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The world of mixed assets is all about putting pieces together to make a strong whole. So, what’s the best combination in the current market and where should investors be increasing or cutting exposure given the uncertainty at play? In this publication, we take a closer look at the future of 60/40 funds, the role of cash and whether alternatives will soon form a crucial element of the mixed-asset allocation. Chris Sloley Editor, Citywire Selector
Unlocking the combination
Size matters
The biggest funds aren’t always the best performers
Sustainable multi-asset investing in uncertain times
sponsored by M&G
Why are there so few Article 9 multi-asset funds?
Sustainable setback
Three leading fund buyers discuss reasons for adding alternatives to the mix
Selector views
Adapt or die: survival traits of successful multi-asset managers
sponsored by SCHRODERS
Alternative angles
Fund managers look at ways to refresh old allocation models
Building a stash
Cash may no longer be the king of safe havens
A closer look at social costs
Cryptocurrencies have positives and negatives when it comes to social impact
Three fund buyers discuss reasons for adding alternatives to their mixed-asset approaches
Khaled Boudokhane Head of long-only external multi-management, Candriam It’s maybe an area of my expertise, being a traditional investor. We’ve had a struggling market for both equities and bonds. If you take the year-to-date returns, some of the fixed income sub-sectors have dragged even at the same pace as other equities. So, there’s not much of a diversifying element in either asset class. The only area where, maybe, you can find some value and diversification is the alternative space. What I’ve seen is perhaps between 10% to 20% alternatives in some portfolios and it’s maybe the year of alternatives, because year-to-date, if you take the performances, lots of alternative strategies are doing really well as it’s the right market environment for them.
It is far better to drive change from the inside by having open and honest conversations with senior management and the board than to walk away and immediately lose any leverage for change
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Natalino Barbosa Senior fund analyst, Candriam I invest 100% in hedge funds, so I wouldn’t have to do the arbitrage between reducing the 60/40 allocation for the clients we advise. I don’t know an exact percentage, but I think it could be very significant and starting from around 2019 with the fears about rising rates. So, you start moving the dial a little bit in allocations to alternatives. Maybe the allocation is going from 2% to 3% or to 4%. After a very good performance in 2020, on a relative basis, the shift from long-only has significantly increased. I think the move can even go further now, especially if you compare the performance from offshore hedge funds, which have been doing really well with volatility levels above average. That has been contributing to feed performance engines from these quant or arbitrage strategies that need higher volatility levels. I think the trend will continue because on a relative basis, again, hedge funds and offshore strategies, relative to the 60/40 and long-only strategies, have been very positive.
Peter Reis Head of fund research, ifsam I think it’s really important to distinguish between highly institutional, which will be funds of funds. There I can see up to 20%. I have had a lot of contact with wealth managers and also advisers in the retail business, where there were a lot of problems in the past because of the low annual returns from these kinds of products compared with long-only products. It was really difficult to advise them to integrate some Alternative Ucits or other alternative products inside their portfolio. So, there’s a lot of potential, perhaps this year or the next because of the market environment. A poor result from bond funds would be a really good time to advise clients to look more towards these alternative funds because we will see, and have seen, a huge minus in the bond area.
The investment case for 60/40 mixed-asset funds has been under pressure like never before. The idea of relying solely on the returns generated by equities and the underpinning support of bonds has rarely looked less appealing. So, how are fund buyers responding and how far are they venturing into more alternative fields? During a recent roundtable with three prominent names from the Luxembourg selection community, we posed the question: is this really the end of 60/40?
This might be the opportunity to reset and make the kind of intuitional changes and policy choices that will lead to a better, greener and more sustainable future
Audrey Ryan Support manager, Aegon Global Sustainable Equity Fund
Aegon Global Sustainability Equity Fund
As inflation hits multi-decade highs and interest rates look set to rise further, investors need to be aware of the risks of a more persistent inflationary environment and the potential for a period of lower economic growth. Inflation in the US has risen to its highest level in more than four decades, according to the latest Consumer Price Index (CPI) report. The outlook could well deteriorate further as the war in Ukraine war and renewed Chinese lockdowns risk further disruption. However, despite the current elevated levels, it’s important to note that long-term market expectations for inflation remain relatively anchored. The US 10-year breakeven rate –a closely-watched indicator of market inflation expectations over the next decade, representing the difference between the yields of 10-year nominal Treasuries and 10-year inflation-linked Treasuries -- sits at around 3%. Clearly, one of the main dilemmas facing investors is gauging how far and how quickly the Federal Reserve is willing to go to combat inflation. This is not an easy task, given the central bank’s track record of engineering a “soft landing” is not very compelling. With uncertainty and inflationary pressures elevated, investors need to be ready to adjust their portfolios accordingly. As we prepare ourselves for higher interest rates in the US and elsewhere, this could put pressure on competing asset classes, such as equities, and lead to bouts of volatility. However, this could also present tactical opportunities for long-term investors such as ourselves. We would argue that one of the best ways to protect value in the current environment is by investing in sustainable business models that are able to pass on costs to their clients. Flexibility to look across a diverse investment universe This sort of environment can be notoriously unfriendly to different asset classes at the same time. A traditional 60/40 approach will suffer if we enter a period where both bonds and equities fall, as we have seen already in some regions during the first quarter of 2022. At the same time, investors pinning their hopes on just a single asset class or a very narrow field of investments need to realise the heightened risks of this approach in an already uncertain environment. Investors should not underestimate the importance of portfolio diversification during times like this. Effective diversification involves finding the right blend of assets to help to potentially keep price volatility low, or within a pre-specified range. This is where we believe multi-asset funds are particularly useful, as they typically offer a ‘one-stop shop’ solution for investors wishing to take a more hands-off approach. We think one of the best ways for investors to navigate these markets could be through a flexible, highly tactical multi-asset-led approach, and one that embraces the fast-moving and increasingly relevant world of sustainable investing. The opportunities in investing sustainably Over the past few years, both private and institutional investors have given increasing levels of credence to the social and environmental impact of their investments, alongside their financial prospects. This has taken place against a backdrop of uncertainty in global financial markets that has been driven in large part by pandemic, but also more recently by the recent rise in global inflationary pressure and heightened geopolitical risk. The impact of the pandemic in terms of health challenges and the wider socio-economic impact cannot be understated, further serving to highlight global social inequality. This is why we think ‘impact investing’ has been highlighted repeatedly as one of the key ways to move forward. Impact investing plays a key part in M&G’s range of sustainable multi asset funds, with allocations to impact assets ranging from 20 to 50%. These are positions in companies and institutions that intentionally aim to make a positive impact on some of the world’s most pressing environmental and social challenges. Impact investments can come from a range of asset classes including listed equities, green and social bonds, listed infrastructure or specialty funds. This focus on impact investments is combined with our belief that the best way to allocate between asset classes is in response to changes in valuations, which can often be rapid and widespread, and on understanding the behavioural and economic drivers of those valuations. Where are we seeing opportunities? Our funds are positioned to seek to take advantage of several long-term sustainability trends, including the transition to renewable energy, the emergence of the “circular economy” – where companies and consumers place greater emphasis on reusability and recyclability of products – and opportunities in social housing provision. The graph below highlights the six positive impact areas we are targeting on M&G’s Sustainable Multi Asset team:
We look to achieve positive impactful investment through listed equities, green corporate and government bonds, supranational bonds, listed infrastructure and collective investment vehicles and other securities. As countries look to enhance energy independence in the wake of heightened geopolitical tensions that have rattled energy markets, a focus on companies able to lead the transition to a renewable energy future makes perfect sense to us. Sitting within our ‘Climate Action’ and ‘Environmental Solutions’ positive impact areas, companies like Israeli renewable energy specialists SolarEdge Technologies look set to grow in importance. SolarEdge is a global leader in smart energy technology and offers a diversified product range for residential and commercial use. Another recent addition to our funds has been Octopus Renewables Investment Trust, a developer and operator of diversified renewable energy assets, including onshore wind, solar and biomass. The company is one of Europe’s largest investors in solar power and generates all of its revenues from renewable energy. Following the broad sell-off in local currency emerging market bonds in 2021, we have sought opportunities that gave us exposure to the asset class whilst meeting our sustainability/positive impact criteria. One such investment was a green bond issued by the government of Colombia. Proceeds from the bond issue will be divided into a range of categories, including sustainable water management, sustainable transport and biodiversity. The country has been reviewed positively by a reputable ESG ratings agency, and we believe Colombia’s green bond framework has robust governance procedures in place. The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested. The views expressed in this document should not be taken as a recommendation, advice or forecast. 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.
