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Pictet Asset Management: Corona conundrum

Markets have rallied sharply on unrelenting policy stimulus, but Covid-19 has yet to be defeated. Fears of a second wave and mounting political risks argue for investor caution. Below, Pictet Asset Management (Pictet AM) shares their views on Equities regions and sectors:

Europe shines but time to cut back on financials

Whether the vantage point is the economy, the political landscape or Covid-19, Europe appears to be in better shape than the US. Which is why Pictet AM retains an overweight position in European stocks. EU member states’ endorsement of the Franco-German led EUR 750 billion recovery fund last month and the ECB’s continued monetary stimulus put the European economy on a much firmer footing; Pictet AM has consequently raised their forecast for the region’s GDP growth for 2021 by 1 percentage point to 7 per cent.

Crucially for investors, Europe’s stock markets do not yet discount the region’s improving economic prospects. Particularly when compared to their US counterparts. At current levels, the gap in US and European price to book ratios (3.7 vs 1.7) implies American corporations’ return on equity will further outpace that of European firms, widening from a differential of 5 percentage points to over 10 percentage points. Such an outperformance looks highly unlikely.

US stocks are already very expensive in any case. For US equities to maintain their current price-earnings multiple of around 24, corporate profit margins would have to remain stable. That is a stretch, particularly when factoring in the US’s continued failure to contain Covid-19, the growing regulatory backlash against Silicon Valley and uncertainty surrounding the outcome of the November Presidential election. Mindful of these risks, Pictet AM remains neutral US stocks.

With an increase in consumer spending a feature of the recovery taking hold in parts of the world, Pictet AM is attracted to consumer staples stocks. The sector has failed to keep pace with the broader market rally, which has been led by cyclical stocks. As Fig.3 shows, consumer staples trade at just a 10 per cent premium to the broader global market – down from over 20 per cent in March and the 10-year average of 25 per cent. Consumer staples companies’ improving earnings growth suggests their stocks warrant a higher premium.

To maintain a defensive tilt in their equity allocation, Pictet AM has reduced their weighting in financials to underweight. Although banks’ bad debt provisions resulting from pandemic-induced lockdowns have been largely in line with expectations, they remain acutely vulnerable to any setback to the smooth reopening of economies.

Moreover, dividend payments are unlikely to recover for the foreseeable future. Regulators across the world– including the ECB, the Fed and the UK’s Prudential Regulatory Authority – have moved aggressively to either cap bank dividend payments or temporarily suspend them. This greatly reduces the investment appeal of financial stocks.

Please click here for more information on Pictet AM’s Investment Outlook.

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

Important notes

This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.

Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).

In Canada Pictet AM Inc is registered as Portfolio Managerr authorized to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA. In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.

The greening of corporate credit

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Ruegg Steph Pictet AM_0 — Foto cedidaStéphane Rüegg, Client Portfolio Manager, Pictet Asset Management. Stéphane Rüegg, Client Portfolio Manager, Pictet Asset Management

The market for green bonds has been booming. Demand for investments with an environmentally-friendly pedigree has increased hand in hand with a growing awareness of the need to control climate change and pollution, to prevent the erosion of biodiversity and ensure a sustainable future.

But as with every new asset class that takes off, investors need to be wary of the pitfalls.

A decade ago, the market for corporate green bonds barely existed. By the end of April 2020, it was worth USD 347 billion.

In a nutshell, green bonds are debt raised to finance specific environment-related projects. Part of their investment appeal is driven by regulation: governments keen to encourage green projects often offer tax breaks for holding these instruments. But they’re also attractive because they signal the sort of management farsightedness that tends to equate with long-run corporate success.

For firms, the benefits are that demand for these bonds tends to diversify their investor base. And data suggest green bond investors tend to be more committed and hold the instruments longer than they do conventional debt.

Green bonds shoot for the stars

Size of corporate and government green bond market, ICE Bank of America Merrill Lynch Green Bond Index, USD bn

Source: ICE Bank of America Merrill Lynch Green Bond Index. Data as at 30.04.2020.

One attraction for issuers is these bonds’ longer maturities, which means refinancing can be less frequent. For example, green bonds (corporate and government) have an average duration of just under 8 years, compared to 7.2 years for global investment grade corporate debt, perhaps reflecting the fact that environmental projects have long time horizons.

