyond traditional reasons such as familiarity, accessibility, and avoiding currency risk. These include the size of the domestic equity and bond markets, capital controls, and tax benefits.
U.S. investors generally have a high appetite for risk, as U.S. households hold the least amount of cash and deposits. Investors in Japan, however, represent the most conservative cohort, with more than 50% of households’ assets sitting in cash or deposits, despite more than two decades of close-to-zero interest rates.
While sustainable investing is most popular in Europe and is gaining interest in Australia, New Zealand, and North America, ESG issues have yet to become top considerations when investors construct portfolios in Asia. In the U.S., sustainability plays a supporting role in investment selection, but ESG considerations appear to be particularly important to younger investors.
Cryptocurrencies are included in portfolios across the globe but continue to be used by a minority of investors, with a heavy concentration among younger cohorts. The most cryptocurrency-friendly investors are in Singapore – which is home to several prominent cryptocurrency companies, Hong Kong, and Canada – which has over 14% of assets allocated to the space.
Franklin Resources, Inc., a global investment management organization operating as Franklin Templeton, announced the completion of its acquisition of BNY Alcentra Group Holdings, Inc. (together with its subsidiaries, “Alcentra”) from The Bank of New York Mellon Corporation (“BNY Mellon”).
Alcentra is an European credit and private debt managers with $35 billion in assets under management as of September 30, 2022 and has global expertise in senior secured loans, high yield bonds, private credit, structured credit, special situations and multi-strategy credit strategies.
With this closing, Franklin Templeton’s U.S. alternative credit specialist investment manager, Benefit Street Partners (“BSP”), expands its capabilities and presence in Europe, nearly doubling its AUM to $75 billion globally, and increases the breadth and scale of Franklin Templeton’s alternative asset strategies to $260 billion in aggregate, as of September 30, 2022.
Alternative asset management is a priority for the firm, as investors are allocating more capital across the full spectrum of strategies.
In addition to alternative credit through BSP and Alcentra, Franklin Templeton’s alternative asset strategies include specialist investment managers focused on private real estate through Clarion Partners, global secondary private equity and co-investments via Lexington Partners, hedge fund strategies via K2 Advisors and venture capital through Franklin Venture Partners.
Founded in 2002, Alcentra employs a disciplined, value-oriented approach to evaluating individual investments and constructing portfolios across its investment strategies on behalf of more than 500 institutional investors. Alcentra’s dedicated and highly experienced team is based in its London headquarters, as well as in New York and Boston.
In connection with this transaction, there will be no change to Alcentra’s brand in Europe or Alcentra’s investment strategies.
As we approach the end of a challenging year for investors, the dominant themes remain that of accelerating inflation, matched with rising interest rates to try and mitigate this threat. Meanwhile, international events – essentially Russia’s war on Ukraine – have reinforced the malaise of investors in 2022. Overall, the appetite for some exposure to a basket of high-quality (‘investment grade’) global corporate bonds, diversified across regions, possibly currencies and industry types, is low amongst bond investors. But against the clear headwind of a global economic slowdown, we believe there are solid reasons to consider investing in global investment grade corporate bonds in 2023.
First, let us look at the market environment today. We have seen heightened uncertainty across all corners of the bond market, with all fixed income assets delivering negative returns year to date. Bond investors especially have become increasingly concerned that interest rates would be raised more aggressively by central banks to tackle surging inflation – with the rising cost of energy and food the core drivers. A noteworthy move was by the European Central Bank, as it raised interest rates by a record margin in September. By the end of that month, the rate of inflation was above 8% in the US, 10% in the UK and a similar high rate across the eurozone. Inflation risk is especially bad for bonds. The purchasing power of money invested in a bond is eroded despite coupon and principal flows. This could leave a diminished positive real return, resulting in lower purchasing power than the investor had to start with.
Improving valuations
One reason we believe a basket of global corporate bonds may be worth considering is comparative valuations. In this context, valuations are measured by the difference between the respective yields of global corporate bonds compared to the average yield of core government bonds (eg US Treasuries or German bunds). This is called the ‘credit spread’. We think the average credit spread on an index of global investment grade corporate bonds is currently at a perceived ‘attractive value’. Excluding the Covid-19 crisis – arguably a one-off event – this is the first time we have seen these type of bonds at attractively valued levels in a decade.
Is the risk of default overstated?