Maria Municchi Sustainable Multi Asset Fund Manager at M&G
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If your client wants their investment portfolio to reflect their strongly held values and beliefs, consider ethical or values-based investing. Some of these funds were originally faith-based and have their roots in religious movements. Others are broader. They will typically use negative screening to remove companies in industries that might be viewed as objectionable from an ethical or moral perspective. They might screen out companies associated with alcohol, tobacco, gambling, pornography, animal testing, weapons and nuclear power, for example. This type of investing is typically quite personalised, as everyone’s moral compass is calibrated differently. What is acceptable to one investor might not be to another.
If your client requires their investments to stick closely to traditional benchmarks but they are happy to screen out the most unsustainable companies, consider an ‘ESG lite’ approach. By investing in the world’s largest companies, there will be some compromises on ESG issues. These companies will not score highly on every factor, although there is a great deal changing, especially since the pandemic. A moderate approach uses negative screening to avoid companies with the lowest ESG scores. This strategy lends itself to investing in less expensive ESG-themed ETFs and index trackers.
If your client wants to choose companies that rank as the most sustainable according to ESG metrics, as opposed to excluding the ones that rank lowest, positive screening could be the best approach. ESG strategies using positive screening seek out companies that are the best in class and score highly on a range of different ESG metrics, including environmental impact, treatment of workers and business ethics. They also use negative screening to exclude companies with the lowest ESG scoring from their investment universe.
If your client wants their investments to support companies creating solutions to world problems, impact investing could be the strategy to follow. The aim of impact investing is to make a positive and measurable impact on society or the environment, as well as generating a financial return. Some impact investing focuses on funding specific projects, such as microfinance funds to create affordable housing, or green bonds to raise money for a clean water initiative. This may mean the portfolio is more concentrated, and there is a good chance it is riskier too. Investors in this space need to be willing to accept more risk and less diversification.
Why are there so few Article 9 mixed-asset funds?
Jan Poser, chief sustainability officer, Radicant
Christopher Greenwald, head of sustainable investments, LGT
‘This is difficult if you are a fund of funds, which many multi-asset strategies are. If there is a lack of look-through to the underlying funds, you will also not be able to report on your objective’
‘If you are using any third-party managers, you are relying on what they are reporting to you. Which means for multi-asset it is difficult to get consistent data’
What Article 9 funds are made of There is understandable scepticism about Article 9 funds in the mixed-asset space, yet several asset managers have decided to categorise their funds this way. If you look at all 77 European strategies falling into the category, certain patterns start to emerge. To begin with, many of these funds are hardly comparable, with the likes of the BGF Climate Action Multi-Asset I2 EUR focusing on the environment and the LBPAM SRI Human Rights R tackling social aspects. There is also an interesting trend towards funds in the category having a less risky profile. Only 11 strategies out of 77 fall into the aggressive allocation class. Zooming in on the nine biggest funds in the range, you can see that on average they hold 40% allocation in equities and 44% in fixed income. Although it is hard to establish definitively why many Article 9 funds have a more cautious profile, Christopher Greenwald, head of sustainable investments at LGT, thinks funds with a more aggressive profile might face bigger data challenges. ‘If you have hedge funds, private equity or smaller-cap companies or high yield, you have less coverage than investment grade or traditional MSCI World companies, where there will be more data and therefore reporting will be more straightforward,’ he said.
If you look at the equity components of the nine biggest funds in the table above, the most commonly-held names within the top 10 holdings are Microsoft, Schneider Electric and ASML. One standout finding is the proliferation of tech and financial names in the category. The Amundi Ethik Fonds, for instance, holds JP Morgan Chase, which the latest Banking on Climate Chaos report highlighted as the biggest financier of fossil fuels, with the firm providing $382bn (€366.4bn) to firms such as Gazprom, Chevron and Saudi Aramco from 2016 to 2021. Other banking names making an appearance include Canadian Imperial Bank of Commerce, Bank Rakyat Indonesia Persero and FinecoBank. Fossil fuel financing could drag down JP Morgan Chase’s ESG rating if an Article 9 fund’s objective is decarbonisation but other factors might come into play, such as the firm’s strategy to decarbonise by 2050. Radicant’s Poser said if this is the case, the likes of JP Morgan Chase might still be part of the portfolio, if they are aligned with the Paris alliance decarbonisation benchmark, for example. On the fixed income side, the biggest nine strategies hold mainly European government bonds within their top 10 holdings, including EU debt of different maturities.
Classifying a mixed-asset fund as ESG-friendly is no mean feat. Leading selectors highlight the multiple challenges involved and why this class of investment is lagging behind in the sustainability stakes Sustainable investing is all the rage at the moment, but one area that seems to be elusive and increasingly complex from an ESG perspective is mixed-asset funds. The debates about the feasibility of the 60/40 split between fixed income and equities are still rumbling on and now sustainability issues are presenting an additional challenge for asset managers. There are very few mixed-asset funds categorised as dark green Article 9 strategies according to the EU’s Sustainable Finance Disclosure Regulation, with only 77 funds across all of Europe falling under this category, according to Morningstar. Why are there so few? To achieve fully sustainable portfolios is challenging enough when you are investing solely in equities, but once you need to assess sovereign bonds or third-party fund exposures the situation becomes trickier. Article 9 funds require asset managers to have a sustainability objective that most of the underlying holdings need to reflect. ‘This is difficult if you are a fund of funds, which many multi-asset strategies are. If there is a lack of look-through to the underlying funds, you will also not be able to report on your objective,’ said Jan Poser, chief sustainability officer at Swiss boutique Radicant. The Article 9 category adds more complexity to the investment process, which might explain the limited number of mixed-asset funds with this badge, according to Paul Schulz, head of selection at J Safra Sarasin. ‘To increase the number of available funds, asset managers may need to invest more in people and processes and this may be driven by demand for Article 9 funds,’ he added. The lack of ESG innovation in the mixed-asset space is also something highlighted by Eddie Cheng, head of international portfolio management for the systematic edge team at Allspring. He said some elements of mixed-asset, for example commodities, are not yet there in terms of ESG incorporation. ‘This is what a lot of multi-asset managers are working on, because we can’t claim the whole portfolio to be Article 9. ‘Some of these sustainable multi-asset solutions you see have become too narrow and you might be scratching your head thinking: this doesn’t look like a multi-asset fund,’ Cheng said.
