Lockdown has radically altered how fund groups are interacting with end clients. But as we enter the new normal of how funds are bought and sold, what methods are fund groups using to keep clients engaged?
Despite the Covid-19 crisis, investors piled £27bn into sustainable funds across Europe in Q1. Baillie Gifford’s Kate Fox believes that with the pandemic shining a light on global challenges, yet more heads could be turned towards ESG.
FOCUS ON THE POSITIVE
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Jul/Aug 2020 highlights
e-volution
volatility
Capital Group
growth
Baillie Gifford
high yield bonds
Eaton Vance
Japan
FSSA Investment Managers
esg
iShares by BlackRock
climate
Lyxor ETF
alternatives
RM Funds
For someone who flies biplanes in their spare time, one would think Sparrows Capital’s Mark Northway would relish active management with its high active share. But it’s actually market beta that really gets his pulse racing.
A SAFE FLIGHT
For David Hunt, president and CEO of US investment giant PGIM, the most important change of the past decade concerns the role capital markets play in allocating capital around the world.
GLOBAL PERSPECTIVE
When one considers the IA North America sector has returned 223% in the past decade, the detrimental impact to performance of under-owning US equities is clear to see. Yet many fund buyers feel the asset class is simply too expensive. Is it a price worth paying?
LAND OF THE GIANTS
Scottish Mortgage is one of the UK’s largest investment trusts. Joint managers James Anderson and Tom Slater discuss why they believe the impact of a small group of exceptional companies is leading fundamental change in the industry, economy and society, and driving returns for long-term investors. Capital at risk.
Capital Group’s latest outlook report reveals that while there is reason to be optimistic, it’s going to be a rather bumpy ride
'The digitisation of daily life is here to stay and there are still long runways for growth among select companies'
With the world’s economy and markets recovering from the coronavirus-induced shutdown, there is much uncertainty in the outlook for economies and stock markets. We are pleased to share our perspectives on the prospects for economies, markets and companies in our 2020 Mid-year Outlook. Some of the key points include:
Despite some significant short-term challenges, there are reasons to be optimistic that there will be an economic recovery. But investors should expect peaks and valleys on the way.
The digitisation of daily life is here to stay and there are still long runways for growth among select companies.
Innovation in healthcare is changing the world. While facing some significant potential headwinds at the start of the year, many healthcare stocks have seen a dramatic change in sentiment since, and greater levels of demand.
Low growth and inflation suggest the low interest rate environment is likely to persist.
Dividends can be even more important in a low interest-rate world. For investors seeking dividend income, the combination of record dividend cuts and historically low interest rates has emphasised the importance of being able to identify those companies that can sustain or quickly restart dividend payments.
Click here to download the 2020 Mid-year Outlook now
Topsy-turvy market conditions often raise questions among investors. Here, Eaton Vance explains how a focus on ‘downside risk’ management in its credit portfolios can, in its view, keep investors on track to achieve their long-term goals
Driving forces Let’s briefly look at some negatives and positives for the asset class (ie the driving forces behind expected volatility), and then look at where we see investment opportunities right now. The negatives first. We expect the pending global recession will last for several quarters. Right now, the fundamentals of high-yield issuers are weakening significantly in the face of the severe economic slowdown. This means investors will need higher yields and spreads to compensate for taking on more risk. We expect average 12-month trailing par-weighted default rates among US high-yield issuers, as represented by the ICE BofAML US High Yield Index, to peak at around 8-10% (ie significantly above the 3.5% long-term average), with Europe lagging in its timeline and peaking lower than the US. We see several positives for the asset class (aside from the enormous stimulus measures announced globally), which includes the fact that spreads over treasurys (as of 30 June 2020) are still wide of historical averages: around 640 basis points for US high yield, 540 for European high yield (using the ICE BofAML European Currency High Yield Index as a market proxy) and 640 basis points for global high yield (ICE BofAML Global High Yield Index). Another positive pertains to defaults and market levels. Historically – as witnessed in the 2008/09 period – the worst pain in the asset class has occurred before the default cycle kicks off. In other words, history suggests that the worst market losses have likely already occurred.
