The COVID-19 crisis won’t have a lasting impact on climate change, but the response will – fiscal policymakers should thus aim to make the recovery green according to the IMF.
By Principles for Responsible Investment (PRI)
The COVID-19 pandemic – and the global response to it – is a serious threat not only to global health, but to our communities, our economies and our investments. As long-term stewards of capital, investors can and should act now to help reduce harmful impacts including: the direct effect on public health, the severity of the associated economic slowdown, the deepening of inequality in societies and the resulting impacts of all of the above on mental health.
To help mobilise the investor response, The PRI is working with signatories to further develop thinking on what the COVID-19 crisis means for investors. It is establishing two signatory participation groups to coordinate and develop investor responses, focusing on short term responses, and a future economic recovery phase.
How can investors be a catalyst for change and have an active voice in a sustainable recovery? This episode explores the role of investors and how they can collaborate for effective collective action. It includes the work of one of the leaders in sustainable investing and the biggest pension fund in Europe, APG. It invites investors to have an active voice in a sustainable recovery.
• Claudia Kruse managing director global responsible investment and governance, APG
• Fiona Reynolds, chief executive, Principles for Responsible Investment (PRI)
About Claudia Kruse
As managing director global responsible investment and governance Claudia Kruse is part of the management team of APG Asset Management reporting into the CIO/ board. APG manages more than EUR 538 billion on behalf of Dutch pension funds. Her 15-people strong team implements the responsible investment policy on behalf of APG and its clients across all asset classes. The focus is on active ownership, ESG integration tailored to the specific investment strategies and investing in solutions that contribute to the Sustainable Development Goals. Before joining APG in 2009, she worked on the buy and sell-side in responsible investing in London for almost a decade. She has been appointed to the German Corporate Governance Code Commission in 2016 and is a member of the EU Expert Group on Sustainable Finance since January 2017. She is on the board of Eumedion, the Dutch Corporate Governance Platform as well as the International Corporate Governance Network (ICGN). In 2016 she was voted CIO Europe’s Next Generation CIO Award winner. She holds a MA in International Management and Chinese, as well as an MSc Tourism & Development (UCL, London), and has lived and worked in China in the 1990s on environmental education. She has inter alia published on the Governance of Sustainability and the integration of ESG factors into remuneration which reflects her strong belief in the connection between good governance and sustainability.
About Fiona Reynolds
Fiona Reynolds is responsible for global operations. She has more than 20 years’ experience in the pension sector, working in particular with the Australian Government, and has played a key role in advocating pension policy change on behalf of working Australians. She has a particular interest in retirement outcomes for women. Prior to joining PRI, she spent seven years as chief executive at the Australian Institute of Superannuation Trustees, an association for Australian asset owners. Reynolds has been a director of AUSfund, Industry Funds Credit Control, the United Nations High Commissioner for Refugees, and Women in Super. In September 2012, she was named one of Australia’s top 100 women of influence by the Australian Financial Review, for her work in public policy. Reynolds also serves on the International Integrated Reporting Council, the council for Tomorrow’s Company, the Global Advisory Council on Stranded Assets at Oxford University, and the Business for Peace steering 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.
Sustainability in a time of crisis is a Top1000funds.com podcast collaboration with PRI, with support from Robeco
Sustainability issues have never been more important than they are right now. How can investors work together to use this unprecedented opportunity to put the promise of purpose-driven leadership and stakeholder capitalism into practice? This collaborative work with the PRI, with the support of Robeco, will showcase leadership in sustainability during a time of crisis.
For PRI’s whitepapers and resources for asset owners visit www.unpri.org
The KRW14.3 trillion ($12 billion) Korea Public Officials Benefit Association (POBA) is sitting on more than 10 per cent cash, but in a unique challenge due to the coronavirus crisis, it is having trouble deploying capital.
The Korean pension fund for regional public servants adopts a very risk-averse investment strategy. Chief investment officer Dong Hun Jang likens it to a US college endowment in its absolute return-seeking philosophy. It has a consistent cash flow thanks to the job security of its membership, made up of Korean regional public officials, who have contributed more as interest rates have come down.
The fund has a relatively low exposure to public equities, 14 per cent at the end of 2019, and 55 per cent in alternatives which encompasses everything from hedge funds to private equity, private debt, real estate and infrastructure.
