Joe Biden will win the US election according to a technique used in finance to predict factor returns and the correlation of stock and bond returns.

The past as a prologue: how to forecast presidential elections, a MIT working paper, co-authored by MIT’s Mark Kritzman and Dave Turkington and Megan Czsasonis from State Street, uses a model that correctly predicted the outcomes of the past five presidential elections. It is now predicting a strong Democratic victory for 2020, with a Democratic loss within a confidence band of one standard deviation. Interestingly, the technique correctly predicted the 2016 election, which the polls failed to do.

The authors apply a novel forecasting technique called Partial Sample Regression which measures the statistical relevance of past elections, and then employs an “obscure mathematical equivalence” – that the prediction from a linear regression equation equals a relevance-weighted average of the values for the dependent variable. It uses this to forecast election outcomes from a subsample of prior relevant elections.

The technique predicts the elections in a mathematically formal way and uses no poll data.

“The essence of our methodology is to measure the relevance of historical elections in a statistically rigorous way. We then rely on an obscure mathematical equivalence to form predictions from the more relevant elections,” the authors say.

“When political scientists or pundits forecast presidential elections, they often analyse past elections for clues about upcoming elections. But they don’t treat all past elections alike. They judge some to be more relevant than others. This behaviour is true in general when we try to predict an outcome based on prior experiences. We look for those events that bear some resemblance to current conditions. We apply this concept to predict the outcomes of presidential elections, but we do so in a mathematically formal way.”

The authors then add to this the less obvious component of “relevance”.

“We consider the unusualness of the past experiences. The intuition is that unusual occurrences are more informative than common occurrences, which simply might be a manifestation of noise in the data. Once we identify a subsample of relevant historical elections, we invoke an obscure mathematical equivalence. The prediction from a linear regression equation equals a weighted average of the past values of the dependent variable in which the weights are the relevance of the values for the independent variables. We apply this equivalence to our relevant subsample of political, geopolitical, and economic data to form our predictions.”

The methodology used to predict election results is similar to that used by Kritzman and Turkington and their co-authors Ding Li and Grace Qiu from GIC in the paper, Portfolio Choice with Path Dependent Preferences, which is forthcoming in the Financial Analysts Journal. That study, which revolutionises scenario analysis by reorienting it towards a path rather than a single period outcome,  finds that a U-shaped recovery is the most likely economic outcome in the US for the next two years, but stagflation has a higher than anticipated chance of occurring.

Responsible investment should be at the core of the relationship between asset owners and investment managers. More and more clients want it, regulators demand it and academic and industry evidence supports it.

Discussions around the integration of ESG issues and selection, appointment and monitoring (SAM) of investment managers have transformed since the Principles for Responsible Investment (PRI) was founded in 2006, when they were considered a “nice to-have”. Now, when leading asset owners work with their investment managers, they are starting to introduce activities such as minimum standards for shortlisting, incorporating clauses into contractual documentation and threatening to terminate relationships due to materialising ESG issues.

Asset managers now expect these types of requirements. But there is still a long way to go until responsible investment is systematically integrated into each step of the SAM journey, and asset owners have been calling out for tools to guide them on this.

That is why this week the PRI published three new guides that focus on each step of the SAM process, and are designed specifically for the PRI’s 550+ asset owner signatories.

The selection guide outlines attributes of leading approaches when selecting asset managers. The appointment guide includes 12 clauses that can be used by asset managers when writing and agreeing contractual agreements. And finally, the monitoring guide includes a set of questions or disclosures that can be used by asset owners during the regular monitoring process.

Encouraging, supporting and collaborating with asset owners is fundamental to the PRI’s theory of change, as this group of signatories plays a key role in influencing the entire investment manager industry. Asset owners, along with their advisers, must be empowered to challenge investment managers on practice, to uncover greenwashing and to really trigger changes in practice across ESG integration and engagement. We therefore hope the guides will support large and small asset owners and their advisers to incorporate ESG factors into how they relate to, co-operate with and challenge asset managers.