And recently, issuance has been broadening along the credit spectrum. Although corporate green bonds are mostly rated investment grade, high yield issuers like recycling and waste management company Paprec, wind turbine manufacturer Nordex and glass manufacturer O-I Packaging Group have also made forays into the market. And more could find themselves there. Fallout from the Covid pandemic could see some of the 44 per cent of the green bonds that are rated BBB – a smaller proportion than the wider corporate debt markets – become fallen angels by dropping into high yield territory.

The risk facing investors is of confusing bonds that exist out of a company’s genuine desire to push forward a green programme with those that are little more than greenwashing. That’s to say, companies issuing debt as green bonds, but then using the money raised for other purposes, such as to refinance existing debt.

There’s no clear demarcation between where the one ends and the other starts. Partly, this is because green bonds aren’t necessarily ring-fenced project financing, but rather tend to sit on the issuing company’s balance sheet and thus are part of the total mix of assets – which is why green bonds are generally assigned the company’s credit rating. But rating agencies could still downgrade green bonds on environmental, social or governance (ESG) considerations as they increasingly factor these into their analysis.

For instance, Italian electricity producer Enel was accused of greenwashing when it issued a bond linked to its commitment to increasing its use of renewables. Failure to meet targets would force the company to pay a higher coupon on the bond. That’s ostensibly green, but critics argued that in fact it was little more than an option to produce dirty power.⁽¹⁾

Or take Teekay Shuttle Tankers, owner of one of the world’s largest fleets of oil tankers which set out to raise at least USD 150 million to build four new fuel-efficient ships with a green bond. It fell short, in part because investors questioned how green even a fuel-efficient oil tanker could possibly be.⁽²⁾

Grey areas in green bonds

Complicating matters is how some issuers are further slicing up this class of securities, for instance ‘blue’ bonds that are related to investment in water, or ‘transition’ bonds that promote the shift to a lower-carbon economy. Meanwhile, ‘social’ bonds that promise wider societal impact have seen renewed interest following the global coronavirus epidemic.

Sometimes it makes sense to look past the green label and to invest in ordinary securities issued by a truly green company. Some firms with a strong environmental pedigree have shied away from issuing green bonds because of the still small size of the market and its specialised nature, or because they calculate they are not being compensated for the additional compliance costs associated with green bond.

So, for instance, only three car companies have so far issued a green bond, and Tesla, leader in the field of electric vehicles, isn’t one of them. And that’s notwithstanding the sector’s wider push into green transport, particularly electrification. Indeed, the green bond market is still relatively concentrated with more than 70 per cent of issuance by financials and utilities.

But for all the grey areas in green bonds, matters are improving. Some of that improvement comes from best practice, some comes from industry bodies, and some from regulators.

For instance, having issued three sustainable bonds, culminating with a USD 1 billion debt raising in 2019, American coffee chain Starbucks has created a template for other companies to follow. Its aims of shifting the sourcing of its coffee beans to sustainable producers and making its retail operations greener attracted widespread investor support.⁽³⁾ The company, in turn, became an information resource for other firms seeking to raise green finance.

A voluntary industry code determines what qualifies as a green bond, which is verified by an approved party certified by the Climate Bonds Standard and Certification Scheme. This, in turn, is reinforced by a second opinion from independent external agencies, such as Sustainalytics, that review the greenness of the bond.

Finally, government agencies have been getting involved. The European Union has led the way in December 2019 by establishing rules governing which financial products qualify as “green” or “sustainable”. These rules require firms to fully disclose what proportion of their investments is environmentally friendly or sustainable. A mere 17 per cent of the market value of the green bonds held in the MSCI Green Bond Index would meet the requirements of EU Green Bond Standard (EU GBS)

But quantifying what are often qualitative aspects of operations is a challenge and the field is still new. Agencies that rate companies on environmental, social and governance criteria can provide wildly differing assessments, depending on the weights they give to various factors, such as industry, operating region and management intentions.

Given all the complexities involved, investors need to take a careful, analytical approach. Some green bonds are greener than others. Some ordinary corporate bonds issued by green companies will be greener than green bonds. And sometimes, ordinary debt finance raised by companies in dirty industries will be put towards environmentally worthy investments – especially when the firm is looking to fundamentally change the nature of its operations. Balancing environmental credentials with social factors demands taking a broad view of the market. No single green bond should be assessed in isolation of the issuing company’s overall strategy towards a greener more sustainable business model.