Margaryta Kirakosian Deputy Editor, Citywire Selector
Manuela Thies, head of retail multi-management, Allianz Global Investors
Commenting on this trend, LGT’s Greenwald said most of the sustainability ratings for sovereigns use standard data sources like the UN or assess the criteria that are generally correlated with levels of development, which results in developed countries having higher scores. ‘I don’t think this is a matter of data availability, as you can get scores across most of the countries, but it is true that European countries end up having higher scores when it comes to sustainability ratings or metrics.’ Be it equities or bonds, it all hinges on the sustainable investment objective for Article 9 funds. But if this is to decarbonise the portfolio, how can an asset like gold fit in? Poser said with Article 9 a potential loophole could be if two thirds of the portfolio overachieves on the set objective, the remaining third is still open to interpretation. ‘For example, if it is to have 50% of green revenues and you have two holdings that derive 100% revenues from green activities, the third one can theoretically be anything,’ he said.
Difficult areas There are plenty of areas within the mixed-asset space that pose ESG challenges, but third-party fund exposures and alternatives are probably the hardest to address. When Citywire Selector looked at ESG funds holding Gazprom earlier this year, two that had exposure to the company were in the mixed-asset category. However, both firms denied holding the stock, explaining Morningstar data through potential third-party fund exposures. This shows that sometimes asset managers might not even be aware of holding controversial investments. Within the Article 9 range, several mixed-asset funds, including the BGF Climate Action Multi-Asset I2 EUR and MS INVF Global Balanced Sus Z EUR Acc, have third-party funds within their top 10 holdings. Both have exposure to green or ESG ETFs, but the Morgan Stanley strategy also holds the Invesco Physical Gold ETC in its top 10, which doesn’t ostensibly have sustainable credentials. Liontrust, BNP Paribas Asset Management and AllianceBernstein also have sustainable funds within their top 10 investments, but these are mainly in-house funds. For example, Liontrust’s GF Sustainable Future Multi-Asset Global fund includes the Liontrust GF Sustainable Future European Corporate Bond fund in its top 10 holdings. The views of fund buyers differ as to how stringent you need to be with third-party fund exposures. J Safra Sarasin’s Schulz is adamant the portfolio should not contain companies excluded from the firm’s universe and the team would only accept ESG-compliant ETFs.
‘In case there are sustainable alternatives available that meet our investment requirements, we would prefer the sustainable products over the traditional instruments’
Manuela Thies, head of retail multi-management at Allianz Global Investors, said her team set minimum sustainability quotas for sustainable funds and might use non-sustainable funds or ETFs to some extent, which gives them more flexibility to meet traditional investment targets. ‘However, in case there are sustainable alternatives available that meet our investment requirements, we would prefer the sustainable products over the traditional instruments,’ she said. Radicant’s Poser said clients would expect to see at least an ESG tech fund or ETF in their portfolio. Although he didn’t expect this to be the case for Article 9 funds, he said policies of some ESG funds allow for a non-sustainable quota, sometimes called a ‘trash quota’. ‘If you have an ESG rating for an asset or asset class, you should use it. Keep to what you can analyse and transparently defend,’ he said. No-go zones No matter how you look at it, there are limits to what a mixed-asset manager can do, especially as sustainability can’t be applied to all market segments. Thies, for example, is drawing the line under instruments that are purely dedicated to government bonds issued by countries that are rated ‘not free’ by democracy monitor Freedom House, which is often the case for emerging markets. Another challenging space, in her view, is liquid alternatives, due to the strong use of derivative instruments for which it is difficult to define binding sustainability elements. Another bugbear is hedge funds, given their untransparent nature, which Poser said is a dealbreaker for ESG. Commodities are also difficult to assess, given the lack of engagement and the fact that a best-in-class approach doesn’t make sense. This is especially pressing now, given the stellar performance the asset class demonstrated at the start of the year. ‘The usual logic of “I punish the investment by underweighting it” does not work. But based on the notion that investors can stoke volatility, which can have dire social consequences, you may want to drop commodities from your ESG funds altogether,’ Poser said. One overarching sustainability challenge for mixed-asset managers is liquidity, which might be at odds with some Article 9 strategies. ‘If I want to access a social development loan or some climate solutions like a wind farm, can we translate that into a liquid solution?,’ Allspring’s Cheng said. ‘This is one challenging area, because it is also a much more direct way to implement impact. But liquidity is one of those difficult factors in between.’ It will take some time for mixed-asset managers to work out how to navigate blind spots like commodities and whether they can reach any compromise there. For now, this leaves Article 9 managers to their own devices, with regulations providing only a marginal guide. ‘If you are using any third-party managers, you are relying on what they are reporting to you. Which means for multi-asset it is difficult to get consistent data. ‘We still don’t have a complete taxonomy or a standard set of data that everyone is using,’ LGT’s Greenwald said.