But does the fact that investors want a larger risk premium for holding global investment grade corporate bonds mean the default for the asset class is set for lift-off? Not necessarily, and we think this is another reason why investors may want to re-examine global corporate bonds in 2023. For a basket of BBB rated (‘investment grade’) corporate bonds, the market is currently pricing in a default rate of over 16%, based on data from leading indices. However, the 5-year cumulative default rate is actually averaging 1.5%. Moving up in terms of credit quality, the market is currently pricing in a default rate of over 11% for A rated corporate bonds. The 5-year cumulative default rate is averaging just 0.3%. Overall, we feel this difference between what the market expects in terms of the number of high quality bonds defaulting, versus what generally has happened based on historical data, can be seen as a positive for the asset class.
Relative value opportunities
Exposure to global corporate bonds could also provide investors with the opportunity to take advantage of the best ideas that such a large and liquid asset class has to offer (€9.6trn as at May 2022; Bloomberg). For instance, it is possible to exploit something called ‘relative value’ in global corporate bonds. Relative value is based on the idea that bonds with the same level of risk should have the same expected returns. This may mean having exposure to bonds issued by the same company (eg, a US technology provider) yet across bonds based in different currencies (US dollar and euro-denominated bonds), and then between different maturity dates (a bond maturing in two years versus one maturing in 10 years).
Aside from relative value opportunities, another key feature of investing in global corporate bonds is the potential to have some diversification based on being able to take different investment views across areas like inflation, interest rates, and business and employment outlooks. Due to varying macroeconomic factors, economies globally find themselves at different stages of the economic cycle, often requiring a tailored monetary and fiscal policy response. As a result, investors may be able to move towards regions and markets where more monetary and fiscal stimulus is coming, and away from regions where it is likely to be withdrawn. They can do this by managing the exposure of a bond to both interest rate risk (‘duration’ in bond terms) and credit risk (‘spread duration’).
Looking ahead
It remains a challenging time for the asset class in an environment of strong inflation and central banks raising interest rates urgently and by relatively large margins in order to try and stem escalating prices. At M&G Investments we are of the view that recession may be coming soon in Europe and UK, so we are careful not to add too much corporate bond exposure in these markets, unless valuations look very compelling. Finally, as we head into the final months of a tough year, we maintain a preference for solid companies and sectors, those that in our view have the potential to outperform in a downturn – utilities are a good example.
Unicorn Strategic Partners(UnicornSP) and iCapital announced an exclusive partnership to distribute private market and hedge fund investments to financial advisors in Latin America and intermediaries in the US servicing non-resident LATAM clients.
UnicornSP will serve as a local distribution partner and product specialist introducing funds available on the iCapital flagship platform to wealth managers in the region.
UnicornSP will add new senior hires fully dedicated to private markets to its teams in Argentina, Brazil, Chile, Colombia, Mexico, Uruguay, and the United States.
On the other hand, iCapital will provide UnicornSP with product support through its in-house research and diligence team, and a bespoke suite of educational tools.
“This is a new chapter for Unicorn Strategic Partners and its clients. It underscores our commitment to providing wealth managers and their clients broader access to an array of diverse investment opportunities,” said David Ayastuy, Managing Partner at UnicornSP. “In launching our partnership with iCapital, we are powering our ability to meet high-net-worth investors’ growing demand for private market and hedge fund strategies, and better support their desired portfolio outcomes.”
UnicornSP services clients including private banks, broker-dealers, registered independent advisors, multi-family offices, and external asset managers across the Latin American markets and financial intermediaries in the US servicing non-resident LATAM clients.
iCapital and UnicornSP see significant demand for private market and hedge fund investments in LATAM alongside a desire for comprehensive educational support.
“We are delighted to strengthen our presence in the Latin American market in partnership with Unicorn Strategic Partners,” said Marco Bizzozero, Head of International at iCapital. “Latin America is of strategic importance to iCapital. This partnership represents our commitment to the wealth managers in the region by providing them with the relevant private markets and hedge fund investment solutions, expertise, and education to help them achieve their clients’ investment objectives.”
Daniel Viera has been hired by UBS International for its wealth management division in New York, the company reported on LinkedIn.
“We’re pleased to announce that Daniel Vieira has joined our International Division as a part of the New York International Wealth Management Office,” posted Catherine Lapadura on LinkedIn.
Viera, with more than 20 years in the industry, comes from Delta National Bank and Trust Company in New York where he worked for more than 15 years.
Prior to Delta, he worked for more than 6 years in Sao Paulo, first as a financial advisor and then portfolio manager, according to his LinkedIn profile.