Column written by Stéphane Rüegg, Client Portfolio Manager at Pictet Asset Management.

For more information on our Fixed Income and Sustainability capabilities, please click here.

Notes:

(1) https://www.environmental-finance.com/content/analysis/
in-response-to-accusations-that-enels-sdg-bond-was-greenwashing.html
(2) https://www.ft.com/content/b1d4201c-f142-11e9-bfa4-b25f11f42901
(3) https://www.sustainalytics.com/sustainable-finance/wp-content/
uploads/2019/05/Starbucks-Sustainability-Bond-Second-Party-Opinion_05012019.pdf

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

Important notes

This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.

Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA). In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.

Short Selling: An Essential Tool for Responsible Investment

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The Alternative Investment Management Association (AIMA) and international law firm Simmons & Simmons have recently published a paper that examines how short selling can be used in the context of responsible investment. To do so, they have worked with some of the world’s leading alternative investment managers, revealed AIMA in a press release.

The research document describes how hedge fund firms can use their investment abilities to accomplish an important goal of responsible investment: protecting against undesired key risks such as climate risk. “Carbon footprinting” is one of the examples they used.

“By properly accounting for the carbon exposure of both their long and their short portfolios, alternative investment managers and their investors can gain crucial insights into how exposed their investments are to climate change and the attendant policy changes”, AIMA said. Short selling can thus be used to accomplish a key goal of responsible investment: protecting investors from ESG risks.

In their view, short selling can also be used to create positive impacts for the broader markets. Short selling campaigns are often triggered by ESG concerns such as questionable issuer governance, poor employee safety practices, environmental issues and even alleged human rights abuses. Alternative investment managers have a long and successful track record of discovering governance failures, as witnessed by the recent Wirecard scandal. They use this same expertise to expose environmental and social failings of issuers, creating more transparent, safer markets for investors around the world.

In that sense, AIMA CEO Jack Inglis commented that alternative investment managers have always been at the forefront of investment innovation. Today, they are using one of their defining abilities (short selling) to protect their investors from novel risks, and to make markets as a whole safer.

“We are happy to see this fact gain increasing recognition from investors and leading organisations such as the PRI, and we have no doubt that short selling will soon be seen not just as valuable for responsible investment, but essential”, he added.

Meanwhile, Darren Fox, Partner in Simmons & Simmons claimed to be “delighted” to have been able to assist AIMA in producing the Guide. “To dismiss short selling as not having a role to play in the context of ESG would be naïve. One only has to look at the recent events relating to Wirecard to realise that short selling has an important role to play within the ESG framework”, he stated.

Fox pointed out that AIMA has “a vital role” to play in fostering the debate on this very important issue and the new Guide should help to stimulate and move forward that debate.

Get ready for an M&A wave on the second half of 2020

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Acuerdo — Pixabay CC0 Public Domain. Trato

U.S. equities moved higher in July against the daunting backdrop of renewed Coronavirus surges that are raising risks for the nascent U.S. economic recovery. During the J.P. Morgan second quarter conference call, CEO Jamie Dimon said, “You’re going to have a much murkier economic environment going forward than you had in May and June, and you have to be prepared for that.” Investor confidence that monetary policy and another fiscal stimulus package will continue to backstop the U.S. economy and markets provides major support for stock prices.

GAMCO expects to see more mergers, some facilitated by SPACs (special-purpose acquisition companies), private equity, or corporations looking to grow. Amazon may decide buy a filmed-entertainment company to gain new content. The outlook for deals and financial engineering brightened during the Honeywell International earnings call when CEO Darius Adamczyk said, “the balance sheet is very strong and well-protected, well-funded. So in short, we’re very much open for business, both from an M&A perspective, as well as potential buyback perspective… the M&A environment is just a little bit slower just because everybody is focused on battling the crisis. But we think that that may open up a little bit more here in the second half, and we hope to be active.”

Among GAMCO’s Private Market Value (PMV) with a Catalyst™ stock research ideas highlighted as ‘stock picks’ during BARRON’S 2020 Midyear Roundtable, published in the July 13 issue, were: NextEra Energy Partners (NEP), which manages renewable-energy projects, Maple Leaf Foods (MFI), equipment rental supplier Herc Holdings (HRI), Vivendi (VIV), Sony (SNE) and GCP Applied Technologies (GCP), a specialty construction chemicals, building materials, and packaging sealants producer. Catalyst Starboard Value, an activist investor, recently won eight board seats.