It has just over 10 per cent in fixed income securities and high percentage in cash at just over 10 per cent as at the end of last year, which Jang says has increased since the beginning of 2019.
“POBA did not intentionally raise cash as much as we could have,” says Jang. “As interest rates came down our members tended to contribute more, so we had strong cash flow from members. Also, in the past two years, we have had a quite conservative market strategy, and have been prepared for the late stage of the market cycle.”
Jang was also conscious of the fund’s high allocation to less liquid assets so was reserving cash in the case of a liquidity call.
“We have a lot of cash available, so we are looking into the market opportunities to see if we can find good investments,” he says. “Our counterparties are all in freeze, not moving at all. So it is quite challenging. The biggest obstacle to us is moving our capital, deploying our capital.”
The fund outsources all funds management and is reliant on GPs, he says. There are around 45 people in the investment team who work with about 100 external managers.
“We make indirect investments, and global GPs are working at home and can’t do due diligence and regular meetings with operations people on site. All activities are frozen.”
In addition, the decision-making process at POBA requires an investment committee meeting to finalise unlisted market investments.
“This month we might finish the scheduled main investment committee meetings and after that, we don’t have an exact schedule to make decisions around alternatives,” he says. “To make final decisions on that, each project requires around two to three months to go through the process, so we need some inventory to go through that process. We have done most of the final investment committee meetings and made decisions for the past three months, but from April we only have some inventory.”
Jang says it typically takes around three to five years to deploy capital once it has been committed, and at the moment around half of the committed assets in alternatives have been deployed. So only around 25 per cent of the total portfolio is at work.
“We can’t pinpoint when this situation will be normalised. But we expect and hope it can be normalised within a couple of months. Once it normalises then each GP needs to move. Systematically their counterparties are so closely related to make a final investment, there will be some lead time for each one. Practically I think autumn is more likely, the next four months will be difficult for us to deploy our capital.”
Listed alternatives
The fund’s target return is 5 per cent with the mantra focused on “not losing money”.
Since 2015 Jang has overseen the portfolio and that has coincided with a reduction in equities from 30 per cent to 14 per cent.
“Now we are very contemplative and watching market movements,” he said. “We can’t pinpoint the trough but are gradually rebalancing back to 14 per cent.
“The biggest risk will be as of now, as we have a limited percentage of listed equities, our NAV drawdown is quite limited. If this risk situation continues we should be prepared and expect our private asset valuation should markdown.”
Jang is confident the impact on the return target will be limited this year but is worried the impact of not being able to deploy capital now will have a lagging effect on returns.
As a result, he’s putting money to work in listed alternatives including REITs and is considering listed infrastructure.
“We are moving money around some other places to fully utilise our capacity,” he says. “In order to take advantage of market dislocation, we committed to some US REITs and are considering listed infrastructure investments.”
Across the alternatives portfolio, the fund has increased investment in debt tranches including real estate – which is the biggest part of the alternatives portfolio – infrastructure, and private debt.
“I hope this market dislocation will not hurt the more conservative debt and mezzanine level. We have some equity tranche in all asset classes which are exposed to the market drawdown,” Jang says.
The last two years the fund has been increasing real estate in logistics and residential sector and social infrastructure, which he says are “very sticky assets and are less affected by late-stage market cycles and market downturns”.
He’s also considering some dislocation in credit areas such as CMBS. Jang says the fund is also looking at distressed assets, which is not an area they have traditionally invested in, at some private equity secondaries.
“Those areas are quite interesting,” he said. “We can’t exactly pinpoint the trough in the market in the asset classes, but as a long-term investor this kind of dislocation is a good opportunity as long as we can maintain our long-term perspective.”
Empathy and compassion will be essential qualities for leaders in a post-COVID-19 world. These ways of being can not be learned, but founder of Authentic Investor, Rob Lake, discusses three ways to cultivate them.
Not surprisingly, and quite rightly, there is no shortage of discussion among individuals, within organisations, in the press and on the internet about what kind of world we will see when the coronavirus subsides; and of what kind of world we want to see. A return to the business as usual we knew before the crisis? A continuing restriction of some of the freedoms that people in most countries where this article will be read have lost? Or a society and an economy marked by greater concern and care for the disadvantaged and more regard for the natural world? We don’t know with certainty of course. But significant change seems likely. Even The Financial Times has said that ‘radical reforms need to be put on the table’.
