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Stay focus on ESG issues in Covid-19 market, asset managers urged

The Edge Singapore
The Edge Singapore5/15/2020 07:00 AM GMT+08  • 9 min read
Stay focus on ESG issues in Covid-19 market, asset managers urged
The year 2019 ended on a high for the global fund market, achieving a total net inflow of US$1.35 trillion ($1.9 trillion) which was more than double that in 2018. All assets, except equity funds, enjoyed net inflows, according to data
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SINGAPORE (May 15): The year 2019 ended on a high for the global fund market, achieving a total net inflow of US$1.35 trillion ($1.9 trillion) which was more than double that in 2018. All assets, except equity funds, enjoyed net inflows, according to data from Refinitiv.

However, barely halfway through the first quarter of 2020, the rapidly worsening Covid-19 outbreak triggered wild swings in the markets. And the impact on the asset management industry was quickly apparent. Between 4Q2019 and 1Q2020, net inflows halved.

“Navigating the ongoing impact of the Covid-19 pandemic on financial markets and economies is the biggest challenge faced by the fund management industry,” says Xav Feng, director, Lipper Asia Pacific Research, at Refinitiv.

Against this backdrop, the rest of the year will continue to see dramatic changes in the global economy, stock markets as well as in the geopolitical arena. “Refinitiv and Lipper will continue to watch how the pandemic plays out across the industry,” says Feng, who was speaking at a webinar on May 5, marking this year’s edition of the Refinitiv Lipper Fund Awards of which The Edge Singapore is the official media partner.

To be sure, the Covid-19 pandemic is not the only problem confronting solely the asset management industry. Mark Wightman, EY’s Asia-Pacific wealth & asset management advisory leader, sees a few key trends shaping up in the coming months.

First, the pandemic will raise questions regarding a company’s operating model. This includes how it should interact with its service providers and customers in the “new normal”. Next, more M&A activities — be they strategic acquisitions or disposals — can be expected. Meanwhile, the growth story of China, which has recovered quickly from the pandemic, should remain intact.

In addition, companies will have to ponder over the “future of work”, including how they should manage their business as well as the cost implications of safe distancing measures at the workplace. Last but not least, the ongoing discussions on environmental, social and governance (ESG) issues will be also amplified by the pandemic, says Wightman at the same event.

David Wong of AllianceBernstein says that while the Covid-19 pandemic is occupying most people’s attention now, they should not lose focus of a bigger threat — the climate change crisis, which is a key plank of ESG. “That will require a lot more coordination globally to solve,” says Wong, who is AllianceBernstein’s senior investment strategist and head, Asia business development, equities.

AllianceBernstein, which won this year’s group award for multi-assets, has been helping clients assess the risks different companies face, including climate risk. “It is a very real issue for our livelihood in the future and we are finding ways to assess risk, and that’s super important for investors,” says Wong.

However, he cautions that the implementation of ESG factors in investing, while important, is not a straightforward exercise. “We use the term in many different ways with different meanings,” he says.

For one, investors need to be discerning when discussing ESG integration. This could mean either designing portfolios that have a particular ESG purpose such as promoting low-carbon footprint activities or taking a broader approach to risk and due diligence of companies.

Nevertheless, there is no doubt that integrating ESG into an investment portfolio helps in terms of risk management. This has been proven by the fact that during the Covid-19 pandemic, companies with higher ESG scores also performed better, says Wong.

“Companies that have better prepared both their own employees and other stakeholders in various ways for various risks are simply going to perform better over time,” he adds.

The focus on ESG has also thrown up some new and interesting ways in which fund managers evaluate a company. Wong explains, “We realised we needed to have other real-time indicators of how economies are doing. We didn’t need to wait for the data to come out to tell us some of these things. We just had to look at cumulative store closures, openings, ships in ports and bookings in OpenTable (a restaurant reservation platform).”

In the same vein, to get a better feel of how companies are performing on the ESG front, asset managers can check ratings on Glassdoor, the popular workplace review website, to see how employees rate their own companies. “If we know how companies treat their employees at this critical time, we can gain insights into corporate culture and how successful they will be over the long term,” adds Wong.

Even so, asset managers face the challenge of comparing how well companies perform in ESG, given that there is no single agreed standard. This means they will need to design their own valuation methodology and measurement framework. “As you become more experienced, you should adapt the framework to suit your own purpose, for example, how to assess risk and returns on a proprietary basis,” says Wong.

