This year is barely into its second quarter but as events have shown, this will be one for the history books. Hardly any country is untouched by the novel coronavirus, which comes on top of dramatic changes in the world’s economy, climate, environment and politics.
IMF has already forecast the world economy to shrink by 3% this year. Singapore’s economy is expected to contract by up to 10% given trade volume has plummeted while the lockdown has been extended. Commodity prices have also fallen, with crude oil futures diving into a hitherto unthinkable negative territory.
For investors, the decade-long bull run is by now a distant memory. Leaving their money as cash deposits simply won’t cut it in the low-interest rate environment. Rather, they should stay focused on the longer-term picture. “It’s never been more important to have your investments entrusted with talented and experienced professionals,” says Xav Feng, director at Lipper Asia Pacific Research, Refinitiv.
Xav Feng, director at Lipper Asia Pacific Research, Refinitiv
Besides having to play a bigger role, professional investment managers now have to assume a heavier responsibility. “Fund asset management firms should help investors build up a diversified portfolio and protect the investor interests in the current volatile environment,” says Feng.
The professional investment managers agree. “It’s during these periods of higher volatility, greater uncertainty and increasing complexity that our competitive strengths have set us apart,” says Ramon Maronilla, managing director, head of the Asia ex-Japan investment specialist team for global fixed income, currency & commodities (GFICC) group, at J.P. Morgan Asset Management.
To acknowledge the role of these professionals, Refinitiv is presenting yet another edition of its long-running Refinitiv Lipper Fund Awards, which has been organised for more than 30 years and in over 17 countries. The awards honour funds and fund management firms that have excelled in providing consistently strong risk-adjusted performance relative to their peers and highlight these top funds to potential investors. The award is built on Refinitiv Lipper’s 47-year track record of providing independent content. Few may realise that the group was first to develop fund classifications that place funds in their respective peer groups.
“The merit of the winners is based on entirely quantitative criteria. This coupled with the unmatched depth of fund data, results in a unique level of prestige and ensures the award has lasting value. Renowned fund data and proprietary methodology is the foundation of this prestigious award qualification, recognising excellence in fund management,” explains Feng.
With a customer base of more than 40,000 institutions from 190 countries, Refinitiv’s offerings in data, analytics, trading, and risk assessment tools are used by finance industry professionals to trade smarter and faster, overcome regulatory challenges, and scale intelligently.“Our heritage of integrity enables our customers to make critical decisions with confidence while our best-in-class data and cutting-edge technologies enable greater opportunity,” says Feng.
Having been in the business for a long time and given its extensive presence in markets around the world, Refinitiv has constructed one of the largest ESG (environmental, social and governance) datasets in the world which asset managers can rely on to support their investment strategies. “We’ll be blending this intelligence with our Lipper fund holdings data to create ESG fund ratings and analytics in 2020,” says Feng.
To be sure, the industry is facing some challenges, observes Feng. “If we look at the past decade globally, as well as in Asia, although active management still took the majority of total net assets, it has stopped growing while passive management continues to rally.
Moreover, passive management enjoyed a consecutive 15 years of net inflows while active management had a volatile flow trend and posted net outflows in 2008, 2011 and 2016,” he notes.
The onus is therefore on the asset managers to be more active in finding ways to generate “alpha” — the measure of active return on an investment — for their clients and win over new ones. Feng believes data and technology will play a bigger role.
“We have witnessed a permanent shift in the role that data and technology are playing in investment decision-making. Investment managers and professionals are now looking at unique ways of using data to differentiate their offerings and tap new opportunities. And many of them are turning to quantitative research and data science,” he says.
If the asset management industry is to play a bigger role in the future, it needs to be more active in identifying broader trends outside the finance world while addressing issues or problems the world faces, especifically on the growing awareness of ESG-driven investing.
Feng believes ESG-driven investments have become one of the most prominent emerging strategies. “That drive is supporting environmental and social impact while also generating economic returns,” he adds. In fact, following an active industry-wide push, ESG investing — which is also known as “sustainable investing” — has started to become mainstream for investors to seek for positive returns and long-term impact on society, environment and the performance of the business.
The industry agrees
Asset managers agree. From the perspective of Paras Anand, CIO, Asia Pacific at Fidelity International, big historical upheavals have this effect of reinforcing trends that are already underway. For example, near-shoring of global supply chains, or increasing use of technology and online platforms, are some trends that are already well in motion before the current Covid-19 crisis. “Sustainability is, in our view, no different,” he adds. “The trends that brought sustainability to the fore in financial markets and in society have been accelerated by this crisis.”
According to Anand, Fidelity sees three main trends when it comes to ESG investing. First, Fidelity’s own research has shown that stocks with higher sustainability characteristics tended to outperform when markets are volatile. “We believe they will continue to do so when the crisis is over,” he says.
Next, throughout the Covid-19 outbreak, Fidelity sees companies placing stronger emphasis on their societal responsibilities. “The crisis has reinforced the underlying point that companies need to offer products and services that bring value and don’t only extract profit,” says Anand.
Finally, the pandemic is an opportunity for regulators to play a bigger and more active role in shaping the kind of society people want to live in once the crisis blows over. “In our view, regulators are going to be even more focused on sustainability in the future,” adds Anand.
Karen Lim of AllianceBernstein agrees that ESG investing is here to stay. “Considering ESG risks in an investment is doing proper due diligence on companies, and it has improved our risk-adjusted returns, especially in avoiding losses that non-ESG integrating investors might have viewed as ‘black swan’ events but which we had anticipated as a risk of our investment,” says Lim, who is managing director of the Southeast Asia client group at AllianceBernstein Singapore.
While it is common understanding that the “G”, or governance, has a major impact on company valuations, the investment community has gained a much better appreciation of risk factors posed by “E”, or environment. To this end, AllianceBerstein is working with the Columbia Lamont Earth Institute of climate science to understand better risks of a warming world on companies and industries. As for “S”, or social considerations, is something AllianceBernstein pays attention to too. “For instance, how our portfolio companies treat their employees and their customers during this crisis — it may have long term implications for years to come,” explains Lim.
From the perspective of Sherry Wong of UBS Asset Management, the focus on ESG is not something new, but already part of their investment process for more than a decade. “We find that good companies — those that plan ahead, also tend to be more conscious of these factors. They understand that having the right ESG policies is part of a good business strategy and over time can help with staff camaraderie and make a positive financial impact,” says Wong, head of asset management Singapore & SEA; head of products APAC.
In recent years, as more asset managers throw their weight behind ESG, UBS Asset Management has further integrated ESG considerations across its investment strategies, especially with its fixed income and equity investment teams. UBS Asset Management’s own Sustainable Investing Research and Stewardship team has also been working more closely with the individual investment teams to influence change at the companies they invest in.
In a sense, there is another powerful trend backing the growing popularity of ESG investing — demographics. A younger generation of portfolio managers — who are true believers of sustainability — is emerging and assuming greater responsibilities.
The way Refinitiv’s Feng sees it, these portfolio managers, well-trained in interpreting sustainability reports and evaluating corporate governance structures, will come together and be a significant force in driving the integration of ESG criteria with the way funds are managed.“This means that at some point in time sustainable investment using ESG criteria will become the new normal,” Feng reasons.