0

Investors should use stewardship to encourage purposeful companies that provide long-term value by meeting the needs of multiple stakeholders and helping improve society. FIS 2020 Digital panellists discuss the characteristics of a purposeful company and the challenges in their evolution.

Denmark’s Novo Nordisk embodies the latest evolution in good corporate citizenship. In an expert panel discussion at FIS 2020 Digital on how today’s companies can and should incorporate purpose, delegates heard how the global healthcare group has moved from mission to a modern day purpose in its evolution from producing insulin to a broader offering helping to treat diabetes. Today the company works to eradicate the disease, all the while inspiring multiple stakeholders and delivering shareholder value.

Navigating the consequences of COVID-19 could see more companies adopt purpose, said Colin Mayer, professor of management studies at the Saïd Business School, Oxford University. Mayer, who led the British Academy’s The Future of the Corporation project, said purpose involves finding profitable solutions to the challenges confronting society and the natural world – rather than profiting from those problems.

He said companies today face difficult trade-offs between cutting costs, supporting their employees or paying dividends to their pension fund investors. Yet having a purpose will help corporates navigate these trade-offs and come out of the crisis. He urged companies to embed purpose in their activities and encouraged boards to lead in the area.

“We should measure the performance of a company against its purpose,” he said to the investor audience. “Purpose helps make companies more resilient and reduces risk for investors.”

He also said that purpose has replaced the dated concept of corporate social responsibility by defining how a company does business and the reason it was created.

Sharan Burrow, general secretary, ITUC, named consumer goods group Unilever and European food group Danone as other prime examples of companies driven by purpose.

She noted how both multinationals have worked with trade unions to protect employees, focused on environmental risk and careful monitoring of their supply chains.

She said purpose driven companies report on purpose to their shareholders and can help “fundamentally reshape a future” where “everybody wins.”

Only when multiple stakeholders work together will companies adopt a purpose that will ultimately lead to a better world, she said, adding that companies without purpose lack resilience or core values. When profits and shareholders come first, it prevents freedom of association and the ability of collective bargaining to solve problems.

“We say let’s transition to a world where everyone’s rights matter,” she urged delegates. Reflecting on whether corporate America is “ready” for purposeful companies, she said appetite was mixed.

Fiona Reynolds, chief executive, PRI, told delegates that some pension fund investors are “good” at stimulating companies to adopt purpose.

However, many investors still think through the prism of “risk and return.” She said the PRI is increasingly working to move the discussion on ESG to incorporate risk, return and impact. Urging delegates to stop thinking “traditionally,” she said valuing companies on just profit and endless growth is flawed.

Reynolds added that institutional investors have a chance to push purpose now because they will be vital contributors to financing the economic recovery in the wake of the pandemic. “Governments can’t do this alone,” she said.

“Stewardship is one of the most powerful tools investors have.”

Here she urged investors to spend more on stewardship, suggesting that only via a collective engagement that looks at systemic issues, will change truly happen. She said building back better could see sustainability come to the fore with a new realisation that without a healthy planet, we can’t have a healthy economy.

“Sustainability needs to be built into the recovery.” She also urged governments to incorporate the transition to a low carbon economy and jobs for the future into their reconstruction packages.

 

Mission to purpose

Panellists discussed how companies should change their mission statement to new statements on purpose. A mission statement details what a company does, whereas a purpose statement details why a company exists; why it was created and what it is there to do, providing a “North Star.”

Panellists also said it should be possible for investors to measure a company for purpose. Mayer urged for integrated reporting to help purposeful companies show investors how they are delivering for all their stakeholders.

He said purpose needs to be integrated into standard accounting measures, and until this happens there won’t be a “bottom line number.” Similarly, Reynolds said purpose should be integrated into a company’s KPIs.

To listen to the podcast conversation about the British Academy’s The Future of the Corporation project, click here.

0

Using official data, China’s debt to GDP ratio is likely to rise between 16-22 per cent this year in contrast to a 6 per cent rise last year. In what Michael Pettis, professor of finance at the Guanghua School of Management in Peking University and senior fellow of the Carnegie-Tsinghua Center for Global Policy called a “huge increase in debt” the numbers have ignited an ongoing debate within China about the extent to which debt should be used to generate growth in the wake of the pandemic.

Speaking to FIS2020 delegates, Pettis said that there are two different “camps” in charge of policy making in China. One on hand, China’s Ministry of Finance and most economic think tanks are concerned about China’s rising debt levels which they want to reduce, even if it has consequences for GDP. Another group is worried about the political implications of a rapid slowdown in growth, and are more accepting of rising debt levels, he said. At the end of last year before the pandemic swept aside all forecasts, the latter group “won” the debate securing a 2020 growth target of around 6 per cent.

