Key takeaways:

  • We expect the Democrats to embark on an aggressive push towards decarbonizing.
  • The coal industry is likely to be a standout casualty.
  • Smaller pure-play exploration and production companies are most likely to face headwinds.

In 2017, not long after he entered the White House, Donald Trump declared his grand ambition: to make the US self-sufficient in energy. The aim, he said, was to “become, and stay, totally independent of any need to import energy from the OPEC [1] cartel or any nations hostile to our interests”.

The president enacted a raft of changes linked to these ambitions: loosening drilling restrictions on federal lands and parks, increasing support for pipeline infrastructure, dismissing the risks of climate change, and undoing Obama-era regulations on emissions from coal power plants, automobiles and oil and gas wells.

A U-Turn in Prospect

Now, with the election of Democrat Joe Biden as president, the door is open for a U-turn in these policies as the US pursues a more open, multilateral agenda. This change of direction could be an abrupt one as government policy aligns with a gathering global consensus in favor of environmental concerns.

We Expect an Aggressive Push Towards Decarbonizing

On climate, the Democrats are unlikely to run against the global tide, and instead we expect them to embark on an aggressive push towards decarbonizing. Depending on how pliant the Senate will be, restrictions on new oil drilling on federal land, in the Gulf of Mexico and in the Arctic Alaska could well be re-enacted. Progress on building the controversial Keystone XL pipeline could also be stopped in its tracks. Emissions – whether from automobiles or by energy companies – will once again come under the spotlight. These are seen to be key to decarbonizing transportation as electric-vehicle penetration grows.

For companies which have benefited from US energy policy under Trump, the election of Joe Biden is seen as a negative – but even here, this will have less impact than in any ordinary year, given the glut in oil, gas and coal supply, the collapse in demand, and the consequent declines in energy-company share prices witnessed through 2020.

Coal – A Likely Casualty

One standout casualty, however, is likely to be the coal industry. Despite all the sound and fury around Trump’s pledge to “make coal great again” over the four years to November 2020, in the cold light of day, efforts to put the fossil fuel front and center of US energy policy amounted to little more than a series of soundbites. As of Q3 2020, for instance, shares in the country’s largest coal producers were well below their immediate highs following Donald Trump’s 2016 election, with several producers remaining in bankruptcy. [2] From generating more than half of America’s electricity 10 years ago, coal now accounts for around one fifth – and that level is falling. Even amid a Trump-mandated push for fossil fuels, the fastest-growing electricity source was wind. [3]

Partly, coal’s collapse is the consequence of market forces: an overabundance of supply coupled with its replacement by cleaner, cheaper gas, and the slump in demand owing to Covid-19. But it also points to the relative impotence of any sitting president when it comes to enacting lasting change on domestic policy – particularly if that change runs counter to the prevailing mood music.

The most you can say about Trump and fossil fuels is that his actions had an impact at the margin. They probably helped support general positive sentiment towards investment, while giving CEOs an excuse to ignore important questions on their environmental actions, such as flaring and methane leakage.

The Investment Community Is Becoming More Environmentally Conscious

As in so many spheres of life, it is market forces that win out over policy – and that is also likely to be the case under a Biden presidency. However, the investment community is becoming more environmentally conscious, more alive to transition risks associated with climate change, and more likely to push for sustainable investments away from polluting companies. In that sense, CO2 producers in the energy sector are likely to experience headwinds regardless.

Smaller Pure-Play Exploration and Production Companies Most Likely to Face Headwinds

The same goes for companies in the energy sector, with the smaller pure-play exploration and production companies most likely to face headwinds, especially the smaller-cap companies which are more exposed to risks around activity restrictions and which have greater federal land exposure. Similarly, this hurts US services companies, particularly domestically focused ones, while refiners would face a higher cost of oil, alongside potential charges for their emissions and demand for their products slowing. The bigger upstream companies, including the majors, are more diversified both in the US and internationally, so, again, this could lead to further consolidation, which we believe would be a good thing for the industry.