Investment decisions help to shape the world. The leaders of investment organisations will bear a great responsibility for which of these paths we take. It seems pretty clear that the post-corona world will need investment leaders with a very high degree of empathy – an even greater ability than good leaders have now to tune into the circumstances and expectations of others, within and outside their organisation. And this empathy will have to be accompanied by compassion: a genuine desire to serve others, to meet their needs and to relieve suffering.
Empathy and compassion are not techniques that can be learned. They are not things we ‘do’; they are ways we ‘be’. Actions that embody empathy and compassion emerge from the presence and experience of these states. The doing follows the being.
If these qualities are desirable, even necessary for the world after COVID-19, but they cannot be learned, what can we do? Fortunately, there are ways we can cultivate them and encourage them to emerge. Here are three suggestions.
While you’re under lockdown, working from home, do less and be more. Instead of complaining that your children or partner are interrupting your important Zoom calls, enjoy your time with them. Get to know them better. The crisis is a golden opportunity radically to alter your work/life balance. Try new things. (I’ve been discovering online singing; and making bread for the first time in around 20 years, and muffins for the first time ever.) Rediscover the human being behind your job title and behind the professional identity that we so often wear like a mask in the office. Enjoy being that person.
Read things you wouldn’t normally read. Explore new perspectives. Deliberately expose yourself to alternative world views. Try people like Charles Eisenstein or Zachary Stein. You don’t have to agree with them; but they will stimulate new thinking. The future will need new thinking.
Be still and listen to the world around you, and to yourself, in new ways. One day in the first week of the lockdown in the UK, the first sound I heard when I woke up in the morning was the call of a green woodpecker – not the usual distant rumble of the ringroad around the city where I live. Enjoy nature. Seismologists who study signals from the Earth’s interior are now detecting those signals more easily because of the dramatic reduction in the noise caused by traffic, public transport and other human activity at the Earth’s surface. With the noise of office life reduced, perhaps we can detect signals from deep inside ourselves more easily now too – the signals that come from our fundamental sense of what is right. If you have a mindfulness or meditation practice, or an equivalent in your own faith or tradition, give more time to it. If you don’t have one, give it a try. Here’s a simple introduction.
After a while, these practices might start subtly to change how you see the world, in ways that will help you and your organisation meet the challenges both of the present situation and of the world that will follow it. You might come to look in a new way at the interconnectedness of the pandemic with biodiversity loss and environmental destruction. Or at the social inequality that means pandemics hit the poor hardest but which also accelerates the spread of disease for all. And of course at the climate crisis, which has not gone away while the pandemic rages.
When coronavirus and COVID-19 abate, do the right thing. You will know what that is. It may be different from what you have done before; perhaps very different. Have the courage to do it. Be a good leader.
Rob Lake is founder of authenticinvestor.org
Markets in disarray are where long-term investors make their money. Investing countercyclically – when many others without long-term liquidity are selling – is a clear advantage for long-term investors. Investors that perform the best over the long term will have taken calculated and deliberate risks and put money to work during crises like this one.
But how? While we didn’t predict a pandemic, FCLTGlobal had market events like this one in mind when we published Balancing Act: Managing Risk for Multiple Time Horizons, and that research provides tools that long-term investors can use right now.
Rebalancing consistently with your fund’s policy is one such tool.
Take for example a message that one of us sent last week in the capacity of an endowment trustee advising the full board: “Panic is contributing to the market crash and, when we see opportunities to buy fundamentally-strong assets at a discount, we will. This may create the short-term appearance of compounding our losses, but the long-term effect of buying low will be an opportunity to sell high in the future, add real value to our fund, and increase grant-making.”
Research associated with Balancing Act discusses why each part of this message is important. It explains the investment tactics in terms of the organization’s purpose: whether that is grant-making, building retirement savings, or funding liabilities. It sets expectations honestly: our tactics are going to make things seem worse before they seem better, but it’s worth it for fulfilling our purpose. And it defines the tactic – rebalancing consistently with policy – in terms that will be familiar to a range of stakeholders, not just the finance people: buying fundamentally strong assets at a discount.