Globally, high-yield bond markets have experienced a strong rebound since the very severe and rapid sell-off that characterised much of Q1 2020. The question on the minds of most investors now is, what next? In short, we envisage continued volatility in the asset class in the near term. However, 12 months from now, looking back at total returns over this period, we believe returns from high yield – be it US, European or global – will likely be seen as attractive in a historical context.
Sources: Eaton Vance, ICE Data Indices, LLC, as at 30 June 2020. For Professional/Institutional Clients Only. Issued by Eaton Vance Management (International) Limited (“EVMI”), visit us at https://www.eatonvance.co.uk/. EVMI is authorised and regulated in the UK by the Financial Conduct Authority. This material is not intended for use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. This material is for informational purposes only and is not investment advice, a recommendation to purchase or sell, or to adopt any particular investment strategy. This material has been prepared on the basis of publicly available information, internally developed data and other third party sources believed to be reliable, however, no assurances are provided and Eaton Vance has not sought to independently verify information taken from public and third party sources. Information contained in this material is current as of the date indicated and is subject to change at any time without notice. Future results may differ significantly from those stated, depending on factors such as changes in the financial markets or general economic conditions. Please contact Eaton Vance Management (International) Limited if you require further clarification on the source or calculation methodology of any data or information presented within this material or its associated attachments. The views and strategies described may not be suitable for all investors. Investing entails risks. There can be no assurance that Eaton Vance, or its affiliates, will achieve profits or avoid losses. It is not possible to invest directly in an index. Past performance is not a reliable indicator future results. An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of non-payment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer’s ability to make principal and interest payments. As interest rates rise, the value of certain income investments is likely to decline. Investments involving higher risk do not necessarily mean higher return potential. Diversification cannot ensure a profit or eliminate the risk of loss. Low rated or equivalent unrated debt securities of the type in which a strategy will invest generally offer a higher return than higher rated debt securities, but also are subject to greater risks of issuer default. Unrated bonds are generally regarded as speculative. The impact of the coronavirus on global markets could last for an extended period and could adversely affect the Strategy’s performance.
'The investment strategy of Eaton Vance’s high- yield team is to seek to take advantage of the ‘bumpy ride’ we foresee and add risk to portfolios in a prudent fashion'
Areas of opportunity The investment strategy of Eaton Vance’s high-yield team, which has a strong track record of managing downside risk and achieving attractive risk-adjusted returns, is to seek to take advantage of the ‘bumpy ride’ we foresee and add risk to portfolios in a prudent fashion. So where do we see investment opportunities? There are three key areas:
Fallen angels. There has been a slew of downgrades in the US and Europe, increasing the size of the overall investible universe. We believe that sensibly investing in companies having the ability to bounce back to investment grade will be a great way to generate returns from here.
European markets. We think that on a like-for-like basis, credit spreads in Europe are looking a little more attractive than they are in the US at the moment.
Primary issuance. A lot of challenged companies have had to come to the market looking for short-term financing to ensure they can get through this pandemic, and this has offered some really good opportunities for high-yield investors to lend to companies that we think are good quality businesses over the long term.
Jeffrey D Mueller, co-director of high yield bonds, portfolio manager, Eaton Vance Advisers International
Searching for sustainable growth in Japan is about seeking out ‘hidden gems’ in a large and deep universe, rather than simply buying the index
Sunset industries Nitori’s track record speaks for itself and by any standard measure, the company would be considered a remarkable success story. Book value and dividends per share have grown by more than 20x over the past two decades, while sales and profits have grown for 32 consecutive years – despite no growth in the furniture and home furnishings market in Japan. Long-term shareholders have been rewarded handsomely. As Akio Nitori, founder and chairman of Nitori, reportedly said, “Economic growth is never a part of our growth assumptions.” This supports our view that there are no sunset companies, only sunset industries. We believe that successful investing in Japan is about seeking out these ‘hidden gems’ in a large and deep universe, rather than simply buying the index. As a highly under-researched market, we believe that Japan offers the perfect opportunity for bottom-up active investors to generate alpha.