Sources

1. The Organization of Petroleum-Exporting Countries, an intergovernmental organization of 13 nations accounting for an estimated 44% of global oil production.
2. The Washington Post: ‘Trump pledged to bring back coal. Like everything under him, it collapsed instead’, June 12, 2020
3. Ibid.

Important information and disclosures

Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice.

Important Information

This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. ‘Newton’ and/or ‘Newton Investment Management’ brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.

Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited.

In Canada, Newton Investment Management Limited is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Ontario and Quebec and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.

Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2020 The Bank of New York Company, Inc. All rights reserved.

Asset owners are reporting only half of their true total costs according to analysis by CEM Benchmarking exclusively for Top1000funds.com. This means tens of billions of dollars across the industry is not being reported.

“Are our fund’s costs reasonable in comparison to other funds?”  CEM Benchmarking has been helping asset owners answer this question for 28 years.

Why do asset owners not simply review each other’s financial statements to compare their costs?  After all, financial statements must comply with accounting standards.

One would expect that costs across funds would be presented in a complete and comparable way, at least for funds subject to the same accounting standards (e.g. US GAAP, IAS).  Unfortunately, this is not the case.

Our research indicates that, at best, only half of true total investment management costs are included in asset owner financial statements.  Across the industry this means an enormous amount of costs actually incurred go unreported. Tens of billions of dollars are not reported by asset owners.

How did we conclude that only half of costs are reported in annual report financial statements?

Short answer to the above question, not easily.  Our cost estimates are based on 28 years of collecting detailed cost and performance data from asset owners.  Table 1 supports our estimate and is also based on a recent comprehensive review of the public disclosures of 24 large global funds representing $4 trillion of AUM.

Table 1.

Actual costs and reported costs in annual report financial statements1

Basis points
External manager fees, third party services and internal costs2 51.4
Private asset carry2 12.3
Transaction costs2 10.5
True Total Cost 74.2
Average financial statement Total Costs in annual reports 1 37.5
Financial Statement Total costs relative to True Total cost 51%
1 Based on a recent study of financial reporting disclosure practices of 24 global funds representing $4.4 trillion.
2 Based on 300+ global pension and sovereign wealth funds representing $9.3 trillion in assets in the CEM database. Transaction cost estimate is based on a subset of 27 global funds representing $1.7 trillion in assets. CEM conducts an annual survey of asset owner performance, costs, and value for money metrics. Time period chosen to match financial reporting disclosure practices study.

 

The group of large global asset owners studied to arrive at the estimate above chose to participate in the CEM database, suggesting that these are asset owners who particularly care about costs. We believe our estimate that 49 per cent of costs go unreported in financial statements of annual reports is conservative and the extent of under-reporting is likely to be higher across the entire industry.

Why are costs reported so differently in financial statements?

Averages do not always tell the whole story and that is certainly the case here.  While the average fund reports only around half its true costs, from fund to fund, there are big differences.

Some report 80 per cent or more of their true costs, others, less than 30 per cent.  The problem is accounting standards provide so much room for interpretation that two funds with identical investment costs could disclose vastly different figures, while still complying with accounting standards.  Most accounting standards do require disclosure of all invoiced investment costs.  While this requirement may seem simple and clear, in practice it leads to inconsistency and frequently to large unreported costs.

What costs are reported most inconsistently in annual reports?

Pooled investments vs. separate accounts – Many pooled investment funds net fees from returns.  Fund unit holders never receive an invoice.  Separate accounts, on the other hand, generally invoice funds directly.  If funds report only invoiced fees, costs could look dramatically different simply due to their choice of pooled or separate account structures.  We found some financial statements did not disclose any external fees because they are all netted from returns.

Private market investments – Private market investments made through Limited Partnership agreements (LP’s) are particularly problematic when it comes to cost transparency.

