I chat with Scott, the CEO of Singapore-based Noviscient, about shape of the hedge fund industry and how to create better systematic allocation to funds using machine learning techniques. Reflecting on his career in Deutsche Bank in Asia and running his own statistical arbitrage fund, we discuss the pragmatic applications of quantitative methods and the use of AI in society.

Nothing on this podcast is to be considered investment advice or a recommendation. No investment decision or activity should be undertaken without first seeking qualified and professional advice

I chat with Linda, the lead scientist from GAM Systematic CANTAB, and recently named as one of the top 50 women in the hedge fund industry. We have a fascinating conversation about the difference between quant and systematic approaches, and the vast uncertainty of financial markets. We talk about the usefulness of machine learning models and the critical role that investment horizon plays.

Nothing on this podcast is to be considered investment advice or a recommendation. No investment decision or activity should be undertaken without first seeking qualified and professional advice.

I chat with Jim, the former CIO of Barclays Global Investors on the history of quantitative investment, the myths of factor investing, and how machine learning can help solve difficult problems in financial markets. We touch on the future of AI and its use in the broader society – where are the opportunities and where are the potential threats?

Nothing on this podcast is to be considered investment advice or a recommendation. No investment decision or activity should be undertaken without first seeking qualified and professional advice

As I attend the UN Secretary General’s Climate Action Summit in New York, I’m energised by the amount of people – young and old – that took to the streets last Friday as part of the global climate strike. There is a growing, global realisation that there is an urgent need to take climate action now, with young people increasingly voting with their feet. Politicians should also take note that many will soon be voting at the ballot box.

Finally, it feels like climate change is taking centre stage, and, hopefully, there is no turning back.

Against this backdrop, however, is the depressing reality that emissions continue to rise, climate investment isn’t growing fast enough, and we are nowhere near the trajectory required to keep the world to no more than 1.5 degrees in terms of warming.

This is despite decades of climate analysis and warnings from the scientific community that without major technological advancements and negative emissions technology we will be unable to meet the 1.5-degree challenge.

As it stands, we are on course for a 3+ degree warming world. Deforestation and fires in the Amazon and Indonesia have rightly caught the public’s attention, with new hot weather records being logged across the globe. A world moving past 2 degrees in the coming decades can only expect the science-based forecasts of volatility and severity in weather events and climate impacts to worsen. No wonder children are on the streets – they know they’ll be around in 2050…and beyond.

Turning back to the summit, the UN Secretary General has told those speaking not to come with “fancy speeches”, but to come instead with “concrete commitments”.

He has also reportedly banned some countries who are doing little more than paying lip service to climate change from addressing the summit. This is to be applauded; what we need now is action from political leaders, not words.

In addition to asking ourselves what actions we are going to take for the future, we must also reflect on why we find ourselves in this position, with the pace of our climate change response so far out of kilter with the urgency.

While the answer to this is multifaceted, one factor in the slow response from policy makers has been the anti-climate lobbying machine.

Fossil fuel money has influenced governments towards inertia and funded scare campaigns in the community.

The investor community has been doing its part to end this destructive corporate lobbying, including the PRI’s guidance, converging on climate lobbying: aligning corporate practice with investor expectations.

It provides an overview of why investors should engage on this topic; suggested questions to ask companies; examples of good and poor corporate practice; and PRI signatory case studies showcasing investor action. We have also undertaken an investor engagement on the topic.

Considerable effort has gone into asking companies about their lobbying efforts and member associations. After all, shareholder money is used to fund climate denier lobbying efforts, and investors understand that in some cases their money is being used in ways that are not aligned with their long-term interests.

A new study of the climate performance of the energy sector from the $15 trillion investor-backed Transition Pathway Initiative finds that “climate progress in the energy sector is inching rather than accelerating towards a low-carbon future.”

  • The research also found that:
    Just two oil and gas majors are aligned with Paris Agreement pledges.
  • Only 31 of the top 109 energy companies (28 per cent) are aligned with the emission reduction pledges made by national governments in the Paris Agreement (and just two, Royal Dutch Shell and Repsol, are oil and gas companies).
  • 29 energy companies (22 per cent) rank in the bottom two tiers for climate risk governance – they don’t have a policy commitment on climate action and/or don’t recognise climate change as a relevant risk. Of these, nine are electric utilities, six are oil and gas, and 14 are coal miners.