Hidden gems At FSSA Investment Managers we believe we have found that Japan contains many ‘hidden gems’ – companies that are able to grow strongly, despite the macro backdrop. How is this possible? Our research indicates that high-quality franchises that are dominant in niche sectors can sustain strong and consistent earnings growth without relying on leverage or macro conditions. Often, these companies incorporate some combination of the following characteristics: innovation, disruption, overseas expansion and a strong focus on return on invested capital. Even in declining sectors, there are singular companies that have beaten the odds and delivered steady returns for investors. One such example is specialty furniture retailer Nitori, the largest furniture brand in Japan. Weak domestic consumption and deflationary price expectations might reasonably challenge any domestically-focused retailer. However, Nitori has continually innovated – from product design to new store formats – to secure new areas of growth. Nitori’s vertically-integrated business model means that it manages the entire supply chain, with product sourcing from south-east Asia, domestic distribution centres that cover every corner of Japan, and direct management of its bricks-and-mortar stores and its e-commerce business. This enables the company to offer high-quality furnishings that are much cheaper than peers and generates higher gross profit margins.
Theoretically, a fast-growing economy bodes well for corporate earnings and stock prices, and vice versa. Because of this, investors often cite Japan’s weak economy and deflationary environment as reasons they have been reluctant to invest in Japan equities. However, the data suggests that these concerns may be unfounded. Although Japan’s nominal GDP has grown by just 4% since the late ’90s peak, Japan Inc’s corporate profits have grown by 180% over the same period.
Important information: This document is not a financial promotion and has been prepared for general information purposes only and the views expressed are those of the writer and may change over time. Unless otherwise stated, the source of information contained in this document is First Sentier Investors and is believed to be reliable and accurate. References to “we” or “us” are references to First Sentier Investors. First Sentier Investors recommends that investors seek independent financial and professional advice prior to making investment decisions. In the United Kingdom, this document is issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 143359). Registered office: Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number 2294743. Outside the UK, issued by First Sentier Investors International IM Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 122512). Registered office 23 St. Andrew Square, Edinburgh, EH2 1BB number SC079063
‘As a highly under- researched market, we believe Japan offers the perfect opportunity for bottom-up active investors to generate alpha’
Searching for sustainable returns in Japan: myths and misconceptions
Indexing is bringing clarity to the sustainable investing space by providing transparency and accelerating the adoption of new market standards
ESG
To learn more about investing in sustainable ETFs visit iShares.com/uk
*Projected growth. BlackRock projection, Apr 2020, based on Morningstar data, as of Mar 2020. Subject to change. The figures are for illustrative purposes only and there is no guarantee the projections will come to pass.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Issued by BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority (‘FCA’), having its registered office at 12 Throgmorton Avenue, London, EC2N 2DL, England, Tel +44 (0)20 7743 3000, has issued this document for access by Professional Clients only and no other person should rely upon the information contained within it. For your protection, calls are usually recorded. BlackRock is a trading name of BlackRock Advisors (UK) Limited. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The views expressed do not constitute investment or any other advice and are subject to change. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer. © 2020 BlackRock, Inc. All Rights reserved. 1230299.
Ways to align investment goals with iShares sustainable strategies
Indexing amplifies the impact of company engagements because index investors typically take a long-term view. Those who are sustainability-minded can exercise influence with companies through engagements across environmental, social and governance topics.
As investors transition to sustainable investing, an indexing approach may help to ensure sustainability is expressed in a consistent way across the entire portfolio. Indices are inherently rules-based, so the screens and ESG integration they deploy are repeatable, regardless of asset class or exposure.
Sustainable investing is not one size fits all and means different things to different investors. The broad range of indices available, and the transparency they offer, allow you to pick the approach that’s appropriate for your portfolio.
Here are the five reasons why we believe sustainable indexing gives investors the clarity they need to build more sustainable portfolios.
Advertorial: Sponsored by iShares by BlackRock For professional clients only. FIVE REASONS TO CHOOSE INDEXING FOR SUSTAINABLE Capital at risk. This information should not be relied upon as investment advice, or a recommendation regarding any products, strategies. The environmental, social and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process. Here are the five reasons why we believe sustainable indexing gives investors the clarity they need to build more sustainable portfolios.