  • Base manager fees are often invoiced and reported after netting offsets and rebates representing fees paid to the General Partner from portfolio companies. CEM believes that the portion of these charges kept by the GP should be included as an additional cost and the portion rebated to the LP should not be used to offset base fees. Why? Because base fees are payable regardless of transactions with portfolio companies and the GP keeps its share of offsets and rebates.
  • Carried interest (aka performance fees) is often poorly reported, if reported at all. Very few funds disclose the level of carried interest accrued or paid, amounts that can be very material.  There is not even consensus about whether carried interest is a cost.  Some asset owners do not include carried interest because they believe it is a form of profit sharing and not a cost.   This problem is even more acute with fund of fund arrangements where there are two layers of fees that often go unreported in financial statements.

Transaction costs – Perhaps the area that is most poorly disclosed is transaction costs.  In recent years regulators in the UK, the Netherlands and Australia have required more fulsome disclosure of transaction costs. But elsewhere in the world disclosures remain rare.  Transaction costs are not trivial, they can represent 20 per cent of total investment costs.  The second issue with transaction costs is inconsistency in what is included/not included.  Complete disclosure includes brokerage commissions, estimates of fixed income trade spreads, and deal acquisition and other transaction costs for private assets.

Going beyond requirements – Examples of better cost disclosures in annual reports

Fortunately however, some funds do recognise that mere adherence to accounting standards results in an incomplete and misleading cost picture. Some leading global asset owners are choosing to go above and beyond the minimum requirement in their reporting.  Here are two excellent examples.

  1. ABP provides a reconciliation of financial statement costs versus true total costs

In their 2019 annual report, ABP, a fund that covers government and education workers in the Netherlands, provided a table reconciling the difference between invoiced external manager fees disclosed in accordance with accounting Guideline 610 for Annual Reporting with what they report to their board, which is the true total costs including costs netted directly from the assets. The difference is stark, actual asset management costs were €2,904 million, compared to what is included in their financial statements, just €488 million.

Excerpt of 2019 ABP Annual Report (English version) page 53, the pension fund for government and educational workers in the Netherlands.

 

  1. Universities Superannuation Scheme (USS) focuses on total cost rather than financial statement cost

USS, the principal pension scheme provided by universities and other higher education and associated institutions in the UK builds on their financial statement costs of 19 bps – which reflects only internal costs plus invoiced external management costs.  In all discussion of costs in their annual report, they refer to their asset management costs as 39 bps, which reflects not only internal and invoiced costs but also costs that were deducted from the assets directly.

 

Exhibit 2 – page 7 of USS Report and accounts 2020
4Excerpt of USS Report and accounts for the year ended 31, March 2020 page 7. USS is the principal pension scheme provided by universities and other higher education and associated institutions in the UK

 

Implications for fund management and stakeholders

While it might be expected that following the generally accepted accounting principles would provide complete, standardised, easily comparable figures, this is not the case.  Accounting standard boards should take note that current accounting rules and practices result in incomplete and non-comparable cost reporting in asset owner financial statements.

Fortunately, some of the world’s leading asset owners choose to go above and beyond minimal financial statement requirements in the other sections of their annual reports (eg management discussion and analysis, report from board/management), to disclose their true total costs.

Transparent, clear, and complete cost disclosure is just one aspect of a good annual report, but an important one.  In his 1954 book, The Practice of Management, Peter Drucker said: “What gets measured gets managed”.

Though perhaps not as catchy, we suggest expanding that premise: “What gets measured in a clear and complete manner and disclosed in public documents, gets managed to fiduciary standards.”

Sandy Halim, CPA, CFA and Mike Reid work at CEM Benchmarking

 

Investors had the chance to join private chat rooms with speakers and their peers to discuss the themes of the conference including the fallout of the US election and what their outlook is for 2021. Using special networking technology this dedicated session allowed for interactivity among delegates to discuss key themes. The “rooms” or “tables” were hosted by leading investors from around the world.