The recent Coronavirus spike slowed the rally in value, small cap stocks, and the U.S. dollar as economic slowdown fears resurfaced. A weaker dollar will make the U.S more competitive in global trade.

Column by Gabelli Funds, written by Michael Gabelli

______________________________________________________

To access our proprietary value investment methodology, and dedicated merger arbitrage portfolio we offer the following UCITS Funds in each discipline:

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GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.

Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.

Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.

Our objectives are to compound and preserve wealth over time, while remaining non-correlated to the broad global markets. We created our first dedicated merger fund 32 years ago. Since then, our merger performance has grown client assets at an annualized rate of approximately 10.7% gross and 7.6% net since 1985. Today, we manage assets on behalf of institutional and high net worth clients globally in a variety of fund structures and mandates.

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GAMCO ALL CAP VALUE

The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.

GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise. The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach: free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.

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Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to ﬁnd out what those restrictions are and observe them.

Some of the statements in this presentation may contain or be based on forward looking statements, forecasts, estimates, projections, targets, or prognosis (“forward looking statements”), which reﬂect the manager’s current view of future events, economic developments and ﬁnancial performance. Such forward looking statements are typically indicated by the use of words which express an estimate, expectation, belief, target or forecast. Such forward looking statements are based on an assessment of historical economic data, on the experience and current plans of the investment manager and/or certain advisors of the manager, and on the indicated sources. These forward looking statements contain no representation or warranty of whatever kind that such future events will occur or that they will occur as described herein, or that such results will be achieved by the fund or the investments of the fund, as the occurrence of these events and the results of the fund are subject to various risks and uncertainties. The actual portfolio, and thus results, of the fund may differ substantially from those assumed in the forward looking statements. The manager and its affiliates will not undertake to update or review the forward looking statements contained in this presentation, whether as result of new information or any future event or otherwise.

Specialization and Diversification Drive Consolidation in Asset Management

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Despite the market downturn resulting from the ongoing COVID-19 pandemic, secular trends in the asset management market that made the environment ripe for consolidation during the past five years (fee compression, outflows from higher-cost active strategies, and product rationalization) are not likely to disappear any time soon, according to the latest Cerulli Edge “U.S. Asset and Wealth Management”, an overview by Cerulli Associates.

In order to combat fee compression, shrinking shelf space, and the rising cost of compliance due to stricter regulations, numerous subscale managers have joined forces. These subscale deals are aimed at strategic expansion into broader markets around the globe and consolidation/rationalization of product lineups to focus on top-performing strategies.

“In theory, these are the kinds of M&A deals that make sense on paper, but they can also serve as cautionary tales of the difficulties of melding operations within different firms with varying cultures,” comments Bing Waldert, managing director. According to him, mergers of this type typically lead to at least some level of reorganization and staffing reductions that run the risk of disrupting a business in the near term after a deal is finalized.

For newly created mega-firms, that there remains considerable potential for growing pains and uncertainty stemming from their efforts to increase scale through outside acquisitions. For Cerulli Associates, a clearer path to success may reside in another type of M&A deal: the strategic acquisition of smaller firms with strong brands and industry reputation.

“We have observed an increasing amount of M&A deals that primarily focus on the opportunistic acquisition by larger firms of specific capabilities and brands known for their specialization in a given sector, like alternative investments and environmental, social, and governance (ESG) offerings,” says David Fletcher, senior editor of the firm.

The Focus on Alternatives and ESG

Alternative investment capabilities are an attractive M&A target for many asset managers given investors’ increasing interest in uncorrelated, risk-adjusted allocations and these products’ relatively attractive revenue potential. Alongside the 74% of firms polled by Cerulli in 2020 citing the potential for increasing revenues as motivation for developing alternative investment capabilities, 59% point to business diversification as a chief driver.

According to Fletcher, the buy option is attractive to many firms that lack in-house expertise and seek quick speed to market. “Acquisition of firms with strong reputations in niche spaces makes sense for larger managers with the luxury of going the ‘buy’ route as opposed to building internally”, he says. Cerulli survey data suggests that, in the case of alternatives, there will be increased use of in-house teams and affiliates to build product lines in the near term as opposed to outsourcing to unaffiliated subadvisors.