During this year’s market dislocation, a majority of sustainable indexes exhibited resilience relative to broad market benchmarks.* We believe this is because sustainable indices are generally comprised of companies with higher profitability and lower levels of leverage than the broader market. Risk: Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
We believe that indexing is bringing clarity to the sustainable investing space by providing transparency and accelerating the adoption of new market standards. This is one of many reasons why we believe investors will choose to put an extra $1trn into sustainable index assets in the next decade.
Capital at risk. This information should not be relied upon as investment advice, or a recommendation regarding any products, strategies. The environmental, social and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.
past and predicted growth of sustainable index assets (2009-29)
Source: BlackRock, as at 31 March 2020
*Source: BlackRock with Q1 2020 data from Bloomberg and Morningstar as of 7 May 2020. Over 90% of sustainable indices outperformed their parent benchmark during this period of the heightened market uncertainty and drawdown.
1. Indexing puts you in control of what type of sustainable investor you want to be
2. Sustainable indexing can help provide a consistent approach across a portfolio
3. Sustainable indexing DRIVES industry standardisation, promotes disclosure and can help motivate better corporate behaviour
4. Sustainable indexes have shown resilience in difficult times
5. Index fund asset managers with active investment stewardship seek to drive long-term change
Climate investors are getting excited about green bonds as they cotton on to the fact that the environmental benefits don’t have to come at a premium
'Environmental concerns aside, green bonds can be an attractive investment in their own right'
This communication is for professional clients only. This document is for the exclusive use of investors acting on their own account and categorised either as “Eligible Counterparties” or “Professional Clients” within the meaning of Markets In Financial Instruments Directive 2004/39/EC. These products comply with the UCITS Directive (2009/65/EC), as amended from time to time. Prior to investing in the product, investors should seek independent financial, tax, accounting and legal advice. It is each investor’s responsibility to ascertain that it is authorised to subscribe, or invest into this product. Lyxor International Asset Management (Lyxor ETF) recommends that investors read carefully the “investment risks” section of the product’s documentation (prospectus and KIID). The prospectus and KIID in English are available free of charge on www.lyxoretf.com, and upon request toclient-services-etf@lyxor.com. Lyxor International Asset Management (Lyxor AM), société par actions simplifiée having its registered office at Tours Société Générale, 17 cours Valmy, 92800 Puteaux (France), 418 862 215 RCS Nanterre, is authorised and regulated by the Autorité des Marchés Financiers (AMF) under the UCITS Directive and the AIFM Directive (2011/31/EU). Lyxor ETF is represented in the UK by Lyxor Asset Management UK LLP, which is authorised and regulated by the Financial Conduct Authority in the UK under Registration Number 435658.
You can do well by doing good Investments that promote environmental sustainability often attract criticism that ethical investing comes at the cost of financial performance. But studies by the CBI have found that green bonds tend to behave very similarly to ‘vanilla’ bonds in the primary market. The upshot is that it doesn’t really matter if your primary concern is environmental sustainability or financial returns. Green bonds stand up to scrutiny in both respects, and are a worthwhile option for anyone looking to build a climate-conscious portfolio.
How ‘green’ is a green bond? With the growth of green bonds has come a rise in the murky practice of ‘greenwashing’ – companies making their products or services seem greener than they really are. Because issuers self-label their green bonds, there is a risk of ‘greenwashing’, where bonds don’t actually live up to the rigorous standards they claim to. In truth, green bonds are quite simple to verify – thanks to the ‘use-of-proceeds’ principle. A company can’t simply add a ‘green’ label onto a new issue. First, an issuer needs to state the proceeds raised for eligible environmental projects and report back on how the proceeds were used . They must also comply with the Green Bonds Principles, which are voluntary, but an issuer needs to adhere to them to have a realistic chance of ‘green’ accreditation. A final certification and accreditation are often the remit of the Climate Bonds Initiative (CBI). This gives the investor the reassurance that their prospective investment truly is ‘green’.
