In the search for yield, where do you see the biggest investment opportunities in 2021?
Anna Maria Reforgiato Recupero, Head of Strategic Investors Group, Generali Investment Partners: If 2020 was all about COVID-19 following the response on the fiscal and monetary side of policy globally, the concern now seems to be much more around inflation and the tantrum in bond markets.
Rates differential is something to watch with reference to the rest of the world and the strength of the US dollar which will affect emerging market economies and some commodities.
So Q3 and Q4 are going to be pretty interesting. If we put this in an asset class framework, total return in fixed income will likely be poor. But if you are a large fixed income investor, like us, you might still find value in structured credit especially as you cross the investment grade line.
There is still attractive risk premia in emerging market names vs. developed market ones but you really need to do your homework there.
The massive inflow in equities after years of net outflows is likely to continue. There is still generous risk premium before it deflates, especially in Europe if you are patient, and especially if you join the sector rotation party.
Private markets are also an area to explore but not all that glitters is gold. There are incredibly attractive opportunities to deploy capital especially in support of the recovery. Digital transformation, energy transition and other high-impact initiatives that you want to be in the front line of. Some are also a natural hedge against inflation and have proved very resilient during the pandemic. Be wise, cherry pick and mind greenwashing which is something we need to become more aware of.
Kylie Willment, Partner, Chief Investment Officer, Pacific, Mercer: We are facing an investment challenge that’s at the turning point of a multi-decade decline in interest rates. There’s been one market environment for many decades and we’re at the end of that and having to face a time where those traditional fixed interest components of our portfolio that have been offering up nice return and nice defensive and diversification characteristics are not doing that anymore and are not going to do that for some time.
We think return expectations are coming down across asset classes and that’s a function of where interest rates are and where yields are.
It’s looking at some of the growth fixed interest asset classes in favor of some of the traditional fixed interest asset classes, so credit, high yield and emerging market debt where you get a little bit more yield on offer.
Private markets increasingly play a big part of our portfolios, primarily property, infrastructure and private debt as you’re getting those nice yields there. And of course equities, depending on what type of investor you are and what your risk tolerance is, are still offering some nice yields.
But all of that involves going up the risk spectrum, so investors really need to think about what their level of risk tolerance is and where there are pockets of opportunity versus over valuation. So active management is really important, as well as your levels of diversification. So perhaps taking a little bit of exposure to all of these things could be part of the solution.
Noorsurainah (Su) Tengah, CFA, CAIA, Head of Alternative Assets, Brunei Investment Agency: We can think about further improving our geographical diversification. We can be mindful about how we want to approach asset allocation. The one thing that resonates across all of these choices we are making is the emphasis on diversification.
To the pockets of opportunity that Kylie mentioned, just drawing that attention to what is an opportunity which I think is available for us to explore is private credit and specifically Asia special situations, that’s happening in our part of the world. There’s a lot in terms of structural opportunities here.
The risk premia that Anna Maria mentioned is due to the imbalance in terms of the scarcity of alternative lenders. So this year in particular is going to be interesting and fundamentally strong on the basis that Asia, led by China is set for strong growth and also a recovery. So economies in Asia are fundamentally stronger and also the deals that we have seen, loan-to-values are much lower, they’re backed by hard assets. They are also senior in structure and on an unlevered basis are attractive.
Also important is the ability of asset allocators to be nimble and opportunistic. We saw how in March last year as markets troughed and credit spreads widened, very quickly spreads adjusted as well and markets have recovered. So other than being mindful of the construction itself is allowing yourself to capture the opportunities as and when they arise.
Aleks Ivanovic, Head Client Coverage, Head of EMEA and Switzerland, UBS Asset Management: You are all saying there are opportunities in alternatives and private markets, emerging markets and especially Asia but the details, where to get involved and how, will matter even more in the environment we are in and going forward.
What are the biggest implications on the back of the pandemic and how do you see sustainable investing evolving?
Su: In this short timespan, we have seen the gravest humanitarian crisis, healthcare crisis, economic crisis, financial crisis and education crisis of our time. The percentage of the world’s population that is currently living in extreme poverty is only expected to rise. The baseline figures alone look very scary. Another 150 million will fall below that threshold of extreme poverty living below $1.90 a day. This is a bad problem that keeps compounding.
As investors, we are responsible for the stewardship of trillions of dollars’ worth of capital, to the extent that we can create an impact with the investments we are making above and beyond financial returns, there is a duty that we need to serve to ensure inequalities are reduced and that no one gets left behind.