In addition to the alternatives space, Cerulli has seen an increasing number of managers expanding via specialized firm acquisitions in the ESG-related product universe. Nearly one-quarter of firms polled are in the process of developing ESG capabilities during the next two years. For some firms, there will be significant cost to building these processes and staffing them. Therefore, as asset owners continue to place increased scrutiny on asset managers’ business practices and processes, Cerulli expects that more M&A activity related to ESG/responsible investing will occur in the near term.

“While pandemic-related uncertainty may impact deal flow in the short term, asset manager consolidation is likely to continue”, says Cerulli. They think that, in addition to monitoring how larger M&A transactions transform the companies involved in coming years, firms should pay attention to the smaller mergers that afford those with more diversified investment capabilities. “These deals could help asset managers broaden their existing product offerings while also expanding their product suites into specialty, niche areas where they may enhance their revenue streams”, they conclude.

Interaction Between Governments, Companies and Individuals Will Shape the Future of Responsible Investing Post-COVID-19

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Heinsbroek_Adrie — Foto cedidaAdrie Heinsbroek, Principle Responsible Investment at NN IP. La interacción entre gobiernos, empresas y particulares en el mundo post-COVID-19 determinará el futuro de la inversión responsable

COVID-19 has disrupted every aspect of human life. This global threat has spurred us to reconsider priorities and heightened the importance of social justice and preservation of the planet. But if it is to be the catalyst that drives change towards a more sustainable world, what role will governments, companies and individuals be required to play? In a press release, NN Investment Partners identified new “unknowns” that responsible investors will increasingly need to take into account in their decision-making.

“Fundamental changes are already underway, as seen in the unprecedented fiscal and financial packages from governments, issuance of social bonds to fund healthcare and employment preservation projects, and companies cancelling dividends and share buybacks to focus on the welfare of their employees and other stakeholders”, says the asset manager. In its view, a second theme to emerge has been the increased urgency to shift to a lower carbon world. “It is already clear that corporate adaptability and responsibility helps build this resilience from an investment performance perspective”.

Adrie Heinsbroek, Principle Responsible Investment at NN IP pointed out that how a new “social contract” between governments, companies and individuals might play out raises many questions. “Investors and asset managers must assess how they should act upon these unknowns and be aware of how flexible they need to be if they are to adapt and tap into these corona-led trends”, he commented.

On 15 July 2020, Heinsbroek was joined by Joseph Stiglitz, Nobel Laureate and former World Bank chief economist, in a digital event to discuss how the actions and interactions of governments, companies and individuals will shape responsible investing in a post-Covid-19 world. This was the second event in NN IP’s UpsideDown series focusing on the world after corona.

Stiglitz said that COVID-19 has created many shocks but it has also accelerated changes that were already underway, especially around how we value economic and commercial success. “GDP, for example, is too simplistic a measure and ultimately misleading. A broader set of indicators are needed to accurately capture the value inherent in wellbeing and sustainability in a new multi-stakeholder world”, he added.

The transition towards a more balanced and inclusive economy is both dependent on and steers developments for three key groups: governments, companies and individuals; “and they form a triangle that is not just linked but also mutually dependent”, says NN IP. Differences between countries, cultures, economic status and type of government will also affect the speed and direction of change.

How will governments lead?

A major question for the asset manager is how interventionist will governments be in the next decade. In its view, the fiscal and monetary support packages enacted to combat the economic fallout from the COVID-19 crisis are “unprecedented”.

But will these packages and government policy be linked to the sustainability agenda, such as climate-change measures and carbon-reduction initiatives? Will governments take this opportunity to make financial support for companies conditional on tackling issues such as social inclusion? Will they intervene more assertively, using punishment and incentives to steer corporate behaviour? “They will also need to collaborate more internationally to meet climate targets and other sustainability goals”, adds NN IP.

A multi-stakeholder model

NN IP believes that within the triangle, companies have the most opportunity to propel change towards a more sustainable economy. The unknowns at a corporate level are driven by the trade-off between a “shareholder first” approach and a multi-stakeholder model. The value of social behaviour (looking after customers and employees rather than investors via dividends or share buybacks) is one of the most prominent developments to have come out of the pandemic.

Will this more sustainable value creation at corporate level become a more permanent trend and continue to be rewarded in the post COVID-19 world? Will companies discard practices that put shareholder interests above those of other stakeholders? If a multi-stakeholder perspective becomes the driver for value creation, the firm expects non-financial parameters to become a determining factor in assessing and predicting this. “Such a change will also affect the role that environmental, social and governance (ESG) factors play in assessing financial value”.