From niche to normal Because green bonds are a reasonably new investment, they suffer from the perception that they’re a niche option. The reality is that they are quickly hitting the mainstream. 2019 was a record year for green bonds with $258bn of new issuance , skyrocketing from $42bn back in 2015 . The Climate Bonds Initiative predicts even higher issuance in 2020 of $350bn. This growth can be traced back to the Paris Agreement in 2015. That’s when 195 leaders agreed to “stabilise greenhouse gas concentrations in the atmosphere at a level that will prevent dangerous human interference with the climate system” (UNFCCC, 2017). It’s broadly estimated that new issuance will need to climb to $1trn per year in the early 2020s if the green financing goals set by international agreements are to be met. Green bonds are a true growth market.
1/3 Source: Climate Bonds Initiative, 2019 Green Bond Market Summary, 5/2/2020 2 Source: IMCA, International Capital Markets Association
For some investors, bonds are synonymous with ‘boring’. Necessary, useful, and dull. However, for those who care about climate change and preserving the environment, green bonds can be exciting. Tackling climate change is expensive, and green bonds are accelerating the financing necessary to bring the fight home. They’re also rapidly being snapped up by investors, who are cottoning on to the fact that the environmental benefits don’t have to come at a premium. Environmental concerns aside, green bonds can be an attractive investment in their own right.
3
2
1
$258bn
$42bn
$350bn
New issuance of green bonds in 2015
New issuance of green bonds in 2019
Predicted new issuance of green bonds in 2020
RM Funds’ proprietary knowledge of alternative assets provides peace of mind for income-hungry asset allocators and investors faced with a difficult task
Alternatives
Our ability to deliver consistence distributions relies on our allocations and holdings. We are focused on businesses and assets which own or provide essential assets and services to society, whether that involves the provision of healthcare or the provision of digital telecommunications, in a post-Covid-19 world both are essential for the continued function of industry and society alike. Pietro Nicholls is the lead portfolio manager of the VT RM Alternative Income Fund and co-manager of the listed investment trust RM Secured Direct Lending.
'Identifying structural drivers are important investment considerations for the investment team at RM Funds'
Source: RM Funds, 23 June 2020
Source: RM Funds
1 VT RM Alternative Income Fund GBP Institutional Income Class
Dividend history
Sector allocation
Generating income While each of the key themes and tailwinds identified provide an outline of the RM Fund’s approach to investing, it is our relentless focus on generating attractive risk-adjusted returns which we pride ourselves on. In the two years since inception the fund has distributed over 9.36p per unit to shareholders, including YTD of 2.63p per unit.
Investing in structural tailwinds It is often cited that the car replaced the horse in a little over two decades, whether this is factually correct or not is extraneous, what is of material importance is that the car benefited from a structural tailwind, namely the growth of industrialisation and early adoption of urbanisation. Identifying structural drivers are important investment considerations for the investment team at RM Funds, three such tailwinds we are currently focused on include: 1. Ageing populations 2. Digitisation of industry 3. Decarbonisation Each one of these structural themes supports and underlines our investment thesis when investing in real and alternative assets. Our investment team are focused on identifying the highest quality assets, which benefit from strong counterparties, generate attractive cashflows and must be run by an excellent management team – without these key areas covered a prospective investment is rarely pursued.
Building an alternatives allocation The VT RM Alternative Income Fund was borne out of our desire to offer investors access to the best-in-class listed infrastructure and real estate assets, on a long-only global basis, while utilising the investment expertise of RM Funds, the firm’s proprietary knowledge of alternative assets and our trading prowess in a simple, cost-effective income-producing fund. The fund offers exposure to three key segments: 1. Infrastructure and renewables 2. Specialist real estate 3. Secured real assets Each area offers access to specific investment ideas and the holdings benefit from structural tailwinds. The fund managers have made investments across multiple geographies including North America, UK, western Europe and Australasia, with circa 50 investments, the fund’s holdings are diversified across 000’s of underlying assets. The fund’s distribution yield is currently circa 5.21%.
Let’s start with some numbers, over 40% of the constituents in the FTSE 100 have suspended dividends. The Bloomberg Barclays Investment Grade index, which represents over 3,000 securities across the European investment grade fixed income market, has a weighted yield to maturity of just 0.86%. And finally, over $9trn has been deployed in fiscal and monetary stimulus from governments and central banks around the world since the global health pandemic rocked financial markets and economies alike. Asset allocators and investors seeking income face a difficult task.