“Backed by the extensive intellectual capital and the expertise of UBS Wealth Management, Daniel is positioned to help UHNW families and individuals in Latin America, simplify their complex financial lives, maximize the value of their businesses, and create lasting family wealth,” the release added.
He studied business and finances at Columbia Business School and the New York University.
Roberto Martins has been promoted to head of International Solutions at Itaú Asset Management.
Martins, with more than 20 years in the industry, posted on LinkedIn about his new role at the Brazilian firm.
He worked in Credit Suisse between 2001 and 2003.
Subsequently, he worked for a decade at Citi where he became head of Private Bank of Brazil.
In 2013, he landed at Itaú where he headed GWS International private banking until now he assumed the position of head of International Solutions.
Martins holds an MBA from the University of California, Berkeley, Haas School of Business and, among other studies and certifications, the Data Science Program of the Massachusetts Institute of Technology.
Jimmy Ly and José Castellano have launched Tigris Investments, a business development firm focused on providing dynamic strategies for global investment professionals and asset managers.
Founded by CEO Jimmy Ly and Chairman and Strategic Advisor Jose Castellano in Miami, their purpose to build Tigris Investments was to provide truly independent and consultative strategies and programs adapting to the highly sophisticated investment community. Tigris Investments ecosystem includes extensively researched business partners in asset management in addition to other opportunities around technology, marketing and consultancy, according the firm information.
La firma, fundada por el CEO, Jimmy Ly, y el Chairman y asesor estratégico, José Castellano, en Miami, nace, según explican en su comunicado, “con el propósito de ofrecer soluciones verdaderamente independientes y de consultoría, adaptadas a una comunidad exclusiva de inversores”. En este sentido, matizan que el ecosistema de Tigris incluye socios comerciales en asset management seleccionados cuidadosamente, así como estrategias en marketing, herramientas de Inteligencia Artificial y consultoría.
“We are excited to officially launch Tigris Investments offering our multifaceted strategies and opportunities to the investment community,” says Jimmy Ly. “The current over-commercialized approach to investment products globally has led to a high concentration of assets in large universal providers. This leaves ample room for diversification and hence an opportunity for high quality specialists with exceptional capabilities and track records”.
Tigris Investments starts with three main offices located in Miami, Uruguay, and Mexico with plans to expand further globally. The company is made up of highly talented individuals with a strong track record and a shared culture of execution and client centricity, the state said. The Uruguay office is led by Tigris’ Regional Partner Paulina Esposito as Head of Latin America Retail channel, along with colleague and Partner Ana Diaz who will be Head of Global Marketing. Peter Stockall, based in Miami, as Head of Sales US Offshore and Manuel Cortina, in Mexico City, as Mexico Country Head.
Tigris Investments immediate value proposition will be to launch three verticals;, distribution, technology and consultancy, the firm said. Each vertical will have a comprehensive range of strategies managed by highly specialized partners, and internally developed capabilities including, independently managed, MaterFunds which will provide a mutual fund quantitative comparative and portfolio building tool & MaterInvest which is a specialized creative content building and consultancy service for asset and wealth managers.
“We are witnessing a substantial regional transformation in the wealth management channel focused on more independent and sophisticated advice. With the increasing need for highly specialized managers, product differentiation, and advanced technology, we aim to pioneer this pivotal movement by creating a multi-strategic organization with exceptional partners with outstanding Investments and client servicing cultures, and sophisticated & innovative value propositions,” says Jose Castellano. “By always taking the view from the perspective of our trusted clients, we know we will have all parties’ interests in mind.”
U.S. equities dipped lower in September, with the S&P 500 recording its worst monthly performance since March 2020. Issues at hand circle around concerns of weaker company guidance, historic interest rate hikes, tighter financial conditions and a rise in hard landing fears. Tensions have been further compounded by geopolitical worries, including the ongoing Russia-Ukraine war and the potential of a global energy crisis. While there are undoubtedly countless factors that could go wrong with the market, much could still go right. Several catalysts will be in focus as potential drivers to push markets higher before year-end, such as an inflection point in the Russia-Ukraine war, U.S. midterm elections or inflation data indicating that prices are no longer rising.
Merger Arbitrage performance slipped in September as investors attempted to price in future rate decisions by the U.S. Federal Reserve after a third consecutive 75bps hike in September. Uncertainty over the Fed’s and the economic path forward yielded greater volatility in markets and the S&P 500 index declined 9.6% in September. On the positive side, Change Healthcare won its antitrust lawsuit in court and was subsequently acquired by United Healthcare for $27.75 cash per share, or $13 billion. Additionally, Twitter made continued progress in court, and Citrix was acquired for $104 cash per share, or about $14 billion. Spreads widened generally on other positions including Activision Blizzard, Inc., Tower Semiconductors Ltd., and Rogers Corp. We view the mark-to-market widening of spreads as an opportunity to earn greater returns as deals close and gains are crystallized.