The guides draw on practices from the 2019 Leaders’ Group, as well as feedback from a series of workshops held during the year, to build a picture of leading practice and initiatives in this area. And I’m pleased to note that these leading practices are not just limited to large European asset owners. Our Asia Pacific workshop discussion on SAM reflects that these are now global practices.

This work program doesn’t stop here. These tools will be followed by SAM introductory guides – these guides have proved popular as a starting point to discover the PRI’s work. We will also be working on mandate design and are interested to hear from asset owners who have started to design mandates which incorporate ESG factors.

I would like to thank all the signatories who contributed to these guides and have been involved in our broader asset owner program. I hope they will contribute to the industry’s technical understanding of responsible investment and empower asset owners around the world to raise the bar on it too, creating a more equitable and sustainable future for our planet.

Fiona Reynolds is the chief executive of PRI.

In this Fiduciary Investors Series podcast, Amanda White talks to Andrew Parry, head of sustainable investment at Newton Investment Management about the complexity of sustainable investment, and the role of the finance industry in guiding investors to choose companies that have relevant business models for a changing world.

Now is the time to embrace the Sustainable Development Goals (SDGs), according to head of sustainable investment at Newton Investment Management, Andrew Parry, with the COVID crisis exposing a lot of the frailties in our society and economic system.

“This is very much a social crisis, a human crisis,” he said in a Fiduciary Investors Series podcast. “It has helped galvanised attention on this issue, and brought together a broad range of partners across private and public sector and [the SDGs] present a way of recovering from the crisis if executed well.”

September this year marked the fifth anniversary of the SDGs, a period of time that Parry says represented a very slow take up in the SDGs.

“If anything it was a labelling exercise. But a lot of people have been calling this out and saying it has not been integrated into business plans it or is not being seen as part of the transformation we need in the economy. The COVID crisis brought all of that home. Now there is a chance for restorative, transformative allocation of capital. It’s very exciting.”

In addition the very low levels of interest rates around the world provide a unique opportunity for the finance industry to be innovative to meet the needs outlined by the SDGs.

“I think the finance sector has gone beyond a re-mapping of the goals, and is beginning to understand that the SDGs represent an enormous opportunity,” he says.

In particular he says there is an opportunity in the fixed income market to accelerate its participation in achieving the goals.

“In the fixed income market one of the measures of impact is additionality. They can bring additional capital to bare to help tackle and fund these needs. One of the really interesting areas is how do we take the learnings from green bonds and apply it to the SDGs and bring new capital to bare,” he said. “The investment world is crying out for attractive investment opportunities if done with the proper public private partnership it’s a tremendous opportunity for the fixed income market to be impactful investors.”

Parry believes one of the biggest obstacles in aligning portfolios to the SDGs is understanding what it represents.

“If you don’t get beyond the 17 goals you’re not doing your job, you need to have a deep understanding. There is a rich body of understanding coming out of the UN agencies of what the goals and targets represent and how to be accessed. This helps you build your own view and taxonomy.”

Parry, who has worked in funds management for more than 30 years, believes the industry needs to be careful in its nomenclature, citing “non-financial” as a bit of a misnomer.

“It’s just a time scale,” he says. “There’s a tension over the short term between economic and financial returns, social consequences and environmental impact but over the the long term they do come together. We need a well-functioning prosperous society living in a vibrant world to support economic returns which drive financial returns.”

This is where it is important that asset owners look through the lens of systems thinking and long-term thinking so the three concepts of environment, people and financial returns all come together.

“There is a lot of dynamism in this and the world is constantly changing. I ask people if ESG didn’t exist as a concept, would you carry on investing in the way you would today under those labels? I would. They are fantastic ways to look at the way the world is going, it’s expanding your world and frees you from the dead hand of the index, and frees you to look at the world and where it is going.”

Parry says the role of investors is to navigate clients through a changing world and identify relevant business models for that.

“Social norms are unstable over time, which is good because we’re seeing such a dramatic shifts in certain things, like gay marriage. Companies that anchor to the past, or have the arrogance to think they will always be relevant will be marooned.”

By way of example he points to the FTSE index which only has 26 names still in it from the 1980s.

