Assets invested in sustainable funds/strategies has surged over the past 10 years. Do you expect this trend to continue if market returns are weaker or more uneven over the next few years?
The modern approach to sustainable investing, at least the way we practice it at UBS Asset Management, is really all about identifying better businesses. This includes better management, more innovation, whether it is efficiently run, has a positive environmental profile – but always in the context that it's a better business. Whether the economy or the market is going up or down – in the end, the better business is going to perform better and it's going to yield a better long-term result.
Trade tensions have risen between the US and its main trade partners due to the tariffs imposed by the Trump administration. Is this a risk factor in your current investment decisions?
The short answer is: not really, and part of that is you can't really anticipate what this administration is going to ultimately do. For now, we are focusing on questions like ’do we own good companies?’, ’are they attractively valued?’, ’can we have confidence in the management and the investment prospects?’ etc. If we do that, we should be o.k. in the long run.
Overall, the underlying economic tone is pretty good. We see good data coming out of the US, improvements in Europe, and also in China things are going quite well. But we watch developments very closely.
What is different about the UBS-AM approach to sustainable investing?
Maybe the single most important thing that I would mention is: Sustainable investing isn't a hobby here at UBS. This is a corporate board-driven initiative. We are one of the few integrated financial groups, and we have sustainability embedded in all our business divisions, which is important. Second, we've been doing this for quite a long time; I've been running the sustainable equities team for more than a decade. The third benefit of the UBS approach is gathering and integrating all the sustainability data into our portfolio management and risk control systems.
We firmly believe sustainability will continue to be beneficial for our clients. It's not something we have taken up because it's fashionable. This is something that is really built into the fabric of who we are.
Can you give us an example of how your team measures the intangible assets of a company and how they can impact their business?
In the developed world for instance, two-thirds of all companies are service companies. When you're talking about service companies in a knowledge-based business, those that can attract and keep talented people gain an advantage in driving scientific and product research and innovation. You can monitor that by researching and collecting a variety of untraditional data. One example is patent data. Another example comes from one of our team members, who researched and wrote a scientific paper showing that Glassdoor1 data is predictive of a company's culture and its ability to attract and keep talented people, traits that are indicative of a company's ability to innovate and generate new products.
What is an example of a company that demonstrates these qualities?
Just as an example, our research indicates that given a choice, highly innovative people would rather work at Google than Yahoo2, because they believe Google's culture is better, the innovation is better, it is the place to work. Google's patent library and work in the field of artificial intelligence etc. is much more powerful than Yahoo's, and the Glassdoor reviews signal that.
The so-called investment thesis signposts are relevant when you consider buying a stock. Which information do you get from those signposts?
The signposts we are talking about are embedded in analyst research notes from our analysts. What they are is a way to write down, to memorialize what we are looking for in terms of a company's evolution that will drive the investment thesis and thereby the investment results. If we're looking at a particular company and the management says we are going to get rid of these businesses and focus on our core business, this has consequences for margins, for returns and thus the valuation of the company, that's a signpost. Of course there are financial results, and we are going to look at those, but the point of the signposts is to give us a bigger picture.
We all know the investor adage "Don't fall in love with your stocks". How does the investment process prevent this behavioral bias?
Having a good, strong, accurate and consistent valuation discipline is the answer. At some point, the valuation of a stock reflects everything you expected, and if there's nothing left to give you must move on.