Speaking at the same webinar, Sherry Wong of UBS Asset Management, which won this year’s group award for equities, says that amid the growing interest in ESG strategies, there is a need for broader industry-wide partnership. “The investment community has different standards and different proprietary processes. The investor would like to know how one ESG fund is assessed compared to another? These are issues our community need to look at and standardise,” says Sherry, who is head of products, Asia Pacific and head of asset management, Singapore and Southeast Asia at UBS Asset Management.

UBS Asset Management, which has been focusing on ESG for more than a decade, has in place a systematic process of implementing an ESG strategy. Firstly, there has to be the initial interest in the investment theme. This will then be followed by a conscious decision to exclude investments in companies in, say, the tobacco or military-industrial sector. Next, the focus will be on how companies are able to operate in a sustainable manner. Finally, “impact strategies” will be formulated to allow selected companies to receive active support from asset managers to generate sustainable returns for all stakeholders, says Sherry.

Stakeholders, partners

Nevertheless, there is one thing all asset managers agree on: No matter how big or global the manager is, it has to work with partners who are critical members of their stakeholder community. For that, Brian Tan of JP Morgan Asset Management, which won the group award for bonds, have his partners to thank. These include banks and other financial institutions which have been working very closely with him.

Tan, who is JP Morgan Asset Management’s head of Singapore funds and global strategic relationships, Asia Pacific, notes that despite the volatility, many of these partners are focusing on the long term, advising their clients not to overreact and let volatility derail their investment goals.

While there was significant fund outflow, JP Morgan’s partners have continued to give “good advice”. Instead of panic selling, clients are advised to build stronger and more diversified portfolios. “That’s quite key. In periods of extreme drawdown, there cannot be a worst time to sell,” says Tan.

Tan also sees the emergence of a few positive outcomes as companies and people deal with the Covid-19 pandemic. For instance, many companies have gone online to interact with their clients. He notes how webinars organised by financial institutions and wealth advisers have become more popular. In response, clients are also paying more attention to these channels and have become more proactive in reaching out.

Furthermore, Tan says he is seeing a “huge pick-up” in demand for investment insights. For example, JP Morgan is seeing an 81% increase in monthly average pageviews for its content. There is also more active engagement with electronic direct mailers and even virtual events such as this webinar organised by Refinitiv, he says.

Recovery in 2H

For now, JP Morgan expects the downturn to last till the middle of the year with recovery in sight in the second half as the effects of fiscal and monetary stimulus, and more importantly, the flattening of the infection curve, come together. “Sentiment should improve then,” says Tan.

“Volatilities and market dislocations do create opportunities. In this situation, the key is to be dynamic and be ready to pivot. There’s a lot of demand for active management,” he says.

In the past decade, passively managed funds have gained market share at the expense of actively-managed funds. However, according to Refinitiv data, active management has clawed back some gains in the first quarter this year.

For instance, the award-winning China equities team at UBS Asset Management has been actively doing field research to come up with the best investing ideas for clients. The Swiss asset manager is in favour of a rebound in China, given activities has picked up strongly following the lifting of the lockdown. And depending on how soon the rest of the world follows suit, this will translate into a recovery in export demand for China’s factories. “In general, we do see pockets of opportunities in both equities and fixed income. You find the right manager, who can select the companies and the stocks,” says Sherry Wong.

During the lockdown, certain Chinese online education companies experienced a 700% surge in the number of downloads by users. Expected to continue growing after the pandemic, these will be the stocks UBS Asset Management will be monitoring very closely, she adds.

AllianceBernstein’s Wong observes that many stocks today, having gone through the brutal 1Q correction, are now trading at significantly lower prices than they were. “But we have to be very careful on what to buy. We need to remember, we don’t need to buy the whole market, we need to buy a carefully curated portfolio of the market,” he says.

This means the common P/E yardstick might not be the best way to value shares, given the volatility in both price and earnings. So, other valuation methods such as dividend discount model, or discounted cash flow model should be applied.

And while technology and healthcare companies seem the obvious winners to emerge from the crisis, the trick is to get the right balance. “What the Covid-19 pandemic brings is a major opportunity for active managers and we can look forward to the winners in the years ahead,” says Wong.

A replay of the webinar can be accessed here.

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