The nine biggest mixed-asset funds
Florian Ginez Associate Director, Quantitative Research, WisdomTree
The Schroder Global Multi-Asset Balanced strategy has a five-star rating from Morningstar. Ingmar Przewlocka, lead manager of the portfolio since September 2018, is rated AA by Citywire. Plenty has been written about the extraordinary market conditions faced by multi-asset managers this year, but the challenges go further than that. We are witnessing far-reaching structural changes in the financial markets. Forces that defined the investment world for a generation are now fading out, or becoming less predictable. The Baby Boomers, for example, are aging. The 30-year downward trend in developed-market interest rates, and the era of low inflation, may be coming to an end. Meanwhile, Quantitative Easing – that phenomenal rising tide that has caused all boats to float over the past decade – is starting to give way to Quantitative Tightening. Opportunities are still out there, but the demands on multi-asset managers are becoming greater, and we are entering a less forgiving era where it’s going to be a case of “adapt or die”. Investors will need to ask their managers tougher questions about how they are meeting the challenges of structural change. Asking the right questions Our portfolio, the Schroder Global Multi-Asset Balanced strategy, falls into the Morningstar EUR Cautious Allocation peer group. But what is a “cautious” strategy? For example, if Fund A is allowed to hold a maximum of 40% in equities and Fund B has a maximum of 50%, does that mean Fund A is more cautious? A better question to ask is how flexible the managers are in moving around their permitted ranges. For example, if Manager A is not very dynamic and hovers around the 30% mark, they may be exposing clients to too much risk during market crises and not enough in bull markets. I think it’s fair to say that clients in our category have a middle-of-the-road risk tolerance. They want to see some benefit from rising markets, but they expect us to take significant defensive measures at times of market stress. We have a 0% to 50% permitted range in equities, and have used nearly all of that leeway since we took over the management of the strategy. For example, in the aftermath of the March 2020 covid shock we started building up our equity exposure and from August 2020 to September 2021 it stayed mostly in the 40% to 50% range. That changed in the fourth quarter of 2021, when we made our biggest pivot to date. We believed not just that valuations were stretched but that, after more than a decade, the era of Quantitative Tightening was beginning, and that hopes of “transitory” inflation were unrealistic. By December 2021, our equity exposure was roughly 15%, and by February 2022, as the Ukraine conflict was starting, it was below 10%. No more free lunches from fixed income Government bonds have been a powerful part of multi-asset managers’ toolkit for many decades, acting as a reliable diversifier and safe haven. After the 2008/09 Global Financial Crisis, quantitative easing brought a flood of liquidity, and the artificial support of central bank buying of investment-grade bonds. At times of market stress, the simple tactic of dialling down equity exposure and increasing bond weightings frequently worked. How many poor asset allocation decisions have been masked by the success of the long duration trade over the past decade? For that matter, how many of the successful multi-asset funds of recent years are actually bond strategies in disguise? We may be about to find out. While we cut our equity allocation in the de-risking we did in late 2021, we didn’t increase our bond allocation. In fact, we had been reducing our interest-rate exposure since mid-2020, with duration significantly below two years for most of 2021. By the end of last year, in our view the negative correlation between the asset classes had been broken by high bond valuations and the prospect of quantitative tightening. At the top-down level, we placed more emphasis on commodities to play a defensive role in the portfolio. This is not to say that we think the role of fixed income is over, either as a defensive asset or a return generator. But the easy wins may be a thing of the past. Going forward, the opportunities may be more nuanced, and they may lie further below the surface. This brings me to the next topic: decision making within – rather than just among – asset classes. Top down is not enough Going forward, investors will need to ask their managers tougher questions about how much analysis they are doing within and across asset classes, as opposed to just between asset classes. My co-manager Philippe Bertschi and I have built our careers on being top-down macro decision makers. But we freely acknowledge that we are entering a world where the value added by portfolio managers is not just about getting the “bonds vs. equities” decision right. The asset class-level decision will always be important, but success increasingly depends on allocation within and across asset class buckets. As portfolio managers, we decide the top-down allocation, and we then draw on the specialist security-selection resources across Schroders to select the best ways to express those views. This may involve looking across asset classes for the most attractive way to express an investment thesis. It will invariably involve looking within asset classes for relative value opportunities. For example, as we were cutting our equity exposure at the end of 2021, we implemented an explicit relative value trade, going long global energy stocks while shorting the broad global equity market. Looking ahead to a potential inflation – or indeed stagflation – scenario: relative value positioning within asset classes has a valuable role to play. In fixed income, for example, this could mean exploiting instances where countries are at different stages in their monetary cycles. In equities, for example, relative value positioning can pinpoint companies that are best able to defend their profit margins, playing them off against those that are most vulnerable. Adapt or die? Under the new rules of the game, what survival characteristics will single out the successful managers from the laggards? One key, as I’ve argued, is flexibility: when none of the safe havens are working and there’s nowhere to hide, the best defence is to be agile. Second, successful managers will need the resources and the willingness to do the hard work of sifting through the whole available opportunity set, extracting the multiple smaller pockets of value within asset classes. The environment we face is in many ways more challenging and volatility may be higher, but this means the opportunities for active managers to outperform are potentially greater.
Risk considerations Credit risk: A decline in the financial health of an issuer could cause the value of its bonds to fall or become worthless. Currency risk: The portfolio may lose value as a result of movements in foreign exchange rates. Derivatives risk: Efficient Portfolio Management and Investment Purposes: Derivatives may be used to manage the portfolio efficiently. A derivative may not perform as expected, may create losses greater than the cost of the derivative and may result in losses to the portfolio. The portfolio may also materially invest in derivatives including using short selling and leverage techniques with the aim of making a return. When the value of an asset changes, the value of a derivative based on that asset may change to a much greater extent. This may result in greater losses than investing in the underlying asset. Emerging Markets and Frontier risk: Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty, operational and liquidity risk than developed markets. High yield bond risk: High yield bonds (normally lower rated or unrated generally carry greater market, credit and liquidity risk. IBOR: The transition of the financial markets away from the use of interbank offered rates (IBORs) to alternative reference rate s may impact the valuation of certain holdings and disrupt liquidity in certain instruments. This may impact the investment performance of the portfolio. Liquidity risk: In difficult market conditions, the portfolio may not be able to sell a security for full value or at all. This could affect performance and could cause the portfolio to defer or suspend redemptions of its shares. Operational risk: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the portfolio. Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.
Important information Marketing material for professional clients only. Any reference to sectors/ countries/ stocks /securities are for illustrative purposes only and not a recommendation to buy or sell any financial instrument/securities or adopt any investment strategy. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of investments to fall as well as rise. Schroders has expressed its own views and opinions in this document and these may change. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Insofar as liability under relevant laws cannot be excluded, no Schroders entity accepts any liability for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise). This material has not been reviewed by any regulator. Not all strategies are available in all jurisdictions. European Union/European Economic Area: Schroders will be a data controller in respect of your personal data. For information on how Schroders might process your personal data, please view our Privacy Policy available at www.schroders.com/en/privacy-policy or on request should you not have access to this webpage. Issued by Schroder Investment Management (Europe) S.A., 5, rue Höhenhof, L-1736 Senningerberg, Luxembourg. Registered No. B 37.799 Switzerland: Marketing material for professional clients and qualified investors only. This document has been issued by Schroder Investment Management (Switzerland) AG, Central 2, CH-8001 Zurich, Switzerland a portfolio management company authorised and supervised by the Swiss Financial Market Supervisory Authority FINMA, Laupenstrasse 27, CH-3003 Bern. United Kingdom: Schroders will be a data controller in respect of your personal data. For information on how Schroders might process your personal data, please view our Privacy Policy available at www.schroders.com/en/privacy-policy or on request should you not have access to this webpage. Issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 1893220 England. Authorised and regulated by the Financial Conduct Authority.
Ingmar Przewlocka Lead Portfolio Manager, Schroder Global Multi-Asset Balanced Strategy
There are some big beasts in the mixed-assets world but a look at the returns shows that big is not always best A hefty assets under management (AUM) figure is impressive but how much does it really say about a fund’s performance? To find out, we looked at the biggest and best-performing Ireland- or Luxembourg-domiciled funds in each of the four Citywire mixed-assets - EUR sectors in the Citywire database. Balanced The €22.1bn mammoth JPM Global Income fund is at least €18m larger than any of the other funds in the Citywire Mixed Assets - Balanced EUR sector, and is managed by US-based trio Eric Bernbaum, Gary Herbert, and Michael Schoenhaut. The fund distinguishes itself within Morningstar’s EUR Moderate Allocation - Global category via its allocation to equities, most notably through a 14.82% exposure to real estate compared with a category average of 2.17%. With a similar contrarian slant, the fund has less than half the technology exposure of its average peer, at 9.25% compared with 20.14%. While boasting an impressive size, the JPM fund has delivered less in terms of performance, and its three-year returns as of April 2022 stand at 6.28%. Citywire A-rated Hendrik Leber’s Acatis Fair Value Modulor VV Nr.1 fund has returned 40.23% over the same period, making it the sector’s top performer. Unlike the JPM fund, where US high yield is one of the largest allocations at 26.1% of the fund as of January 2022, Leber is underweight to the US by 18.7% and has a homebound tilt to Germany at 22.27%, compared with the Morningstar category’s 5.43% average. Leber’s €551m fund is heavy on equities, with 69.23% allocated to the asset class compared with the JP Morgan fund’s 40.42%. The fund’s 17.23% fixed income exposure is significantly smaller than the JP Morgan fund’s (44.68%) and the category average (39.95%). The JP Morgan fund is overweight in high yield bonds, with a 50.5% exposure to BB bonds and 23.94% exposure to B bonds, but the Acatis fund takes it one step further with a whopping 86.63% in unrated bonds.