Pettis said that GDP in a Chinese concept is not comparable to other countries because of different accounting models. Local government in China doesn’t have “hard budget constraints” and most of the debt is guaranteed. He said that in “one China” bad investments are written down in line with other countries, but in “the other China” they are not. He urged investors to exercise caution when thinking about the impact of COVID-19 on “both” GDP numbers. He said this explains the “enormous debate” about the nature of Chinese growth.

 

Real growth drivers

Pettis reflected on the extent to which consumption, exports and business investment will drive real growth in China. He said consumption will be “way down” in 2020 because of falling household incomes and savings levels. Here he noted how the re-appearance of COVID-19 in Beijing has caused further panic and slowdown. He also noted that unemployment in China is still high with a knock-on impact on household spending. Moreover, he said that households have responded to the pandemic by increasing savings, further hitting growth and consumption.

Other drivers of growth are also down – namely exports. Conversely, he noted “good growth” in business investment amongst SMEs and the private sector but said that many of these businesses serve consumers and export sectors. All “good sources” of growth are going to be negative, he said.

Monetary policy debt constraint

China has surprised some commentators by its decision not to slash interest rates in response to the virus, said Pettis.

While the rest of the world has aggressively lowered interest rates, China has made a couple of “restrained” reductions. Here Pettis noted that the People’s Bank of China doesn’t have the “freedom” of the Federal Reserve or the European Central Bank because it intervenes on the currency, constraining its ability to change domestic monetary policy.

Instead it has remained “prudent,” only expanding domestic money supply if there are increases in reserves. In a red flag, he warned that if monetary policy cannot accommodate a significant increase in debt levels yet China’s regulator requires an increase in debt, it could lead to distortions on the domestic financial system, including bank runs and defaults.

“This is what we have to watch,” he said.

Investment opportunities in emerging markets include high yields on local government debt and cheap currencies, while China’s Renminbi has proven its resilience and is now considered a safe asset currency according to chief economist at Pictet Asset Management, Patrick Zweifel.

Contrary to the idea that COVID-19 will hit emerging economies most, many developing countries particularly in Asia and eastern Europe have successfully managed the crisis, said Patrick Zweifel, chief economist at Pictet Asset Management.

Speaking at FIS2020 Digital, Zweifel said that some emerging economies managed to source healthcare equipment and instil societal discipline around lockdowns better than the US and Europe. However, reminding investors to not view emerging markets as a single asset class, he said India and countries in Latin American are struggling with the outbreak.

Zweifel said that GDP levels in some emerging markets look more favourable than growth levels in developed countries. This is partly attributable to larger service sectors in developed countries, particularly hard hit by COVID-19. In what he called an “attractive story” for investors, emerging markets are also improving on key indicators around governance, economic diversity and improved debt levels, he said.

Other factors are also at play regarding emerging markets’ ability to outperform: a weaker US dollar, Chinese growth and a spike in commodity prices.

“Commodity prices will rise if the first two conditions are met,” he said.

As for growth in global trade which particularly impacts emerging markets, he said “the worst is behind us.” Trade data shows flows reached a low in April, but May figures show stabilisation. For example, Brazil’s exports recently got a boost from Chinese demand.

Zweifel said that emerging economies have struck an appropriate fiscal response between necessity and affordability. Highly indebted countries have mostly refrained from over-spending, he said. He noted how for the first time in history nine emerging countries have adopted quantitative easing. Meanwhile, many emerging economies will continue to attract inflows as investors search for yield. Apart from risky Italian debt, it is hard to find positive real yields in developed markets, he said.

 

Currency opportunity

Along with high yields, cheap currencies will also draw investors to emerging markets where he believes many currencies are undervalued.

Regarding the Renminbi, he said the currency has “been through the crisis and shown resilience” making it “a safe asset currency.” Moreover, he said the Renminbi has become more influential in Asia, supporting other Asian currencies and commodity exporting countries.

This gives China the “elasticity” to build monetary zones or a currency bloc, he said, predicting the Chinese currency will position “more internationally.”

One factor that could influence the Renminbi’s rise is other emerging countries’ perception of China. Here he believes that in contrast to developed markets, most emerging markets have a positive view of China.

“Ultimately the economic fundamentals will prevail, and it is a hard trend to stop,” he said.

Negative sentiment towards China is particularly fuelled by China’s human rights record and transparency. However, countries that benefit from an economic relationship with China are less mindful of these issues.

In contrast, countries which compete with Chinese products like South Korea have a negative view, he concluded.