Individuals behaviour

The COVID-19 crisis has increased people’s awareness of climate and social issues and the consequences of their behaviour. But will this heightened awareness translate into new patterns of behaviour? Will preferences strengthen for more sustainable products and services, such as organic foods? Will the trends developed during the lockdown, such as healthier lifestyles and less flying, continue? Finally, will sustainability become a privilege just for those who can afford it, posing a threat to a more inclusive global society?

Heinsbroek concludes: “There will be many challenges ahead and differences to address, but there are also elements that connects us. One aspect that has become clear is that effectively assessing value involves taking a broader perspective. Looking beyond financial factors. This will become an increasingly dominant trend in how we measure both economic and societal progress, and as investors we have the means to positively influence it.”

NN IP Maintains Highest Score of A+ from the UN Principles for Responsible Investment

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hands-2847508_1920 — Pixabay CC0 Public Domain. Santander AM entrega 200.000 euros a 25 ONG

The UN Principles for Responsible Investment (UN PRI) has recently awarded NN Investment Partners (NN IP) with the top score (A+) for its strategy and governance approach to responsible investing and environmental, social and governance (ESG) integration. The asset manager stated in a press release that these scores reflect the strength of their approach to responsible investing.

NN IP also received an A+ score on all the equity-related modules and for its external management selection and monitoring (Altis), and further improved its scores on the fixed income modules, reflected by A scores on all three modules.

“We are proud to see that our commitment to responsible investing is again confirmed by the latest PRI assessment. The results reflect how we put our principles into practice by putting capital to work in the real economy to benefit society at large”, said Valentijn van Nieuwenhuijzen, Chief Investment Officer at NN IP.

In his view, the high scores and improved areas are the result of further increased focus within their combined efforts to drive this forward. “In addition to broadening the integration of ESG factors in the asset classes that we manage, we also advocate for responsible investing in the investment industry in general”, he stated.

Jeroen Bos, Head of Specialised Equity & Responsible Investing, said that it’s “great” to see that they score A+ on all equity modules and sees it as a reflection of their strong efforts to instigate change by engaging with the companies in which they are invested. “Examples include our steadfast ongoing drive to further strengthen the way we integrate engagement work in energy-related sectors and our work in collaborative initiatives such as Climate Action 100+”, he added.

Bos pointed out that the scores also reflect their E, S and G criteria integration in their investment processes. “Achieving the highest score is not where it stops. In the coming period, we will continue to introduce further enhancements to our ESG integration and engagement efforts”, he concluded.

NN IP has been a signatory to the UN PRI since 2008 and has been active in RI since the late 1990s. For the asset manager, their active involvement in this initiative demonstrates their ambition towards RI and underlines their shared responsibility to promote the further integration of ESG criteria and corporate governance in investment decisions for the benefit of society as a whole.

The PRI is the world’s leading proponent of responsible investment and is supported by the United Nations. It works to understand the investment implications of ESG factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership practices.

Four Principles of Financial Freedom to Teach Your Children

| For IreneValiente | 0 Comentarios

Every hour of every day, parents are “teaching” their children about finances, among many other things, with their own behavior. That’s what Stephanie Mackara, President & Principal Wealth Advisor of Charleston Investment Advisors and author of the new book “Money Minded Families”, points out in a press release.

In her view, if you make a habit of spending unconsciously or irresponsibly, you run the risk not only of creating your own negative financial situation, “but also of passing your financially unhealthy behavior onto your children”. To teach kids healthy spending and saving habits that will prepare them for life, Mackara recommends practicing 4 financial principles:

1. Saving = freedom

“Many people opt out of saving when given the choice, either because they just don’t think they can afford to, or they don’t have a clear understanding of how savings will provide them with choice and freedom,” Mackara says. The solution for her is to think of it not as saving, but as purchasing freedom.

2. Model the behavior you want your kids to learn

“Every day brings opportunity to show children and young adults about the simple process of spending, saving, and investing, and also to demonstrate the values that guide your choices”. Mackara recommends to live in a place where you spend and save thoughtfully, where your behaviors and thinking about your finances contribute to your personal well-being, and “where anything is possible”.

3. Don’t rely on government or corporations to dictate what your retirement will look like

In her view, the financial foundation of the United States is no longer stable and the only way to fix it for the future generations is to “take charge and DIY (do it yourself)”.