On lobbying, the study found that 94 per cent of oil companies “do not ensure consistency between their own climate position and [their] trade associations”.

The most recent example of action is from the consortium of ACCR, ACTIAM, Church of England Pension Board, MP Pension, Vision Super and Grok Ventures, which have filed a shareholder resolution asking BHP to suspend its membership of industry associations that are undertaking public policy interventions that are inconsistent with BHP’s support for the Paris Agreement.

The group is acknowledging that BHP has been a leading company in addressing climate action within the resources sector but remains concerned that it has been too slow to address the misalignment of lobbing by their trade associations.

So, while I desperately hope this week in New York sees a huge leap forward when it comes to climate action, we must not forget that there are still many vested interests putting billions of dollars into keeping the status quo.

We need to redouble our efforts in addressing negative corporate climate lobbying. The children who voted with their feet last Friday called for stronger climate action; they want to live their lives in a world committed to limiting warming. The least we can do as investors is vote with our shares against those who seek to thwart them.

Fiona Reynolds is chief executive of the PRI.

The Employees Retirement System of Texas is looking to allocate more capital to start-up hedge funds and take ownership stakes after backing Cinctive Capital Management in New York.

Chief investment officer Tom Tull said they had “60 to 70 firms” all looking for seed capital after a series of roadshows in New York and Texas. He said the Cinctive deal capped two years of negotiations as they tried to figure out a way to invest in emerging managers.

“We are going to continue to build on that base,’’ the CIO told delegates at an Investment Magazine’s Absolute Returns Conference in Sydney earlier this month. “We have committed capital to have this work and we think it’s going to be a good model going forward.”

The $28 billion pension fund has formed a strategic partnership with hedge fund specialist PAAMCO to become anchor investors in Cinctive, which raised $1 billion from several parties ahead of its launch. Tull said ERS will get a revenue share and a “good piece” of the investment performance.

ERS has been slowly rebuilding their hedge fund book after a mass liquidation of funds in 2017 when Tull said the markets got a “little heady.” The pension fund may reinvest with some of the managers they defunded, depending on the environment, he said. As of June, around 3.5 per cent of the portfolio was allocated to hedge funds, just short of the long-term target of 5 per cent.

“We are seeing so many hedge funds being closed down so it’s timely to be starting up a firm that has a new lease on life,” Tull said of Cinctive. The managers “want to have an opportunity to build a book that can generate competitive rates of return and quality returns rather than be paid on just how much capital you have. I think that is important.”

More than 60 per cent of ERS’s overall assets are managed by internal investment teams. Tull said that while they would like to bring more money in-house, if they find external managers that can add alpha they will hire them. “Cheque sizes vary from $100 to $300 million” for positions in their absolute return portfolio, he added.

As for hedge fund fees, Tull said he did not believe in the 1 or 30 structure adopted by the $154 billion Teacher Retirement System of Texas, where investors pays performance fees only after managers meet an agreed upon hurdle rate.  It means that hedge funds can earn whichever is greater – either a 1 per cent management fee or a 30 per cent cut of the alpha after benchmark.

“I would rather negotiate a base fee, discounted fee and get paid a carry with a hurdle rate,” the CIO said. “We have been just as successful in negotiating those fees. We feel that we get better bottom line rates of returns than Teachers based on our approach.”

The Austin-based pension fund is due to review its overall asset allocation next year after rejigging the portfolio in 2017. Around 40 per cent is currently allocated to global equities, followed by 27 per cent in fixed income. They upped their holdings in alternatives, which includes private equity and infrastructure, to hit their target at 37 per cent from 26 per cent.

After selling about US$1 billion worth of private equity assets in the secondary market, the pension fund is also looking to get more actively involved in co-investment, according to Tull. He said ERS would look anywhere to co-invest including in real estate and infrastructure.

“Co-invest is going to be the way of the future in terms of picking and choosing and being able to co-invest alongside a manager for a good deal,” Tull said at the conference. “The hang up is that you have got to have a team in place to manage that deal in a relatively short period of time, like a week in some cases.”

Tull said next year’s review of the fund’s portfolio will come down to the risk tolerance of the board, adding that a new member will be joining ERS in December. He said that unless inflation picks up, expectations for returns will reduce.