“Businesses need to think about the world as in adaptation. There is a very different construct in the FSTSE in names but also the businesses that reflect society. No business model is designed to last forever because things succumb to changing norms. Being relevant in a changing world is a powerful concept. Darwin didn’t say survival of the fittest, he said survival of the most adaptive.”

 

In this Fiduciary Investors Series podcast, Amanda White talks to Jeff Wendling, chief executive of HOOPP – the C$94 billion Healthcare of Ontario Pension Plan. In 2007, HOOPP moved to a liability driven investing approach, which included a large allocation to bonds and a lot of internal investment management. The approach helped the fund survive the global financial crisis and has served it well for the past 13 years. But now – with the COVID crisis and a very low interest rate environment – that approach is being revisited and the fund is looking to invest more in alpha generating assets. They speak about the evolution in the investing approach and the outlook for the macro economic environment with particular reference to inflation.

About Jeff Wendling
Jeff Wendling became president and chief executive officer (CEO) of HOOPP on April 1, 2020. He has 30 years of investment management experience and has been with HOOPP since 1998. Prior to his appointment as CEO, he had served as HOOPP’s executive vice president and chief investment officer since 2018. Before that, he spent more than six years as co-CIO. He began his career at HOOPP as a senior portfolio manager on the public equities team. Wendling is a proven leader of a large and sophisticated management team, and he has spearheaded the fund through a variety of market environments. He was also heavily involved in developing HOOPP’s liability driven investing approach. This approach, coupled with solid investment results, has allowed HOOPP to maintain its strong funded position, keeping plan pricing stable while providing benefit improvements to plan members. Wendling earned his BA in Economics and his MBA from the University of Toronto and holds the Chartered Financial Analyst designation. He is also a board member of the Canadian Coalition for Good Governance and is the chair of its Public Policy Committee.

About Amanda White
Amanda White is responsible for the content across all Conexus Financial’s institutional media and events. In addition to being the editor of Top1000funds.com, she is responsible for directing the global 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.  She holds a Bachelor of Economics and a Masters of Art in Journalism and has been an investment journalist for more than 25 years. She is currently a fellow in the Finance Leaders Fellowship at the Aspen Institute. The two-year program seeks to develop the next generation of responsible, community-spirited leaders in the global finance industry.

What is the Fiduciary Investors series?
The much-loved events, the Fiduciary Investors Symposiums, act as an advocate for fiduciary capitalism and the power of asset owners to change the nature of the investment industry, including addressing principal/agent and fee problems, stabilising financial markets, and directing capital for the betterment of society and the environment. Like the event series, the podcast series, tackles the challenges long-term investors face in an environment of disruption,  and asks investors to think differently about how they make decisions and allocate capital.

Detroit’s car manufacturers risk Armageddon by staying in the fossil fuel industry while European and Chinese manufacturers drive off into a future of clean mobility. Car manufacturers in the original Motor City have got the policy response wrong, and will increasingly lose market share to electric carmakers as the transition to the green economy gathers pace, argues Nigel Topping, high level champion for Climate Action COP26, in an interview with Top1000funds.com. Germany’s Daimler, now targeting a net zero fleet by 2039, and Volkswagen and its Chinese partners recent decision to pour €15 billion into electric vehicles in China over the next four years, go to show the pace of change and the risk of being left behind.

In fact, the future is approaching so fast the ability of laggards to catch up will be increasingly difficult. In 2016, most people thought emission-pumping cars would still be around in 2060. Since then, 2060 has been pulled forward to 2040 in some jurisdictions, while the Netherlands and the UK, which will ban the sale of new petrol, diesel or hybrid cars from 2035, have gone further still.

The pace of change will accelerate even faster when multiple levers come into play, predicts Topping. In the car industry, levers hastening change could comprise investors only allocating capital to green manufacturers, cities banning cars and national governments investing in charging infrastructure. It all points to unstoppable momentum in a race to zero that will leave behind old-style manufacturers which haven’t switched.

“You can’t catch up with exponential change if you are behind it,” warns Topping. “It disappears into the distance.”