4. Financial literacy is no longer optional

“We must shift our thinking from allowing our children to take minimal personal responsibility and acquire limited financial knowledge, to consciously increasing the level of education they receive relative to financial matters”. Mackara points out that the next few generations don’t have the luxury of waiting until age 50 or 60 to pay attention to their financial wellness and money management habits.

All in all, she thinks American citizens must become more conscious of their financial journey before, during, and after retirement. “We must work toward living a life of financial mindfulness and wellbeing in order to better enjoy our present lives as well as our future retirements”, she concludes.

Juan Pablo Galán Becomes Credicorp’s Country Head For Colombia and Carlos Coll Steps Up in Miami

| For Gabriela Huerta | 0 Comentarios

Annotation 2020-08-03 101321 — Juan Pablo Galán. foto cedida

Credicorp has made changes to its management leadership this August. Juan Pablo Galán takes on the position of Country Head Colombia, while Luis Miguel González undertakes a new challenge as part of the Board of Directors of Credicorp Holding Colombia.

Carlos Coll (current COO of Credicorp Capital Advisors and Ultralat) will act as interim CEO of Ultralat in Miami.

It is expected that in a few months Felipe García, current Head of Capital Markets at the regional level, will additionally become Country Head of Credicorp Capital US (which includes the RIA -Credicorp Capital Advisors- and the Broker Dealer -Ultralat Capital Markets and Credicorp Capital Securities that are in the process of merging-).

According to a press release, under the leadership of Galán, Credicorp Holding Colombia, a Holding company of the Credicorp Group that is regulated by the Colombian Financial Superintendence, will take a new and more commercial approach, with the aim of promoting the development of its businesses and contributing to the fulfillment of the firm´s strategies in the country.

Eduardo Montero, CEO of Credicorp Capital said: “I welcome Juan Pablo to this new stage for the organization, congratulate him on this new role he is assuming and give him all the confidence in this endeavour.”

Galán has more than 25 years of experience in the financial sector, having held important roles as MD at Corredores Asociados, CEO of Alianza Valores and, for the last 4 years, as CEO of Ultralat in Miami. He has a BA from CESA (Colombia) with an MSc in Investment Banking and International Markets from the University of Reading – Henley Business School (England).

Jon Mawby (Pictet Asset Management): “Fixed Income Investors Need to Consider a Contrarian and Value Driven Stance”

| For Meritxell Sedo | 0 Comentarios

Jon Mawby Pictet AM — Foto cedidaJon Mawby, Pictet Asset Management. Jon Mawby, Pictet Asset Management

According to Jon Mawby, Head of Investment Grade Credit at Pictet Asset Management (Pictet AM), investors need to rethink the way they manage risk in their fixed income portfolios. Coming from a decade of double-digit US bond yields in the late 70s and early 80s, the “Total Return Fund” era started in the late 80s and during the last 35 years has benefited from the counter-cyclical monetary policies exercised by the Federal Reserve. In more than three decades, US government and corporate bond yields have experienced lower highs and lows. This has been largely driven by the monetary policy response implemented by Alan Greenspan, Ben Bernanke, Janet Yellen, and Jerome Powell, former and current Chair of the Federal Reserve Board, through a series of financial crises.

More recently, all the stimulus that has been pumped into the system to fight the coronavirus crisis, -the successive cuts in interest rates, the unlimited QE and the several lending programs that were announced back in March-, has left US bond investors facing close to zero or negative yields. This is a hugely different environment in which traditional bond investment can lead to losses in capital or in purchasing power, hence the need of investors to reevaluate the way they manage their fixed income portfolios.

The challenges faced by investors today

In Pictet AM’s opinion, after the Global Financial Crisis, the starting point for asset allocators of a traditional 60/40 portfolio is largely misguided. This is broadly driven by the fact that global government bonds in traditional fixed income portfolios were considered a vehicle to store value that offered a reasonable yield and that, in a wider portfolio context, had lower or negative correlation to risk assets. These three characteristics allowed traditional fixed income funds to deliver attractive returns and diversified risk across a wider risk asset portfolio over several cycles.

US 10-year Treasuries and many other government bonds in developed markets are now offering yields below the 1% threshold. At this level, government bonds have a limited upside and a potentially large downside risk if economies move from a deflationary to an inflationary environment. Therefore, investors can no longer rely on the traditional model to produce the same risk-return characteristics going forward.