“They are all long-term investors until they are not,” the CIO said. “To get the higher rates of returns, they have to be willing to accept more risk as they go forward…We provide about 60 per cent of the money that the agency needs to cover pension liabilities.” ERS’s current funding ratio is about 71 per cent.

With interest rates where they are near record lows, Tull said ERS would probably put more money into alternatives rather than conventional fixed income products. Even so, he said there were other ways to make money in the asset class which included funding fixed income ETFs.

“I have no idea where rates will go but we are currently building teams in optimistic credit and high yields,” he said. “So when we do see the stress, where we do see the problematic environments out there, we will have the means by which to take advantage of it.”

 

A growing number of influential asset owners have expressed interest in a new sustainable development investment (SDI) Asset Owner Investor Platform launched by Dutch funds APG and PGGM. The AI-driven technology sifts through reams of structured and unstructured data to gauge the extent to which companies’ products and activities meet the UN’s Sustainable Development Goals (SDGs).

Rather than measure a corporate’s conduct or progress on sustainability, the platform looks through a different lens. It rates up to 10,000 companies on the extent to which their core business activity helps create, for example, sustainable cities (SDG 11) or generate clean energy (SDG 7) in a novel approach that brings a new level to standardisation and efficiency to SDG portfolio management in fixed income and equity.

“More global asset owners and institutional investors want to understand the contribution they make through their investments to the SDGs. The goal of the platform is to create a critical mass of asset owners who together define what it means to be investing in the SDGs,” said Claudia Kruse, managing director in APG’s global responsible investment and governance team.

Australian construction industry pension fund A$46.7 billion ($31.5 billion) Cbus, the UK’s £65 billion ($81 billion) Universities Superannuation Scheme (USS) and “a large Canadian pension fund” have expressed a keen interest in the platform which aims to formally launch in the first quarter of 2020, she said.

Collaboration not competition
The platform, also available to the wider investment industry, is all about collaboration. The data is shared and visible to all and although not open-source or free to use, it isn’t a commercial venture. This could erode any competitive advantage in burgeoning SDG investment, but Kruse says cooperation and a common language is crucial for wider SDG success.

“The platform operates under a common definition, taxonomy and data source. When we engage with companies, we can speak with one voice,” she said.

Indeed, an important tool to the platform is that it signposts companies towards meaningful disclosure and how to improve their SDG credentials.

“If there is better disclosure we benefit and the market as a whole benefits. We felt it was in the interests of everyone to establish a collaborate initiative.”

The shared approach also means the platform can draw on a wide pool of expertise as it builds-out and improves. Moreover, asset owner and manager disclosure become comparable, providing stakeholders with more transparency.

Its sole functionality around data provision and information means the platform offers no insight into the financial returns of SDG investment. Investors using the platform must make their own decisions as to whether SDG investment meets their risk return targets, says Kruse.

“Platform users will have to find their own way of using the information. In our case, any sustainable development investment (SDI) has to hit the same risk return as all our other investments,” she said. APG also uses the same AI-driven data to inform its alternative investments, identifying for example SDIs within private equity. In real estate, the fund integrates ESG via GRESB, the ESG benchmark for real assets.

The gathering interest in the platform is the fruit of years of work and initiative. In 2015 ABP, the €430 billion Dutch civil servants pension fund and APG’s largest client, pledged to double its investments in the SDGs in a bid to better match its investments with its beneficiaries’ beliefs and make a genuine contribution to change. Another APG client, Dutch builders pension fund bpfBOUW, also set a target to allocate €12 billion to the SDGs.

APG sprang into action creating de-facto standards around the SDGs and in 2017, together with PGGM, jointly published an SDI taxonomy or methodology that identified SDG investment opportunities. Next, the lack of company data and information led the fiduciary manager to analytics experts Entis, part of Deloitte Nederland. APG bought the offshoot in 2018 to start developing data analytics in sustainable investment in-house. See our story APG takes the lead on AI

The platform currently draws on companies relevant financial or operational metrics to assess if their activity meets the SDGs. For example, revenue and capital spending as well as contextual information are all data points. It cannot measure the outcome, or impact of an investment but this will be a likely evolution, said Kruse.

“Looking ahead, we may decide to develop metrics that give insight not only into how much we invest into companies that contribute to the SDGs and to which ones, but also into the outcomes those companies have achieved. An example could be the number of people provided with access to financial services,” she said.