Inevitability

Of all the catalysts for change, perhaps the biggest will come from a switch in government policy. The need for industries and investors to prepare now for new government policies heading down the track lies at the heart of the PRI’s Inevitable Policy Response (IPR). It lays out how the policy response will hit specific industries, and flags 2025 as a crunch year. The demise of coal in the UK is an obvious example of the power policy wields: the UK government’s clear end date of 2025 for coal ends any policy uncertainty.

“Markets respond to clarity,” warns Topping.

And the policy response has already started to happen, says the PRI’s Fiona Reynolds who points to the EU’s new green deal and many more countries targeting a net zero policy.

Last month China’s President Xi pledged the country would be carbon neutral by 2060 in remarks to the UN General Assembly.

“Achieving net zero doesn’t just happen; you have to change policy settings,” Reynolds says. “The question for investors is not if governments act, but when. The message for investors is act now or pay the price later.”

Topping and Reynolds both believe the pandemic could be another catalyst. It has created a growing resolve to accelerate the transition to green, resilient economies and there is no trade-off between building green economies and economic recovery in the wake of the pandemic – it should be done in tandem. Witness how pandemic recovery packages have already tilted to the future include early stage investment in the hydrogen economy. Elsewhere, France has issued mandatory emission reduction targets to Air France linked to its bailout.

Against the backdrop of a ticking clock, more pension fund board members will see climate change as a financial issue first and foremost, ditching old-school arguments that green investment sacrifices returns. The next step is to commit to net zero, says Topping, a former board member of the London Pensions Fund Authority.

“Committing to net zero is a fiduciary requirement,” he says. “At London Pension Fund we took engagement seriously. All companies in your portfolio should expect consequences,” he said.

Investors will be looking for science-based decarbonisation targets.

“It’s more than lip service. Detail and thought are going into it,” concludes Reynolds.

With only a few days before the US election Amanda White speaks with Stephen Kotkin, the John P Birkelund Professor in History and International Affairs at Princeton University, about what it would take to actually make America great again.

Kotkin, an expert in international affairs and diplomacy, looks at the impact of the election results over the short and long term, examining the eroding of trust in institutions and the role of government in society; the moral societal degradation and the undermining of social solidarity; and America’s position in the world and the ongoing conflict with China.

About Stephen Kotkin
Stephen Kotkin is the John P Birkelund Professor in History and International Affairs at Princeton University.
He is the co-director of the program in history and the practice of diplomacy and the director of the Princeton Institute for International and Regional Studies. He established the Princeton department’s Global History initiative and workshop, and teaches the graduate seminar on global history since the 1950s.
He also holds a joint appointment in the Woodrow Wilson School for Public and International Affairs at Princeton and is a research scholar at the Hoover Institution at Stanford University.
He has authored many books including his latest Stalin: Waiting for Hitler.

About Amanda White
Amanda White is responsible for the content across all Conexus Financial’s institutional media and events. In addition to being the editor of Top1000funds.com, she is responsible for directing the global 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.  She holds a Bachelor of Economics and a Masters of Art in Journalism and has been an investment journalist for more than 25 years. She is currently a fellow in the Finance Leaders Fellowship at the Aspen Institute. The two-year program seeks to develop the next generation of responsible, community-spirited leaders in the global finance industry.

What is the Fiduciary Investors series?
The COVID-19 global health and economic crisis has highlighted the need for leadership and capital to be urgently targeted towards the vulnerabilities in the global economy.
Through conversations with academics and asset owners, the Fiduciary Investors Podcast Series is a forward looking examination of the changing dynamics in the global economy, what a sustainable recovery looks like and how investors are positioning their portfolios.

The much-loved events, the Fiduciary Investors Symposiums, act as an advocate for fiduciary capitalism and the power of asset owners to change the nature of the investment industry, including addressing principal/agent and fee problems, stabilising financial markets, and directing capital for the betterment of society and the environment. Like the event series, the podcast series, tackles the challenges long-term investors face in an environment of disruption,  and asks investors to think differently about how they make decisions and allocate capital.