Moderator

Van Dam is an experienced and innovative director of strategy. He is the investment director responsible for developing and benchmarking PGGM’s investment practice in order to stay best practice. He is currently working on PFZW’s investment strategy 2025. Van Dam has broad knowledge and experience on strategy, investment policy formulation, asset allocation and value chain design. In 2013 he was voted CIO / “Investment Head of the Year” by aiCIO. Current other activities include being chair of the VBDO, the Dutch Association of Investors for Sustainable Development, Chairman of the European Chapter of the 300 Club and member of the research committee at the International Centre for Pension Management (ICPM). Together with Kees Koedijk and Alfred Slager he authored “Achieving Investment Excellence: A Practical Guide for Trustees of Pension Funds, Endowments and Foundations.”
He holds a Master’s Degree in Finance from the Erasmus University Rotterdam.

Walker is responsible for the investments of the Mineworkers’ Pension Scheme and the British Coal Staff Superannuation Scheme. Prior to joining CPT, he was managing director and global chief investment officer of the Univest Company, Unilever’s internal investment group. He joined Unilever from Mercer, where he was a partner and head of the London Investment Consulting Unit. Walker has more than 20 years of experience in actuarial, pensions and investment work. He is a fellow of the Institute of Actuaries and a member of the 300 Club.

Williams joined RPMI Railpen in 2014 and became CIO is 2018. Previously he held senior portfolio management positions at BlueCrest Capital Management (UK) LLP and at Fischer Francis Trees & Watts. At both firms he managed global fixed income portfolios for Railpen. He began his career as a consulting actuary and is a Fellow of the Institute and Faculty of Actuaries. Williams is also an experienced non-executive director and adviser. He is currently chairman of the Nestlé UK Pension Fund investment committee, a member of The Health Foundation’s investment committee and a trustee of Lincoln College Oxford 2027 Trust.

There are many differences between the 2008 financial crisis and the 2020 COVID-19 induced economic crisis, not the least of which is how the policy makers have responded. In 2008 the bailout of the banks was the focus, and in 2020 the bailout of the consumer was the focus. So why have governments been focusing on the consumer, and what does that mean for investment opportunities? Is this a long-term thematic that investors should be navigating in their investment allocations?

Speakers

Peter Branner has been chief investment officer at APG since September 2018. In this role, he is responsible for the overall investment operations and further optimising sustainable and long term returns in line with the APG strategy. APG Asset Management is part of APG Group NV, the Netherlands’ largest pension delivery organization. APG Group manages €479 billion in pension assets and ensures that over 4.5 million people can be confident that their accrued pension rights are being invested, administered, and paid out correctly. Branner has more than 25 years of investment experience. Before joining APG, he served as CEO/CIO of Swedish SEB Investment Management in Stockholm. In this role he was responsible for the overall investment process at the firm and its broad range of funds and institutional mandates covering all major asset classes with in excess of €100 billion in assets under management. Previously, he was CIO at Fortis Investments’ multi management division in London. Before that role, he served as managing director of IKANO Fund Management in Luxembourg and held other investment positions within the IKANO Group. He graduated from Copenhagen Business School with a BSc in economics and a MSc in business administration.

Matt Hammerstein is the CEO for Barclays Bank UK, covering retail banking, investments and wealth UK, business banking and Barclaycard UK.
Prior to becoming CEO, he was head of retail lending covering both the secured and unsecured lending businesses. He joined Barclays in 2004 as director of group strategy, later progressing to become the group chief of staff; a key strategic role in which he provided vital support to the Group CEO during the financial crisis. He went on to manage Barclays Group corporate strategy and corporate relations, Barclays customer and client experience in retail and business banking and Barclays UK retail products and segments.
Before Joining Barclays, he was a senior management consultant at Marakon Associates where he worked for 12 years in the financial services, consumer products and energy sectors within the Americas and Europe.
Hammerstein graduated with a degree in Mechanical Engineering from Yale University, and an MBA from the University of Chicago.
He is a member of the BBUK board and sits on the money and pensions service adult advisory group. He is also a member of the FCA practitioner panel and trustee of the Charities Aid Foundation and active ambassador in Barclays for inclusion, wellbeing and anything that makes the workplace more fun.