‘There is no regulated player that can really cater to these big institutions yet, so crypto ETPs are the only way they can invest in the underlying market in a secure way and through their regular channels’
Roxane Sanguinetti, GHCO
Behemoths and giant killers
Hector McNeil, HanETF
Siri Christiansen Reporter, Citywire Selector
Conservative With assets under management of €7.43bn, the UniRak Nachhaltig Konservativ fund is at least three times as large as the other funds in the Citywire Mixed Assets - Conservative EUR sector. Under the management of Joachim Buddendick, the UniRak fund outperformed more than half of its sector peers over the three years to April 2022, gaining 4.76%. However, the much smaller €119m Robeco Multi Asset Growth E € fund gained the most over the period with a 24.54% return. The two funds differ from each other most notably in asset allocation: the UniRak fund has opted for a slight twist to the 60/40 mix at 61.78% fixed income, 34.91% equities, 1.09% in convertibles and 2.21% in cash, whereas the Robeco fund has 78.49% in equity, 24.35% in fixed income, 0.16% in preferred securities, 0.72% in convertibles and a negative cash balance of -3.80% as of 31 March 2022. The UniRak strategy is overweight in industrials at 20.46% compared with the Morningstar EUR Cautious Allocation - Global Sector average of 12.16%, and underweight in financial services (9.72% vs 15.12%). The Robeco fund, on the other hand, is underexposed to industrials (7.34%) and has prioritised investments in financial services (14.89%) and technology (27.33%). Similarly, UniRak’s Buddendick is overexposed to the developed European market (36%), whereas Robeco’s fund manager Ernesto Sanichar has decided to substantially underweight the sector to 12.75% of the portfolio.
Aggressive Attracting the most assets in the Citywire Mixed Assets – Aggressive EUR sector is the Mediolanum Best Brands Morgan Stanley Global Selection L EUR Acc fund, with an AUM of €4.39bn and three-year returns of 15% as of April 2022. This compares with the 45.14% returns over the same period from the smaller €75m JD 1 - Special Value fund. The JD fund’s standard deviation is smaller than Mediolanum’s, at 10.74 compared with 11.71, and the Morningstar EUR Aggressive Allocation category average of 14.05. Despite taking less risk, the JD fund’s total returns of 13.22% are much higher than the 4.16% category average. This is the achievement of solo manager Citywire AAA-rated Jürgen Dickemann, founder of the Berlin-based investment advisory firm Dickemann Capital, who has tilted the JD fund towards European small- and mid-caps and international blue-chips. Brian O'Rourke, on the other hand, has steered the Mediolanum strategy into US-based large caps. The fund is dominated by equities with 78% allocated to the asset class, and is slightly underweight in fixed income at 7.90%, compared with the Morningstar EU Agg Gbl Tgt Alloc NR EUR index average of 11.82% as of 31 December, according to Morningstar data.
Flexible At €6.5bn, the Eurizon Azioni Strategia Flss Z EUR Acc fund is the largest flexible mixed assets fund domiciled in Ireland or Luxembourg. Corrado Gaudenzi, head of long-term sustainable strategies at Eurizon Asset Management, has run the strategy for nearly 12 years, and has generated 12.03% in three-year returns as of April 2022. But over the same period, the sector leader in performance terms, the €17.7m M&W Capital fund, has more than doubled its assets and returned 130.73%. The fund’s managers, Citywire AA-rated Martin Mack and Herwig Weise, are co-founders of Mack & Weise Vermoegensverwaltung and have significantly outperformed the Citywire sector average since the start of the pandemic and the fund showed its resilience during this particularly turbulent time. For example, the Citywire Mixed Assets - Flexible EUR sector average return dipped to -8.4% in the first month of the Covid-19 pandemic. The M&W Capital fund, on the other hand, stayed afloat at 0.3%. The following month, the fund’s returns were up to 46.7%. By August, that number had reached 99.6% while the sector average had barely made it into positive territory. The M&W Capital strategy is, however, very unusual. Equity makes up 95% of the portfolio, and is 100% invested in basic materials, as of March 2022, according to Morningstar data. This includes a 9.71% holding in the Canadian mining company Karora Resources. In contrast, the majority of the Eurizon fund’s 123 equity holdings only make up around 0.5% of the portfolio at most. Its allocation to equities and fixed income is 56.45% and 36.17% respectively, and its bond exposure is almost entirely in A and AA tranches. All in all, the fund is more cautious than the Morningstar EUR Flexible Allocation - Global category, with a standard deviation of 8.98 compared with the Morningstar category’s average 10.56.
Fund houses have become increasingly aware of the mixed-asset model’s limitations and company leaders are looking at ways to revive its effectiveness The idea of opening up a mixed-asset fund and finding a sizeable tranche allocated to farmland might have sounded like a clerical error a decade ago, but asset management bosses are willing to try new things to diversify and improve their allocation-focused portfolios. ‘Traditional portfolios – the 70/30, 60/40 models, with stocks and bonds – they are not going to get the job done going forward,’ said Jose Minaya, chief executive officer of Nuveen Asset Management, TIAA Cref’s investment arm. Speaking to Citywire Selector in March, Minaya said the onus is now on asset managers to offer something different to fit the evolving needs of its investors. ‘You need true diversification,’ he said. ‘For us, that means real estate, but we know retail-focused real estate has been a little bit more challenged, as has the office-based space. But what has been really strong is where we have really diversified, which is through things like industrials, multi-family occupancies, logistics and affordable housing. ‘We have also seen that private credit has been a very, very strong asset class, while we have also looked at the role of farmland, timber and renewable infrastructure. But it doesn’t stop there, because we could also see agri-business, private equity and impact investing.
‘We have looked at the performance of these through the pandemic, as those asset classes have had very, very low volatility and very, very low correlation to wider asset classes. We are seeing a lot more interest from clients because they are feeling the volatility and they are seeing that inflationary pressure.’ Modernising the mix Minaya is not alone in his thinking. Bob Steers, who recently moved from being CEO of the eponymous Cohen & Steers to executive chairman, believes asset managers need to be smarter when looking at mixed-asset combinations. ‘I think we are clearly in a new regime, a new market regime where 60/40 is not working as well as it did,’ he told Citywire Selector during a recent visit to London. ‘It is illuminating that investors do need diversifiers, including inflation hedges. So, we’re seeing a tremendous uptick in activity. ‘I just wish that advisers whose job it is to help investors create proper asset allocations, were a little more foresightful and had already allocated to real assets, but nonetheless, I think that’s the change that’s underway. I think 60/40 doesn’t become irrelevant, but it’s a little oversimplified and it’s not an optimal allocation.’