September was the sixth month of negative returns for the global convertible market in 2022, joining June and January as the months seeing the sharpest declines. As noted, investors have become very focused on economic data, interest rates and how the US Federal Reserve’s actions to slow inflation will lead to a recession. Discussions abound of a “Lehman moment” or “Bear Stearns moment” where the massive move in rates over the last year will cause a significant institutional failure. The “Fed put” of the past is clearly not on the table until inflation shows signs of slowing. Correlations across asset classes have increased and sentiment is extraordinarily low. We acknowledge the factors that have continued to weigh on markets this year but believe that there is significant opportunity in the market here.
Reinsurers facing shrinking balance sheets amid rising rates and increasingly volatile catastrophic losses have effectively utilized the insurance-linked securities (ILS) market to manage risks and topay insured losses. However, ILS investors not properly compensated for risk or facing elevated losses amid fallout from Hurricane Ian may choose to reinvest capital elsewhere, which would exacerbate the demand/supply imbalance of the reinsurance sector, which is especially acute in the Florida property market, Fitch Ratings says.
ILS include catastrophe (cat) bonds, collateral reinsurance, sidecars and industry loss warranties, representing around 20%, or $100 billion, of global reinsurance capacity. Cat bonds are approximately 30% of the ILS market. Commentary from the Monte Carlo Rendezvous 2022 indicated a pipeline of ILS deals of $5 bil. of additional reinsurance capacity, which would benefit insurers facing a hardening market.
However, the ILS market will assume a fair share of losses from Ian, with Fitch estimating total insured losses of $35 billons.-$55 billons., second only to Hurricane Katrina at $65 bil. ($90 bil. in 2021 dollars).
As frequency and severity of losses have increased in the past 10 to 15 years, modeling catastrophic losses and pricing risk effectively is challenged by secondary peril costs and potential effects of climate change on catastrophe events. Escalating inflation and litigation expenses also make controlling claim costs more difficult.
Major hurricanes have hit Florida in five of the past six years, following a 10-year reprieve after Katrina (2005). The state remains attractive with its population growing over 16%, or three million people from 2010 to 2020. Estimated losses from Ian will make the tenuous Jan. 1 renewal season much more difficult.
ILS investors are compensated for possible principal loss due to natural catastrophe risk. Since 2017, with insured losses from Hurricanes Harvey, Irma and Maria, the number of cat bonds not returning full principal to investors totals 55 individual tranches with either a full or partial loss to investors, a dramatic increase compared to 75 tranches in totality since 1990.
Nearly 33%, or $10 billons (bil.) of outstanding cat bonds, have some exposure to Florida wind damage. ILS investments exclusively or predominantly exposed to Florida wind or the southeast region and Hurricane Ian are $2.9 bil.
Without proper compensation, investors will look elsewhere. Cat bonds become unattractive if investors perceive they are not adequately compensated for “loss creep” and “trapped capital” due to settlement delays, which can last three to four years. During this time, Cat bond investors may forego investment opportunities from other asset classes or be stuck with ILS deals at lower spreads. ILS-trapped capital from Hurricane Ian is estimated at $15 bil. – $18 bil. according to Trading Risk.
Fitch rates two catastrophe bonds, Stratosphere Re Ltd., 2020-1 and Long Point Re IV Ltd., 2022-1. These bonds are not at risk of principal loss given the former’s structural features and the latter’s predominantly northeast U.S. insured property value.
Several cat bond indices provide initial market reaction to Ian, reflecting preliminary estimates based on pricing sheets and not reported claims from sponsors. September sequential-month returns for Swiss Re Global Total Return, Eurekahedge ILS Advisers Index and Plenum Indexes were -8.6%, -7.6% and -5.2%, respectively, versus the ‘BB’ High Yield index return of -3.8%.
ILS indices prior to September were positive and performing very well in 2022 to financial asset classes, showcasing non-correlation benefits. However, ILS performance has trailed the 3 to 5-year ‘BB’ rated High Yield Index over the past five years. Spread attractiveness and diversification benefits for ILS investors may fall with rising interest rates, which may reduce investor appetite in dedicating time and resources to a sector that has plateaued between $90 bil. and $100 bil. of outstanding issuance.