0

The only solution to the problem of COVID-19 is a vaccination. Oxford University’s Jenner Institute is one of the organization’s racing to provide a vaccine, and it’s director Adrian Hill believes the Institute could have cracked it by year-end.

Sometime later this year a vaccine for COVID-19 should work, predicted Adrian Hill, a vaccinologist and director of Oxford University’s Jenner Institute. Speaking at FIS 2020 Digital, Hill said that the development of a COVID-19 vaccine by the Jenner Institute, one of the organisation’s racing to develop a vaccine, swung into rapid development in January. Since then it has been tested on animals and is now in its second human trial in the UK where 6000 people have been given the Covid-19 vaccine and 6000 an irrelevant vaccine.

“It’s moving along well,” he said, telling delegates there have been no safety issues in the people vaccinated, and the trials haven’t been stopped.

The Jenner Institute is not alone in developing a vaccine. Hill said around 150 other groups are also developing a vaccine, 12 of which are in clinical stages.

“If ours works, several other will as well,” he said adding that the process isn’t competitive. The number of people to vaccinate means no one company has ever made a vaccine on this scale before. It would be surprising if by the end of the year there wasn’t good evidence that one or more vaccines was working, he said.

“This looks like a do-able vaccine.”

However, he cautioned that the vaccine might not be successful first time, and that success might involve a combination of vaccines or multiple doses. As well as UK and US participants in the trial, the drug is now being tested in Brazil, where infection rates are rising.

Hill also noted the willingness of funders, governments and companies to invest money at risk. Drug maker AstraZeneca, which will manufacture the Jenner vaccine in multiple countries, has already started making billions of doses even though it is still unproven.

Lots of money has been spent at risk because building up manufacturing and distribution capacity now will save money via the economic benefit of having a vaccine, he explained.

Although Hill noted the philanthropic drive of the drugs companies, saying “no one is seeking to make a profit,” he said finding a cure is an important showcase of vaccine technology.

COVID-19 has not caught the medical community unaware, said Geoffrey Ling, MD, founding director of the Biological Technologies Office of DARPA and a professor at John Hopkins Medical Center.

He told delegates that it comes from the same family of coronaviruses that causes SARS (severe acute respiratory syndrome) and MERS (Middle East respiratory syndrome) and said that new viruses will appear in the coming years too.

COVID-19 has been around for years, harboured in the animal kingdom.

“A biological event is not one and done,” he said.

He added that investment opportunities span PPE manufacturing to diagnostic tests, as well as investment opportunities in business that can work through a pandemic. In defence of President Trump’s response, the former veteran said it was a difficult time to be a leader, and that everyone was learning through the experience.

0

Founder of SVPGlobal, Victor Khosla tells FIS 2020 delegates that although the opportunities in distressed debt are significant, investors should pick and choose. It’s not like 2008.

The pandemic has presented once-in-a-decade opportunities for private debt investors, said Victor Khosla, founder of SVP Global. Speaking at FIS2020 Digital he cautioned, however, that the opportunities are not “once in a generation” and shouldn’t be exaggerated.

He predicts a 10 per cent default rate on high yield and leveraged loans as GDP declines across Europe, the US and emerging markets. However, unlike 2008 which was truly “extraordinary”, there has been no systemic collapse through the financial system. It means that today there is also more capital on the side-lines ready to invest.

“Prices won’t fall as low as 2008,” he predicts.

He also cautioned that the current climate isn’t an opportunity to “go and buy the market,” rather investors should look at the difference between long-term and short-term opportunities. Forced, or distressed sellers account for one opportunity bucket, but he said this market wasn’t as deep as 2008.

The second part of the cycle will come via defaults and restructuring and companies filing for bankruptcy, but here he cautioned these can be “very low quality businesses”.

A third phase will see opportunities as restructuring and defaults occur in stronger companies that are over-levered. “We don’t focus on the first wave of restructuring in the most part,” he told delegates.

Khosla said that Europe’s recovery will be slower than the US.

“The US is very good at creative destruction,” he added, also noting that some European economies were heading into recession before the pandemic. “We believe the European trough is lower and the recovery longer,” he said.

Meanwhile he will avoid sectors like retail and “broken” airlines, businesses he described as “in the eye of the storm” and going through secular declines before the pandemic. He also cautioned that oil and gas was “already in trouble” before the pandemic, and referred to underwriting distressed debt here as “difficult”.

European economies hold further challenges for investors because of complex restructuring and bankruptcy codes. Instead, opportunity lies in industrial businesses – like a US life sciences group with senior debt maturing next year as a typical target. Khosla also avoids emerging markets where he said it was much more difficult to “have a hand on the steering wheel” to drive change in a business.

“Focus on businesses where the range of outcomes is broad; don’t go off-piste.”