‘Traditional portfolios – the 70/30, 60/40 models, with stocks and bonds – they are not going to get the job done going forward’
Steers, who has many decades’ investment experience, said the wisdom of a directional 60/40 portfolio has historically made a lot of sense. However, a modern, optimised portfolio would now have 5-15% in real assets, in markets such as infrastructure, real estate or real estate investment trusts. ‘I totally understand how, for the last 10 or 20 years, there’s been little or no interest in inflation hedges or diversifiers away from stocks and bonds,’ he said. ‘I also believe that you can’t time the market but, to reiterate the point, we are now in a new regime.’ This modest allocation to private assets has been on the table for a while now. Speaking to Citywire in mid-2021, Kate El-Hillow, chief investment officer of Russell Investments, said there was appetite for 4-5% private markets exposure and that could be expanded to as much as 20-30% depending on individual need.
‘I think 60/40 doesn’t become irrelevant, but it’s a little oversimplified and it’s not an optimal allocation’
Jose Minaya, CEO, Nuveen Asset Management
Bob Steers, executive chairman, Cohen & Steers
Alternative medicine
Death knell for 60/40 Syz Group in Switzerland has picked up on this prevailing trend in recent years, which partly led to the creation of Syz Capital, a dedicated private markets arm. Speaking to Citywire Selector earlier in 2022, Eric Syz, founder of the Swiss private bank, said diverse needs call for diverse responses. ‘I think it is a fair assessment that the 60/40 model of multi-asset investing is over. So we need to look at things in a much more strategic way, in terms of asset allocation,’ he said. ‘We have seen opportunities arise in areas such as music rights and litigation finance, for example. ‘The challenge is, if you want to use them as building blocks, so to speak, you need to have people who have a good working knowledge. That is hard to build up within asset management, which has a capital preservation and liquidity mentality. ‘I think we need to adjust to an illiquid mindset, which can really push the idea of diversification. Also, you start to think about things with a 10-year view, it’s not about buying today to sell tomorrow.’
Chris Sloley Editor, Citywire Selector
Eric Syz, founder, Syz Group
‘I think it is a fair assessment that the 60/40 model of multi-asset investing is over’
James de Bunsen, portfolio manager, Janus Henderson
‘We do think that flexing the cash weighting can serve a few purposes – primarily dampening volatility and having dry powder – but retreating too far into cash can be problematic’
Volatility and uncertainty have long driven investors to the protective embrace of cash. We talk to rated fund managers and selectors about whether this tactic still holds true ‘Cash combined with courage in a crisis is priceless,’ said Warren Buffett. So, which investors are currently in tune with Buffett’s view as global markets become increasingly uncertain? The strong value rotation at the start of 2022 could be described as among the most turbulent in modern history. Worsening inflation, looming recession, war in Ukraine, China’s seemingly erratic policy moves, as well as gold’s disappointing risk-hedging performance, have all created an environment in which some investors are turning to cash. Speaking to Citywire Selector recently, Aurèle Storno, Lombard Odier Investment Managers’ chief investment officer for multi-asset, admitted to being ‘embarrassed’ by the volume of cash he has left on the sidelines in the current market environment. In a video call he said some of his balanced portfolios have as much as 50% in cash. Surprising as this may be, Storno is not alone in taking this stance. Currently, three of the 10 largest Article 9 funds hold more than 20% cash, according to Morningstar data. Caixabank Si Impacto 0/60RV Plus FI, Caixabank Si Impacto 0/30 RV Plus FI and AXA Optimal Income C, have cash levels of 27%, 36% and 22.23% respectively. Kevin Thozet, a member of the Carmignac Patrimoine Investment Committee, agrees that cash is a useful tool in inflationary markets. ‘We started the year with 15% of cash in one of our portfolios, which currently stands at 25%. ‘But beyond the old adage that “cash is king”, an environment where risk-on and risk-off assets sell off together and most markets re-correlate is a vindication of active management. Even more so as while cash was/is one of the few assets to allow the amortisation of the selloff, it is also key to be able to redeploy this cash on future performance drivers at some point.’ Is cash still a safe haven? Cash has long provided a safe haven for cautious investors but in an age where the payment spectrum could soon be one with cash at one extreme and crypto on the other, does this age-old asset allocation provide the same level of protection? ‘We are roughly in the middle of our range of 2-10% cash in the Janus Henderson Diversified Alternatives fund,’ said James de Bunsen, the strategy’s Citywire + rated manager. ‘We do think that flexing the cash weighting can serve a few purposes – primarily dampening volatility and having dry powder – but retreating too far into cash can be problematic. In an environment of high inflation and very low interest rates, the real purchasing power of your capital erodes very quickly. And if you are wrong about a market selloff then getting invested again is psychologically hard, as you must buy back assets that you just sold, at increasingly higher prices,’ he added.
Is cash still the king of safe havens?
Krystle Higgins Reporter, Citywire Selector
Questioning crypto: a selector view Fund selector Toni Iivonen is among those who are more sceptical. The Helsinki-based investor does not invest in cryptocurrency due to concerns around security and ethical issues, as well as doubts around the volatility of such assets. Iivonen, who is chief investment officer at Elite Alfred Berg, said the financial and IT sectors will be crucial to the success of crypto stocks. ‘JP Morgan has publicly endorsed the adoption of crypto in its banking business and could take advantage of its reputation to easily reach its clients. ‘Exchange platforms such as CME Group are exploring the crypto world and could eat up the market share of crypto exchanges such as Coinbase. In the information technology world Meta is already developing its own cryptocurrency,’ he said. Iivonen doesn’t rule out investing in cryptocurrency in the future, but said long-term winners will employ blockchain technology as part of their business.
Dramatic selloffs in the markets are in response to two things: the Federal Reserve’s rate hike, as well as expectations of what the next couple of Federal open market committee meetings may look like. However, despite these issues, not all investors are convinced that cash is the best place to find cover. Amundi’s A-rated Andreas Wosol said his long-term strategy remains largely intact despite the market’s fraught condition. ‘To be honest, we’re not holding cash for the sake of holding cash,’ Wosol said during a video call. ‘We have operational cash in our fund that usually sits at around 2%, we are not using cash as an asset allocation just because it may have become more attractive from an investment perspective.’ Mirroring this sentiment, is Abrdn’s European equities investment director Sanjeet Mangat, who says that while she understands the temptation to sit on cash, now is not the right time to do so. A-rated Mangat said: ‘It is a very tempting thing to do, and the markets are extremely bearish now. ‘We saw some defensive leadership with Russia’s savage invasion of Ukraine, and that sentiment is now driving people to be very tactically defensive. ‘We started the year worrying about rising interest rates, and it feels like those worries have evolved and exploded. People are worrying about a recession and inflation. So, I think that has pushed people into being very bearish.’ However, with 15 years’ experience bolstering her view, Mangat said she is already on the lookout for which equity opportunities to buy during current dips in the market. ‘If my clients are paying me for European equities exposure, I think I should continue to be as fully invested as possible,’ she said. For Nadège Dufossé, who is Candriam’s senior allocation strategist and named as portfolio manager across a host of mixed asset funds, one key question when deciding whether or not cash really is king right now, is what you consider to be cash. ‘It depends on what you call cash. For example, if you are a US investor, it is not cash but short duration US and government bonds, which can be viewed as being attractive compared to longer-term investments.’ Dufossé is quick to warn against this for European investors, however. ‘At the end of the day, if you have cash, it is because you are negative. Plus, it is easier for US investors than for Europeans because the real return is much lower. But it is key to remember that this safe haven will only ever be temporary.’