This leaves investors with essentially two traditional choices in terms of long-term asset allocation, equity like risk assets (corporate credit, direct equity, or private equity) and cash. Hence, even though investors may not realize it, portfolios that follow this traditional 60/40 asset allocation mix are by design riskier than historical models will predict. This applies both generally to risk asset portfolios and more specifically to credit and fixed income products.

The macro drivers

The Fed has cut rates from 2,5% down to 0%, but the compressions in corporate bond yields came from 150 basis points to 75 basis point, this is quite little to cushion investors from the volatility around the credit markets. Hence, investors need a different way to think about how they manage risk in their fixed income portfolios.

In Mawby’s opinion, investors need to be a bit contrarian and value driven. They can no longer rely on their government bond exposure to offset the equity like risk exposure in their portfolios. Investors now need to think about managing fixed income in a more proactive way, it is no longer enough to have some degree of credit and equity risk long to effectively diversify a portfolio.

What are the investment implications of the COVID 19 crisis?

This crisis leaves some opportunities to explore. It has created dislocations in price, generating potential opportunities to pick up companies with strong balance sheets at attractive valuations. At the current levels, selected corporate hybrids and out of the money convertible bonds offer attractive opportunities. But investors need to remain highly selective in primary markets amid a deluge of corporate issuance. Additionally, the intervention of central banks continues to distort investment grade credit curves while US Treasury bonds volatility has recently receded back to pre-crisis levels.

On the other hand, there are many risks that need to be considered. There are ‘cheap’ value traps given associated with solvency, downgrade, and default risks. The path to emergence from lockdown remains mixed and fraught with potential obstacles for some industries, particularly for those associated with the service sector, like restaurants and airlines.

Meanwhile, dispersion is increasing across the credit market- there is a need to retain optionality in the form of risk overlays and downside protection, as there is still potential for further liquidity challenges in credit. This claims for an up in quality stance across both US and Europe.

Particularly, one of the areas that Pictet AM is a bit more cautious on is the subordinated debt in the financial sector, the Additional Tier 1 hybrids bonds could be affected by potential regulatory risk and this could have a ripple effect for coupons and dividends.

Given this backdrop, managing volatility is going to be especially important in the next 6 to 18 months in terms of navigating another downturn. When looking back in time, crises seem to be occurring in 18 to 24 months cycles – Sovereign debt crisis in Europe in 2012, taper tantrum in 2013, oil crisis in 2014 and 2015, Brexit in 2015, “Trumpflation” in 2017 etc.-, as intervention and rhetoric are driving more and more the alternation of increased volatility periods with other periods of yield and volatility repression. This gives an advantage to investors that think about volatility in a less traditional way.

Broader portfolio themes and opportunities

Starting with the “Powell pivot”, as the last monetary stimulus package launched by the Federal Reserve has become known, the new measures have brought interest rates back to 0 and have followed a QE program at unprecedented levels. In turn, these actions have created distortions and mispricing opportunities that can be exploited by investors, especially in convertibles, corporate hybrids, and QE eligible bonds. On the other hand, they have also created agency issues in the corporate sector related to historically low rates.

In addition, there are also opportunities driven by the increase of volatility, as uncertain environments create dispersion and dislocation in prices that can be released if investors think about risk in a proactive way.

Then, looking at high yield and idiosyncratic positions in the portfolio, sources of yields can be added when they make sense, selecting names with limited cyclicality, event-driven names, and rising stars (companies that are deleveraging their balance sheets and considered as credit upgrade candidates).

Looking to the medium-term, there is a probability that at some point the narrative could shift as lookdown emergence continues. The possibility of developed markets seeing double digit growth is a potential bullish catalyst for risk assets and is something the team will be monitoring closely. Therefore, it is important to keep a close eye on data releases and how they shape sentiment in the short-term.

Conclusion

Downside risks have increased, and fixed income portfolios have become riskier by design. In Mawby’s view, traditional fixed income strategies will no longer deliver what investors need from their asset allocation when they need it. Hence, it is necessary to rethink risk and how to navigate the cycle. Moreover, central bank and investor actions have distorted the playing field, that is why fixed income investors need to consider a contrarian and value driven stance, to get advantage of volatility when it occurs and to get what they want out of bonds: diversification, downside protection and income.

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

Important notes

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