Anna Maria: COVID-19 has given us a common agenda. The level of engagement of governments and institutional investors on this has increased.
As a group, Generali is fully committed to the recovery and we have launched a multi-billion investment programme focused on impact investments across asset classes supporting the recovery. Now the level of awareness of ESG thematics has skyrocketed. The investment world is getting more responsible and is getting greener at last. Not only because of the marginal outperformance that we have seen but there is simply nowhere to hide now.
I feel very strongly about the duty that Su refers to. If this means ESG must become mainstream, I welcome that. The next challenge is creating robust and distinct features within ESG. It doesn’t have to be just a label - I want to see substance behind it. You will want to avoid greenwashing.
Kylie: Just to step back, the biggest implication from the pandemic is we have this heightened awareness that we live in one whole system (economic, health, environmental, financial, society). Any one of those elements can manifest in very real financial risk and/or opportunity. That’s the biggest link here.
Over the past few years we have been coming towards this conclusion that there are environmental, societal issues that are financial risks. Taking them into consideration in an investment process, there is strong alignment between those two issues.
We have taken a lot of learnings from companies through the pandemic period, such as those companies that better managed ESG issues are more resilient and better able to adapt to lockdown. They treated their employees much better and those companies did much better through the crisis period.
Applying the ESG lens from a gender perspective, what further efforts are needed to ensure female representation in leadership positions going forward?
Kylie: There has been a fast tracking of our acceptance that Diversity & Inclusion (D&I) and a diverse culture is good for a company. Companies that had flexible working environments, which is good for women, were better able to adapt to working environments imposed through the lockdown period. Acceptance that diverse teams are important and linked to strong financial performance of companies is what we can do to improve gender diversity.
The main stumbling block still comes back to unconscious bias and how we get rid of that, if we want to come to real gender equality. We need more leaders in the industry. Be deliberate about having diverse teams and bring females the training, development opportunities and coaching they need.
Su: There is more focus on diversity and inclusion generally. The more we can do to increase the agenda in our portfolios, the better but unconscious biases are there. Culture starts at the top. So if you prioritize culture there are higher odds of success and you can accelerate progress.
Anna Maria: Lets go back to gender. COVID-19 was severe for women. The job loss rate across female workers has been high and approximately 47% of women had to seek financial help. The Global Gender Gap report released by the World Economic Forum highlights that at the current pace it will take 167 years to close the gender gap at work. Before COVID-19, it was 99 years. As a result of the pandemic, women are more vulnerable. More women want to take matters into their own hands. And men are supporting this. We still need to push and lets all be activists.
Aleks: I remember looking at a McKinsey study which was shocking to me. Companies were asked if they believed diversity and inclusion were important, from both the gender and ethnic diversity perspective, and 90% said yes. But when they asked their employees, I believe only 40% of the employees said, gender diversity is important and only 22% said ethnic diversity is important so there is still a lot of work to be done.
What impact will Europe’s Sustainable Finance Disclosure Regulation (SFDR) have globally?
Anna Maria: Europe has been at the forefront of sustainability so it’s one of the areas where it can drive the rest of the world. I like that Sustainable Investing (SI) is becoming a must-have and the level of awareness has increased. SFDR is a serious commitment of the European community to SI.
As a group, we are committed to that. This framework is the largest attempt towards standardization and transparency and is a paramount step ahead. But will we all start investing with an ESG criteria?
Will Bitcoin play a more important role in global portfolios?
Kylie: We don’t currently invest in crypto currencies. Some investment managers we hire within the funds are comfortable and tend to use it as an inflation hedge. The reason we are not quite there is it’s a new technology with limited track record and history of how it behaves and when. In comparison – gold has a track record you can analyze. There are cyber issues that come with it. The reality is that there could be new wave that comes along that solves some of the earlier issues. Risk reward for us is still not there in terms of how it behaves.
Is there a growing trend for ESG in the private markets space?
Su: It is visible and making its way into portfolios. For us at least, there is no trade-off so far when considering ESG as part of decision-making. We are quite comfortable with the direction.
How should companies be approaching D&I?
Anna Maria: I welcome initiatives on diversity so we can see diversity as a natural thing, so it stops being something that we need to keep talking about it. D&I takes men and women to contribute collectively.
Please note, all views expressed are panelists own and should not be relied upon as investment advice.
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