William Nicoll was appointed CIO, private and alternative assets in February 2020 which covers private debt, real estate, private infrastructure equity and teams investing in third party funds. Prior to this he served as head of institutional fixed income and was previously co-head of alternative credit where he was responsible for the development of various products for institutional investors.
Nicoll joined M&G in 2004. Prior to this, he was head of European credit at Henderson Global Investors and before this had worked at Cazenove & Co in corporate bond research and fund management.
He graduated from Trinity College, Cambridge University with a degree in Natural Sciences. He is a CFA charterholder and a Chartered Fellow of the Chartered Institute for Securities and Investment.

Moderator

Colin Tate has been an investment industry media publisher and conference producer since 1996. In his media career, Tate has launched and overseen dozens of print and electronic publications. He is the chief executive and major shareholder of Conexus Financial, which was formed in 2005, and is headquartered in Sydney, Australia. The company stages more than 20 conferences and events each year – in London, New York, San Francisco, Los Angeles, Amsterdam, Beijing, Sydney and Melbourne – and publishes five media brands, including the global website and strategy newsletter for global institutional investors conexust1f.flywheelstaging.com. One of the company’s signature events is the bi-annual Fiduciary Investors Symposium. Conexus Financial’s events aim to place the responsibilities of investors in wider societal, and political contexts, as well as promote the long-term stability of markets and sustainable retirement incomes. Tate served for seven years on the board of Australia’s most high profile homeless charity, The Wayside Chapel; and he has underwritten the welfare of 60,000 people in 28 villages throughout Uganda via The Hunger Project.

Key takeaways

Will

  • This is a very weird crisis due to the level of government support being thrown at consumers.
  • Consumer risk transfer from banks to asset managers will continue into the future.
  • We believe there is still a demand for quality real estate offices in the future however retail will be challenged. Offices will not go away but it is an opportunity to upgrade and reconsider what type of space is needed.
  • All private asset markets have their own cycles. The real challenge is to find a market that is not commoditised.

Peter

  • The S of ESG is increasing in importance.
  • China was strong before the pandemic and even stronger now.
  • Physical due diligence is likely to return as soon as possible.
  • The extent of de-urbanisation is possibly overstated.

Matt

  • We are all in the same COVID storm but we are in two very different boats in terms of how people have been impacted. Young people, those with children and the self-employed are particularly vulnerable.
  • There have been many habitual shifts during COVID – Cash usage in the UK has been down c. 60%, and non-cash payment methods are likely to continue in the future. The buy now pay later trend has been greatly accelerated during COVID. There has also been a big shift to supporting local businesses, to investing in one’s home and spending on hobbies.
  • Retail has hardship but also pockets of huge opportunity.

Related reading

Seeking income: How private corporate debt can help pension schemes meet their long-term goals
The world that COVID built

Just over a year since the he Business Roundtable re-defined the statement of purpose of a corporation, away from just shareholder primacy, the world faced a severe global crisis. This session looks at companies’ responsiveness to the COVID-19 pandemic and inequality issues and how corporations can better serve all stakeholders in the future.

Speakers

Anthony Eames is a vice president and director of responsible investment strategy for Calvert Research and Management, a wholly owned subsidiary of Eaton Vance Management specialising in responsible and sustainable investing across global
capital markets. He is responsible for the suite of strategies focused on responsible investing, encompassing actively and passively managed US and international equity strategies, fixed-income strategies and asset allocation funds. Eames is responsible for client communications and insights on investment strategy and portfolio positioning. He joined Calvert Research and Management in 2016 when Eaton Vance acquired the business assets of Calvert Investment Management,
forming Calvert Research and Management.

He began his career in the investment management industry in 1995 with Calvert Investment Management. He has been affiliated with the Eaton Vance organisation since 2016. Before joining Eaton Vance, he was senior vice president and national sales manager at Calvert Investment Management. Previously, he represented Calvert as senior regional vice president in the northeast and held various roles in client services and sales.
Eames earned a B.A. from Wittenberg University. He holds the Accredited Investment Fiduciary and Accredited Asset Management Specialist designations, and FINRA Series 7, 24 and 63 licenses.