Sanjeet Mangat, portfolio manager, Abrdn
‘If my clients are paying me for European equities exposure, I think I should continue to be as fully invested as possible’
The social costs of cryptocurrency
Margaryta Kirakosian Deputy Editor
Out of all 124 strategies identified by Morningstar, only the following two were identified as having direct links to sustainability in their names, see table below.
Cryptocurrencies have drawn a lot of criticism for the potential environmental damage they cause but sustainable investors will also be looking at their social impact, and it’s not all bad Cryptocurrencies remain a contentious topic among professional investors but debates grow even more heated when the topic of sustainability is mixed in. Many commentators have highlighted how energy-intensive bitcoin mining poses environmental challenges but few have touched on its social impact. Decentralised ledger systems have the advantage of anonymity and security but these qualities can also provide the perfect cover for a range of criminal activities. According to data from law firm Pinsent Masons, crypto investment fraud in the UK, for example, increased by 64% in 2021, reaching 9,458. Software company Chainalysis identified that crime involving cryptocurrencies hit an all-time high of $14bn (€12.6bn) last year, while crypto received by digital wallet addresses linked to activities such as scams, darknet markets and ransomware jumped by 80%. Russia’s invasion of Ukraine has added more controversy to the mix as both populations have searched for ways to disconnect themselves from devalued local currencies, raising concerns that cryptocurrencies have the potential to take the sting out of sanctions. Searching for sustainable funds No matter how you look at cryptocurrencies, investors will be hard pressed to find existing funds in this market that meet sustainable criteria. Morningstar currently has no specific category for crypto funds, but when Citywire approached the research company for data, it ran a search using keywords which identified 124 strategies. The following 10 funds are the biggest on the list and none of them have ‘sustainability’ or ‘ESG’ in their names:
Martin Vezer, manager covering thematic research at Sustainalytics, said the team’s model blockchain portfolio is showing higher risk on the issues of human capital and business ethics in large part because of its allocation to the information technology and financials sectors. Both are highly exposed to data privacy and security risks because they collect and store a vast amount of sensitive information, such as customer data and financial records. ‘In our analysis of 46 financials companies that are included in our blockchain model portfolio, we found that 19 of these companies have experienced significant to severe business ethics controversies over the past three years,’ Vezer said. Things can improve, however, and active management has a role to play in pushing up the ESG profiles of crypto funds. Vezer said active managers developing a blockchain thesis can engage with companies to promote more clarity in disclosures about cybersecurity, their programmes to adapt to technological change and their plans for attracting and retaining specialised developers and data security experts. ‘They can also respond dynamically to current events, such as company controversies,’ he added. ‘Passive strategies can also incorporate ESG considerations, such as screening a blockchain index for company involvement in severe business ethics incidents.’ Vezer said investors exploring the blockchain fund market can investigate the approach of a fund’s management team to see whether they have a strategy for addressing ESG risks and can also assess the ESG performance of the issuers that are included in a given fund.
Given this data, there aren’t likely to be many crypto funds that fall within sustainable regulations such as Europe’s Sustainable Finance Disclosure Regulation, but industry experts are not so pessimistic. Charlie Morris, founder of ByteTree, said the Article 8 category, which promotes environmental and social characteristics, is not too difficult to comply with, assuming tech and computing in general seem to qualify. Meanwhile, Article 9 would need either a focus on proof of stake or an offset of some sort. Will Wilson, climate lead at Apex Group, can also see crypto funds having their own niche within sustainable fund frameworks. ‘If they clearly articulate how the benefits are achieved, back the claims up with accurate data and, for example, use renewable energy and carbon offsetting in order to minimise environmental impact then they could be consistent with the requirements of the regulation,’ he said. Tackling ESG issues When assessing the sustainability of various crypto funds it is key to take a closer look at their specific components. The Sustainalytics team did this when they built a model portfolio consisting of 10 blockchain-themed ETFs and compared it with the Morningstar Global Markets Large-Mid Cap index. The weighted material ESG issue risk scores of the fund of funds were 17% higher on human capital and 71% higher on data privacy and security.
BIGGEST CRYPTO FUNDS BY AUM
Will Wilson, Apex Group
‘If they clearly articulate how the benefits are achieved, back the claims up with accurate data and, for example, use renewable energy and carbon offsetting in order to minimise environmental impact, then they could be consistent with the requirements of the regulation’
CRYPTO FUNDS WITH DIRECT LINKS TO SUSTAINABILITY IN THEIR NAMES
Martin Vezer, Sustainalytics
‘In our analysis of 46 financials companies that are included in our blockchain model portfolio, we found that 19 of these companies have experienced significant to severe business ethics controversies over the past three years’
Forensic look It is easy to poke holes in cryptocurrencies’ sustainability credentials, but the technology is not without its bright spots even on the social side of the ESG acronym. ByteTree’s Morris said similar social concerns were voiced about the internet in the 90s. ‘The network is a technology which is neutral, rather like the dollar. It is the bad actors that need to be held to account. ‘The same approach should be taken as with traditional financial crime. Blockchains are rich in data and leave a trail. Best to avoid crypto for crime as the tracking systems are highly sophisticated.’ Benjamin Dean, director of digital assets at WisdomTree, said blockchains are open source, distributed databases that anyone can see and investigate, which makes them a poor way to launder money. He suggested investors can address the criminal issue through the use of blockchain forensics companies, which track transactions from accounts known to have been associated with criminal activity in the past. ‘Indeed, these companies’ services are used by all major custodians and exchanges for compliance and know-your-customer/anti-money laundering (AML) at present,’ Dean added. In the ideal world, the transparency of the blockchain should enhance the ability to see where and from whom money has flown. ‘It is then up to those trading to do the necessary AML and due diligence checks on the traders identifiable on the blockchain and flag any concerns both internally and externally,’ Apex’s Wilson said. In his view by removing the need for brokers and broadening access to investing, the ledger and blockchain enhances transparency. ‘The technology could also help auditing carbon credit retirements or following capital flows for charitable donations among other things,’ he said.
ETPs step up for safety
Exchange traded products are blazing a trail for safer access to crypto markets
An approach to cryptocurrency risk management
sponsored by wisdom tree
Cryptocurrencies are rapidly gaining acceptance, but regulators are holding back
Pushing for the mainstream
Citywire’s international editors give us the lowdown from their markets
A world’s eye view of crypto
The evolution of crypto
sponsored by wisom tree
The genie’s out
Cryptocurrencies are here to stay but they’re not the answer to every investor’s wishes
Crypto’s ascent in emerging markets
The use of cryptocurrency is on the rise in EMs but these markets can be especially volatile
Clean versus dirty energy
The what, where and how of impact investing
sponsored by Wellington Management
Greenflation: a fair cost or an obstacle?
sponsored by Candriam
The challenge for asset managers in the climate crisis
sponsored by Axa Investment Managers
Beyond SFDR: Understanding the ESG credentials of Article 8 and 9 portfolios
sponsored by AllianceBernstein
Selector perspectives on sustainability
Paying attention to human capital
Do gas and nuclear power deserve a sustainable badge?
