Global Asset Tracker: Connecting tech trends with sense and sustainability
Elisa Trovato provides analysis of the Global Asset Tracker 2021 survey, highlighting the themes on investors’ minds as we move into the “the next economic revolution”
Major structural shifts in demography, technology and the environment are transforming the world and changing society in a meaningful, and sometimes irreversible way, driving future economic growth. These trends not only impact people’s daily lives, but also the way wealthy clients should think about longer-term investing.
Chief investment officers (CIOs) and investment strategists at private banks are devoting much effort to understanding how these powerful forces manifest in financial markets, allowing them to design investment strategies relevant across different market scenarios offering attractive long-term return potential. Importantly, these strategic themes, often well diversified across industries, sectors and geographies, enable them to be more persuasive when discussing views with clients.
If anything, the pandemic has validated the importance of a thematic approach, as it has strongly accelerated many overarching trends, from digital consumption and technological transformation to biotech, while firmly placing sustainability at the core of all investment activities.
Better connection
PWM conducted its 6th annual global asset tracker (GAT) study — a comprehensive piece of asset allocation research — in January, canvassing the views and plans of CIOs, heads of asset allocation and chief investment strategists at 50 global, regional and domestic private banks. These institutions, which scored well in PWM’s Global Private Banking Awards in recent years, together manage more than $13.5tn in client assets globally.
More than 90 per cent of private banks in the study use investment themes in client portfolios, with the majority implementing at least a handful of them.
There is a strong consensus (96 per cent) that employing investment themes allows advisers to better engage with clients and offer more tailored advice, which is why CIOs are increasingly churning out themes, and not just as part of their new year investment outlook.
“We talk about themes all the time, not just once a year, as they are a very good way to communicate ideas and connect better with our clients,” explains Edmund Shing, CIO at BNP Paribas Wealth Management. “If we just talk about stock markets and bonds, or the economy in a traditional manner, wealth clients may find it a bit dry and boring and do not really relate to it. What they relate to are investment themes, particularly topics such as ageing population, new growth in China, or ESG (environmental, social and governance) and sustainable investing” he adds.
Climate change
While sustainable investing is itself an investment discipline, based on the integration of ESG factors into the investment process, many specific investment themes are embedded within sustainability. Almost three-quarters of the survey respondents detect a strong connection between sustainable and thematic investing.
Energy transition/climate change, which is expected to generate one of the most attractive risk-adjusted returns (see Fig 1), is the trend investors most intuitively understand today, says Mr Shing. This is due to growing awareness that human society and the global economy are both closely related to the ecosystem, carbon emissions and energy sources.
“It is a very simple argument: if we do not do something drastic and change the way we use energy, then we are going to have a big problem.”
Mr Shing reports “huge” demand for products and services related to energy transition, fuelled by innovations, government policies, carbon dioxide targets, and changing consumer and investor preferences towards sustainability.
The French bank plays this theme by focusing on companies in technological innovation and equipment in solar, wind, geothermal energy and hydrogen Players in energy storage, power and grid equipment makers, batteries and related chemicals and materials are also a target. Both active funds and ETFs are used to access these firms.
The aim is not only to achieve superior investment returns, but also encourage companies to improve responses to climate change. Excluding offenders from investments is not encouraging the right behaviour. Moreover, investing in improvers is highly rewarding, in overall environmental impact and financial returns. “The biggest potential gain to be made, at the margins, is with those firms that have very bad practices, which waste a lot of energy and create a lot of waste, but are transitioning the fastest and the best, sector by sector,” says Mr Shing.
Highly rated ESG companies benefit from lower funding costs, access to green and social bond funding, and higher valuations permitting an edge in mergers and acquisitions.
Governance
Another investment theme is that of strong governance, often neglected in favour of the more visible environmental and social criteria. “Marrying strong corporate governance and high profitability is an attractive long- term defensive equity strategy and good alternative to sovereign and corporate bonds,” notes Mr Shing.
Another investment theme clients should consider is that of strong governance, believes Mr Shing, which is often neglected in favour of the more visible environmental and social criteria. “Marrying strong corporate governance and high profitability is an attractive long-term defensive equity strategy and a good alternative to sovereign and corporate bonds,” he notes.