Khosla told delegates how the asset class has changed over the last 20 years. It used to be a “paper business” whereby investors bought distressed debt (mostly from commercial banks) and converted the debt to equity which they then sold. There was little competition, he recalls. Although this remains the strategy for the vast majority of distressed debt investors, Khosla started on a different path 12 years ago.

His firm began to build sourcing and origination teams from which it then grew to pick-off low hanging restructuring opportunities itself. Good management teams typically leave an ailing company, opening a gap for in-house teams to go in and build a new business plan, he said.

“We are sourcing and originating the majority of what we buy; we are firmly on the steering wheel driving that business. This is how we have built a competitive advantage.”

Khosla said that given “there was much more capital today than 2008” competition has “exploded” in recent months. In contrast, in 2008 the world was short of capital and “most things people bought made money”.

He warned: “It is not that world, today.” He also cautioned that today’s crisis is a health crisis first and foremost. “If a vaccine comes to market does the opportunity disappear? This will drive the shape of the recovery.”

He concluded with advice to plan for a slow recovery with second waves of the virus stalling progress. He also suggested financing purchases with senior debt that offers a price cushion, helping to manage risk and a slower recovery.

“In distressed debt you don’t have to go to junior junk bonds; stay focused on senior secured debt.”

Real estate is one of the asset classes hardest hit by the pandemic. Although FIS 2020 experts warn that some companies may never return to the office, opportunities are already appearing in smaller, regional hubs while listed real estate will recover quicker than private investments.

COVID-19 has “turbo charged” changes already underway in real estate, Jason Rothenberg, head of real estate at the $110 billion State of Wisconsin Investment Board, SWIB, told FIS 2020 Digital delegates. The pension fund allocates 8 per cent of its AUM to real estate in a portfolio that targets both durable income and alpha, favours private investment and a high level of control via segregated accounts and joint ventures. Since the crisis, the pension fund has navigated rent relief requests and is currently studying ways on how best to bring people safely back into offices, he said.

Rothenberg also noted that carrying out due diligence and inspections of properties during lock down is challenging. Checking real estate conforms with social distancing rules across dining, fitness and healthcare sectors makes the pension fund’s relationships with partners and managers all the more important: SWIB doesn’t manage real estate “in isolation” but uses a manager or two, he said.

Unconventional fiscal policy, low interest rates and uncertainty as to where inflation is heading is casting uncertainty over the asset class, said Jon Cheigh, CIO at Cohen & Steers. Income generating assets are normally “top of list” if people are worried about inflation, yet “significant” disruption from the pandemic has left retail and commercial offices empty, he said.

Yet Cheigh reminded delegates that real estate’s range has expanded in recent years to include logistics, data centres and tech towers. “Retail and office are smaller than some of these other areas which have now become bigger parts of the market.”

He said the future is best viewed through different lenses. Hotels and offices will go through a “normal recession” cycle, while in a second phase some sectors like office, university and elderly housing will have to adjust to new social distancing rules and adapt to “unique” conditions.

He said that winners and losers will emerge from the current market. On one hand office is bound to be hit hard.

“Parts of some companies may never return to the office,” he warns. However, he countered that people still want to work in offices for concentration, culture and collaboration. “Office is an area where we will be selective and find value; we see decentralisation of some areas and some gravitation away from global cities and more affordable lifestyle cities. There are changes afoot.”

Real estate is also a key asset for investors seeking to protect against inflation – a worry that is “seeing lots of interest,” he said.

He also cautioned that while real estate faces unprecedented challenges because of our new virtual lives “in reality everything we consume is physical.” He said that a shift in dominant sectors within real estate doesn’t herald the demise of the whole asset class, just as the end of banks’ dominant role in stock indexes in the 2000s didn’t leave equity markets permanently damaged.

He urged investors to diversify (although he said even smart people never get it 100 per cent right) and invest with conviction: some retail assets will make sense, as will some office assets. He also said that over a full-cycle investors wanted listed and unlisted real estate to balance returns, risk and volatility. “A combination is best but at times you want to be tactical. Listed tends to correct first creating more of an opportunity.”

As for the much-talked of shift out of cities in response to COVID-19, both commentators were circumspect.

“I believe in cities. They are engines of creativity and productivity,” Rothenberg said.

However, he noted that near-term there will be more of a focus on so-called 18-hour or smaller cities which don’t have the same pressure on public transport or health services.

“In the long-term this is a blip, but in the short-term we will see movement out of global growth cities into regional hubs,” he predicted. Cheigh concluded that this held opportunities for decentralised retail and dinning solutions. People working from home want to go somewhere for lunch, he said.