Robert Eccles is the world's foremost expert on integrated reporting and a leader on how companies and investors can create sustainable strategies.

He was previously a tenured Professor and Professor of Management Practice at Harvard Business School.

He is the founding chair of the Sustainability Accounting Standards Board (SASB) and one of the founders of the International Integrated Reporting Council (IIRC). He has recently joined the board of Mistra Centre for Sustainable Markets (MISUM) in Sweden. He is also on the Advisory Board of the JANA Impact Capital Fund.

In 2011, Eccles was selected as one of the Top 100 Thought Leaders in Trustworthy Business Behavior, for his extensive, positive contribution to building trust in business, and in 2014 and 2015 he was named as one of the 100 Most Influential People in Business Ethics. He is also an Honorary Fellow of the Association of Chartered Certified Accountants (ACCA).

Eccles is the award-winning author of a dozen books, including seminal works on integrated reporting, sustainability, and the role of business in society. A prolific writer for both academic and practitioner audiences, he has his own column on Forbes.com. His most recent book (with Michael P Krzus and Sydney Ribot) is The Integrated Reporting Movement: Meaning, Momentum, Motives, and Materiality (John Wiley & Sons, 2015). In this book he suggests the idea of an annual board of directors 'Statement of Significant Audiences and Materiality'.

From the beginning of his career as an academic and practitioner, Eccles has always been dedicated to turning theory into practice. One of his most significant current efforts in this regard is 'The Statement of Significant Audiences and Materiality Campaign' in collaboration with the American Bar Association’s 'Task Force on Sustainable Development', the UN-backed Principles for Responsible Investment, and the UN Global Compact. The goal of this campaign is that, by 2025, the board of directors of every listed company will publish 'The Statement.' In doing so, they will demonstrate the extent to which the company views its role in society to be one of supporting sustainable development for the long-term interests of shareholders. This will help to make sustainability core to both companies and investors.

Eccles received an SB in Mathematics and an SB in Humanities and Science from the Massachusetts Institute of Technology (both degrees in 1973) and an AM (1975) and a PhD in Sociology (1979) from Harvard University. He joined the faculty of Harvard Business School that year and received tenure in 1989.

Mark Tulay has served in leadership roles in sustainability initiatives for over 25 years, focusing on advancing the metrics, measurement and management of corporate sustainability performance. As program director and the first employee of Ceres, he was involved in the early stages of the Global Reporting Initiative (GRI). He co-founded the Strategic Investor Initiative (SII) at CECP, which is re-orienting the capital markets to the long-term and is elevating sustainability factors as a CEO leadership imperative.

Tulay serves as finance and ESG program manager for GreenBiz, which is launching the GreenFin Summit to accelerate the rise and growth of sustainable finance and ESG and its link to corporate sustainability.

He also serves as founder and CEO of Sustainability Risk Advisors (SRA), which helps companies measure and manage what matters most for community, climate and culture.

He has a proven record of driving innovation and sustainable growth for environmental organisations, investment firms, companies, and environmental, social and corporate governance (ESG) ratings and research providers. He has demonstrated a unique ability to collaborate effectively with a diverse mix of constituencies – institutional investors, government, NGOs and companies – towards the common goal of accelerating the global transition to sustainable finance and development.

He serves on advisory boards for Cornerstone Capital Group and holds an MBA from Northeastern University.

Moderator

White is responsible for the content across all Conexus Financial’s institutional media and events. She is responsible for directing the bi-annual Fiduciary Investors Symposium which challenges global investors on investment best practice and aims to place the responsibilities of investors in wider societal, and political contexts, as well as promote the long-term stability of markets and sustainable retirement incomes. She is the editor of conexust1f.flywheelstaging.com, the online news and analysis site for the world’s largest institutional investors. White has been an investment journalist for more than 20 years and has edited industry journals including Investment & Technology, Investor Weekly and MasterFunds Quarterly. She was previously editorial director of InvestorInfo and has worked as a freelance journalist for the Australian Financial Review, CFO, Asset and Asia Asset Management. She has a Bachelor of Economics from Sydney University and a Master of Arts in Journalism from the University of Technology, Sydney. She was previously a columnist for the Canadian publication, Corporate Knights, which is distributed by the Globe and Mail and The Washington Post. White is currently a fellow in the Finance Leaders Fellowship at the Aspen Institute. The two-year program consists of 22 fellows and seeks to develop the next generation of responsible, community-spirited leaders in the global finance industry.