Red flags on green bond labels
Venture capital roadblocks on ESG
Wellington’s impact portfolio managers, Campe Goodman and Tara Stilwell, answer essential questions on impact investing and how to access it. What is impact investing? Impact investing provides funding to companies and bond issuers actively addressing the world’s major social or environmental challenges. Impact investors like us intentionally direct capital with the aim of generating positive outcomes for people and the planet while seeking to deliver competitive investment returns. Where do you find impact investment opportunities? We focus our research on 11 impact themes, centred on life essentials, human empowerment and the environment. Life essentials covers affordable housing, clean water and sanitation, health and sustainable agriculture. Human empowerment seeks to address the digital divide, education and job training and financial inclusion as well as safety and security. The environmental category encompasses alternative energy, resource efficiency and resource stewardship. How do you define a company as “impact”? To be considered for our impact funds, each potential investment must meet a high bar of alignment with our impact themes. The impact case must be material, with the majority of a company’s revenues or business activities advancing one or more of our themes. The impact of the potential investment must also be additional, addressing a specific need that is unlikely to be met by other agents, be it competitors, governments or non-governmental organisations. We believe it is also important to understand a company’s or an issuer’s holistic impact. For example, with green bonds, we scrutinise not just the use the bond’s proceeds will be put to, but also the issuer’s wider business activities. With government bonds, we only invest where the proceeds are being used specifically to address one or more of our impact themes. We also assess any potential investment for unintended negative consequences that would outweigh its positive impact — for instance, the impact of a new recycling facility on local communities or the environmental implications associated with the data storage involved in digital solutions. Finally, the impact case for each investment must be measurable so that we can quantify and report on its progress over time. We believe investors must be able to analyse, track and measure impact outcomes as thoroughly as they do financial outcomes. We also believe this transparency helps encourage much-needed capital to be directed towards impact companies and issuers. How exactly do you measure impact? To measure impact, we create custom key performance indicators (KPIs) for each company or issuer in our portfolios. The KPIs will vary depending on the security, sector or impact theme, but they must all be logical, transparent and based on reliable information, such as science-based insights from our climate research team. For example, we may measure the amount of greenhouse gas emissions avoided by recycling waste instead of sending it to landfills or the percentage of a population provided with clean water, internet access or affordable housing. In addition to monthly publications on our funds’ financial performance, we publish annual reports on KPIs and the impact of our holdings. How do you address the UN SDGS? When the United Nations (UN) published its Sustainable Development Goals (SDGs) in late 2015, we were pleased to see how well our themes aligned. Today, between our impact equity and bond approaches, our investments address all 17 SDGs, either directly or indirectly. For each company and issuer in our portfolios, we tag the goals that we believe they align with, as well as any of the 169 underlying targets outlined by the UN. While we do not manage the portfolios to a targeted level of alignment, our high standards for inclusion result in an investment strategy that naturally supports many of the SDGs. All the companies and issuers we invest in offer what we consider to be much-needed solutions to many of the major challenges identified in the SDGs. Wellington is proud to continue supporting the UN SDGs. Which asset class is most suited to impact investing: equities or bonds? Both equities and bonds provide excellent opportunities for impact investing, with large and growing opportunity sets. In fact, we believe the two asset classes provide complementary impact exposures and can be blended within a broader portfolio to create compelling synergies. Some themes are easier to access for fixed income managers, such as affordable housing bonds issued by local housing associations. Other themes, such as financial and digital inclusion, are more accessible for equity managers. What about financial returns? We believe impact investing does not entail giving up return potential, and our experience to date actually points to the contrary. Both the Wellington Global Impact Fund and the Wellington Global Impact Bond Fund aim to deliver competitive returns for clients alongside positive social and environmental outcomes. All our impact investments must meet specific financial thresholds to be considered for inclusion in our portfolios. In our view, many of the companies we target also benefit from structural tailwinds given their focus on products and services that seek to address some of the world’s most pressing issues. Companies that can provide effective solutions to those problems are likely to see healthy growth in their revenue and market share in the years to come. How do you bring it all together? After defining the universe of potential investments that meet our impact criteria, we focus on selecting the best combination of securities to reach our financial objectives, via bottom-up research. Key to successfully building and managing portfolios, in our view, is our multi-disciplinary approach. We regularly integrate the insights and perspectives provided by Wellington’s global teams of experienced research professionals across industries, asset classes and investment styles. This includes close collaboration with our career credit analysts and industry specialists, who provide detailed insights at the security, industry and sector level. We also draw heavily on the expertise of our dedicated ESG research and climate research teams. How do you approach engagement? We seek to enhance both the impact and the financial value of our portfolios further through active engagement with company management teams and boards. Engagement helps us identify opportunities for companies to improve, measure and report on their impact activities. It also allows us to report more meaningful data at the issuer and portfolio level. Ultimately, engagement creates an important feedback loop and mechanism to help us deliver and measure impact. What is so attractive about impact investing? Impact investing is an exciting space where we get to help clients align their financial objectives with social and environmental aspirations. We are committed to helping investors appreciate the potential benefits of directing their equity and fixed income allocations towards solutions that help people and the planet while pursuing their investment goals. For more information, please visit wellingtonfunds.com/sustainable-investing INVESTMENT RISKS CAPITAL: Investment markets are subject to economic, regulatory, market sentiment and political risks. All investors should consider the risks that may impact their capital, before investing. The value of your investment may become worth more or less than at the time of the original investment. The Funds may experience a high volatility from time to time. CONCENTRATION: Concentration of investments within securities, sectors or industries or geographical regions may impact performance. CURRENCY: The value of the Funds may be affected by changes in currency exchange rates. Unhedged currency risk may subject the Funds to significant volatility. EMERGING MARKETS: Emerging markets may be subject to custodial and political risks, and volatility. Investment in foreign currency entails exchange risks. EQUITIES: Investments may be volatile and may fluctuate according to market conditions, the performance of individual companies and that of the broader equity market. CREDIT RISK: The value of a bond may decline, or the issuer/guarantor may fail to meet payment obligations. Typically, lower-rated bonds carry a greater degree of credit risk than higher-rated bonds. SUSTAINABILITY RISK: Sustainability risk can be defined as an environmental, social or governance event or condition that, if it occurs, could cause an actual or potential material negative impact on the value of an investment. PLEASE REFER TO THE FUND PROSPECTUS AND KEY INVESTOR INFORMATION DOCUMENT FOR A FULL LIST OF RISK FACTORS AND PRE-INVESTMENT DISCLOSURES. For professional and institutional investors only. This material and its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase, shares or other securities. Investing involves risk and an investment may lose value. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed are those of the author(s), are based on available information and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. Except where registered for public sale, Fund units are offered only to qualified or professional investors on a basis that it does not require the registration of the Fund for public sale. The Fund only accepts professional clients or investment through financial intermediaries. Please refer to the latest Key Investor Information Document (KIID), the Fund offering documents for further risk factors, pre-investment disclosures, and the latest annual report (and semi-annual report) before investing. KIIDs are available in the official languages of each country in which the Fund is registered for sale (please visit www.wellington.com/KIIDs). UCITS Funds are authorised and regulated as a UCITS scheme by the Central Bank of Ireland-Wellington Management Funds (Ireland) plc. This material is provided by Wellington Management International Limited (WMIL), a firm authorised and regulated by the Financial Conduct Authority (FCA) in the UK. ©2021 Wellington Management Company LLP. All rights reserved.
Campe Goodman, CFA Fixed Income Portfolio Manager
Tara Stilwell, CFA Equity Portfolio Manager