Behavioral scientists note the importance of the framing effect, particularly as we react more strongly to losses that we do to gains. Rather than framing the conversation around peak to trough losses, investors that track how they are progressing towards their long-term goals – even if they may have taken steps back from their goals through this time – are more likely to be confident in their decision to proceed with rebalancing in down equity markets.
Drawing on set-aside funds is another tool that long-term investors can use right now. The way to permanently impair capital in a down market is to sell positions, realize losses and remove the ability to bounce back. Crises like this are why set-asides exist. Using the set-aside money for liquidity spares organizations from having to realize losses in the core portfolio.
We all recognize this “mental-accounting” behavior. This same endowment uses exactly this sort of set-aside account to shelter eighteen months’ worth of grantmaking and operational costs from market risk. Having that resource adds to the organization’s liquidity and the board’s confidence in a way that makes rebalancing possible.
True impairment means becoming unable to do the organization’s work or fulfill its purpose. This set-aside, or rainy-day fund, provides the staying power to continue the work long enough for markets to rebound. Furthermore, because the organization has the set-aside as a source of funding during down markets, there is more patience with performance in the core investment account – even to the level of being willing to rebalance into highly-volatile markets.
All of these mechanisms reflect plans put in place long before the crisis. Ideally, investors have planned strategically and calmly as portfolio and investment allocations are made, rather than allocating capital based on the emotions of a particular day’s or week’s disturbances.
Every investor will be in different positions of planning, using set-asides, and rebalancing. The key long-term behavior is not arriving at a single right answer, but having these tools come together in a strategic and internally coherent way with respect to each investor’s purpose.
Risk models or historical statistics will not provide a definitive answer about how to invest in markets like these. We typically think in terms of probabilities over an investment time period. However, the most common projections of risk – probability of loss and value-at-risk – pertain only to the end point of the investment, not to the pathway. What is important is to account for multiple time horizons within risk models with such statistics such as “first-passage” or “within-horizon” probability of loss and value-at-risk.
Let’s take for example a $100m allocation with a value-at-risk of $10m according to a 95% confidence interval. In more common language, this means that the investment will have an ending value of $90m or more in all but five cases out of a hundred. What the statistic does not mean, though, is that the valuation of this investment will remain above $90m throughout the investment horizon in all but five cases out of a hundred. Quite the contrary: it is a statistical truism that the likelihood of a temporary dip in valuation below $90m is much higher. Statistical inference allows us to compute the maximum drawdown that the same investment may experience within its horizon with equal probability. Just for the sake of illustration, the within-horizon value-at-risk of this same investment could be $30m. And, of course, these value-at-risk models do not tell us at what happens in those five cases out of a hundred when the outcome is beyond the band.
Additionally, the benefit of estimating risk across multiple time horizons is not just mathematical. Having interim and final figures provides a frame to everyone involved, both for risk professionals and others, like board directors, so that they expect the pathway to be bumpy even if they are headed to the right destination. Managing expectations to be realistic is an essential long-term behavior: it reduces surprises, which in turn reduces short-term reactions.
The COVID-19 pandemic presents an extremely difficult short-term crisis, but nearly all long-term investors will have an investment horizon beyond this pandemic. Focusing on that horizon will help us use our risk models better; and will ultimately help us perform better too.
Yet, even with these improvements in how we use risk statistics, human behavior underlies financial markets, and no unified set of statistical assumptions encompasses these behaviors, much less the ways that they interact, particularly in times of crisis.
In these times, a long-term investor will understand that the world has moved outside of statistical probability and that human behavior will affect both our response to the pandemic and the risk and return that financial markets produce. Long-term investors recognize that this crisis presents a leadership opportunity to contribute to outcomes that fulfill our organizations’ purposes.
Sarah K. Williamson and Matthew Leatherman are CEO and Research Director at FCLTGlobal, respectively. FCLTGlobal is a non-profit organization that develops research and tools that encourage long-term investing. Its membership is comprised of global asset owners, asset managers, and companies that play a leading role in rebalancing capital markets for sustainable growth. Further research and practical toolkits are available at www.fcltglobal.org.