Key takeaways

Anthony

  • Companies will be judged on how they balance the needs of shareholders vs the needs of the rest of the stakeholder ecosystem.
  • We believe the corporate response can either lengthen or shorten the severity of the pandemic.
  • COVID is a helpful exercise in crisis management because the climate crisis is coming.
  • There is power in engagement – companies are starting to fully publically disclose their employee diversity statistics.

Bob

  • If we really want to push the boundaries, more companies should change their form to be public benefit corporations. Investors should pressure their portfolio companies to do that.
  • ESG research is flawed because the data is not optimal quality. We need ESG reporting standards and mandated reporting in the same way that finance has accounting standards to ensure comparability of performance. Standards and mandated ESG reporting would give greater clarity on whether companies are meeting their intended purpose.
  • System level inequality is an issue to wrap our global arms around to tackle, just like climate.

Mark

  • Based on research with over 1 million datapoints:

1) Speed of response to the pandemic did correlate with outperformance
2) Companies with a strong ESG track record pre-crisis outperformed during the peak pandemic months
3) There was no correlation between companies signing a pledge and them treating stakeholders fairly during the pandemic

  • Two additional key findings were:

1) European companies performed no better on the test of corporate purpose. This is not a US-only issue.
2) Current ESG research is not fit for purpose for investors, meaning a new research model leveraging machine learning and technology is needed

  • This is not a time for complacency or celebration.
  • Companies cannot and should not shirk away from hard facts, and companies that outperform on ESG metrics should be celebrated.
  • The US is too male, pale and stale and increased disclosure requirements will help change this.
  • Investors need to more proactively engage boards in the corporate purpose conversations to ensure top down buy-in.

Poll results

How do you enforce funds managers to engage on your behalf with corporate boards regarding their purpose?

Related reading

Facing hard truths: How a pandemic brought inequality into the board room
The COVID-19 pandemic and the demand for racial justice
The investor revolution: Shareholders are getting serious about sustainability

 

This session will take a deep dive into the macro economic outlook for next year, as well as the medium term and long term; including a discussion of the capital market assumptions that go into that outlook, and the impact on individual asset classes. Importantly it will also discuss asset class correlations and whether investors can rely on their current risk management and portfolio construction tools going forward.

Speakers

Dan Farley is an executive vice president of State Street Global Advisors, and CIO of the investment solutions group. In this role, he oversees a team of over 75 investment professionals managing over $180 billion in multi-asset class portfolios, including tactical asset allocation, liability-driven investments and working with clients in developing customised investment portfolios to meet their specific objectives. He is also a member of the firm's executive management group. Prior to this role he was responsible for the US multi-asset class solutions team.
Farley holds an MBA from Bentley University, a BSBA from Stonehill College and has earned the Charter Financial Analyst (CFA) designation. He is a member of the CFA Institute and the Boston Securities Analyst Society. He is on the State Street Foundation's corporate allocations committee and executive sponsor of the firm's Latin American professionals group.. He is also the vice chair of the board at the Crispus Attucks Children's Center.

Millan Mulraine joined Ontario Teachers in 2016 after close to 10 years with TD Securities, most recently as deputy chief economist in New York where he was responsible for directing US economic research and rates strategy. At OTPP he leads the economics team and is responsible for designing and conducting macro-oriented research to inform the fund's investment decisions.
Mulraide holds an undergraduate degree in economics and statistics from the University of the West Indies in Jamaica, a Masters in Economics from the University of Warwick in England and a Ph.D. in Economics from the University of Toronto.

Bruno Serfaty has been head of the dynamic asset allocation team and senior portfolio manager in the multi-asset allocation team at USSIM since September 2015.
He has extensive experience in financial markets, manages a talented team of discretionary and quantitative traders and runs substantial assets across liquid asset markets within one of the largest tactical asset programs run from London. He has a long career in funds management including as a global macro trader, managing director and head of European fixed income working at Mercury Asset Management, Merrill Lynch Investment Managers, Dalton Strategic Partnership and Nylon Capital.

Moderator

White is responsible for the content across all Conexus Financial’s institutional media and events. She is responsible for directing the bi-annual Fiduciary Investors Symposium which challenges global investors on investment best practice and aims to place the responsibilities of investors in wider societal, and political contexts, as well as promote the long-term stability of markets and sustainable retirement incomes. She is the editor of conexust1f.flywheelstaging.com, the online news and analysis site for the world’s largest institutional investors. White has been an investment journalist for more than 20 years and has edited industry journals including Investment & Technology, Investor Weekly and MasterFunds Quarterly. She was previously editorial director of InvestorInfo and has worked as a freelance journalist for the Australian Financial Review, CFO, Asset and Asia Asset Management. She has a Bachelor of Economics from Sydney University and a Master of Arts in Journalism from the University of Technology, Sydney. She was previously a columnist for the Canadian publication, Corporate Knights, which is distributed by the Globe and Mail and The Washington Post. White is currently a fellow in the Finance Leaders Fellowship at the Aspen Institute. The two-year program consists of 22 fellows and seeks to develop the next generation of responsible, community-spirited leaders in the global finance industry.

Key takeaways

Dan

  • We have experienced a shutdown rather than a slowdown so need to navigate a path out of that space.
  • We look forward to thinking about a sustainable recovery.
  • There is a solid backdrop for risk assets due to low rates, risk-seeking investor sentiment and policy tailwinds causing the system to be awash with money. Gold is acting as a hedge against unexpected risk.
  • Most portfolios are not well equipped to deal with a rapid inflation shock, if it were to happen. A shock would place material pressure on valuations and equity markets, increasing the importance of hedging and thinking from a total portfolio perspective.
  • People are looking to real estate, commodities, gold episodically and infrastructure for returns but you must been highly selective since there is so much money chasing these asset classes.
  • The dollar has been a great tailwind for investors over the last few years but investors need to rethink those implications.
  • Bonds continue to be a diversifier, but the issue is that they are not as much of a diversifier as we want them to be so therefore we need to expand our defensive toolbox. Low volatility equities or hedges on growth equities growth are a possible alternative.
  • There are pockets of opportunity in 2021 including emerging markets Asia ex Japan, emerging market debt and the future of real estate.

Millan

  • There is a feeling that in 2020 and 2021 we are only papering over the cracks. What will the long-term cost be? Arguably all we have done is bring forward future growth, but where will sustainable growth come from in those future years?
  • The board is asking three important questions:

1) What is the performance expectation of assets?
2) What is the view on interest rates? And most importantly;
3) What is the view on inflation?

  • The inflation outlook is more uncertain than it has been over the last few decades. Natural hedges including diversification through geographies will help.
  • There is no easy answer to identifying an alternative to bonds for defensive purposes.
  • Geographically diverse investment in real assets provides positive opportunity in 2021 and beyond.

Bruno

  • Our view is subdued. What will the long-term COVID legacy be? The scale of the policy response this time is unprecedented, which has caused immense debt load. GDP may more positively in 2021 and 2022, but the same cannot be the said for debt levels, quick the opposite in fact. There is a lot of money chasing good return in good investment and that is usually not a good recipe.
  • With bond yields so low, we should ask ourselves what is the purpose of a potential allocation to bonds. The answer to this question will help identify a potential alternative solution to achieve the same goal, including currency diversification.

Related reading

Asset allocation and market regime review
Portfolio protection – Rethinking the role of government bonds