Since 2015, European companies with a strong track record of corporate governance, relating to transparency and shareholder rights, have collectively outperformed the Stoxx Europe index consistently, particularly when allied to an above-average level of profitability. Covid-19 has brought governance to the forefront, related to the way employers take care of their stakeholders — and their employees in particular.
Companies that have provided flexibility to their workforce, looking after mental and physical health have fared better over the past 12 months, and are likely to outperform in the future. A happier and more productive workforce leads to reduced staff turnover and costs. Employee churn is an effective measure of moral leadership and a good proxy of how much the firm cares about its customers and supply chain, explains Mr Shing.
Sustainability is an area Northern Trust has focused on for long time, but only in the past year it has seen a “real acceleration in client demand”, acknowledges Katherine Nixon, CIO of wealth management at Northern Trust. “Everybody loves to skate to where the puck is going” she adds, borrowing the expression from the hockey world. “Investors see huge opportunity in sustainable investing, with the US president Joe Biden’s sustainable agenda clearly putting the trend on steroids.”
Also, clients continue to express growing interest in aligning their investment strategies with their family values, and while some of this growth is being driven by the next generation, there is generally a more intense focus across generations. This manifests in growth across ESG-specific products and strategies, but also through assessment of current portfolios and managers using an ESG lens.
It is a “push-and-pull dynamic”, adds Ms Nixon. Some wealthy clients are explicitly interested in ESG investing, while others are keen to make sure they have no exposure to specific companies harmful to the environment or society, with social issues becoming a post-Covid focal point. “Advisers add value by making clients aware their portfolio scores well — not only on the financial aspect, but also on sustainability — because we think that when companies are not doing the right thing in the E, S, or G space, ultimately shareholders will pay the price.”
Growth opportunities
With the world shifting toward sustainability, many of the highest-growth opportunities in the decade ahead are set to be sustainability-related, explains Mark Haefele CIO at UBS Global Wealth Management. Companies in the greentech space, ranging from battery electric vehicles to renewable energy, should benefit strongly from government regulation, recovery spending, and investment aimed at propelling a transformation from high- to low-carbon economies.
More than 80 per cent of survey respondents agree that increased government, business, and consumer emphasis on sustainability, combined with regulatory intervention and growing investable opportunity set (94 per cent) are key growth drivers in this space. Outperformance of sustainable solutions during the pandemic was also a key driver of client interest, according to more than 70 per cent of respondents. (See Fig 2)
Such factors contributed to driving UBS’s decision to make sustainable investing its preferred global approach, bringing it to a wider, mainstream audience. The world’s largest wealth manager also experienced “extraordinary growth in demand” for its flagship discretionary sustainable solution since launch three years ago, while demand for specialist advisory products also continues.
Demand for sustainability-related themes, as well as more general sustainable investing, is set to explode among wealthy clients. In five years’ time, 60 per cent of private banks expect sustainable or impact investing to represent at least 50 per cent of their client assets, with the remaining 40 per cent believing it will represent no less than 30 per cent. (see Fig 3)
“We have experienced sustainable requests go from the exception to the norm,” says Bill Street, group CIO at Quintet Private Bank. “The interest is such that we are now comfortable making sustainable investments our default across discretionary books,” he adds. The bank will soon commence transition to a “credible portfolio populated by green bonds, development bank debt and a range of lenses, such as leaders and themes.”
Last year represented an inflection point for sustainable investing, believes Mr Street. “Investors have preferred to de-risk their ‘dirty part’ of their portfolios, their non-ESG allocations, keeping a longer term perspective on sustainability, which has helped ESG funds outperform as well.” The term ‘sustainable’ will make itself redundant, as sustainable principles will become the norm of investing going forward, he adds.
Leading the revolution
Stéphane Monier, CIO of Lombard Odier Private Bank, believes “the next economic revolution” has begun and sustainability will be a major driver of returns. “For those with skills to adapt to this new reality, sustainability will create new sources of alpha, open up new investment opportunities and lead to enhanced return and reduced portfolio risk.”
More than 80 per cent of assets managed by the Swiss institution are invested sustainably, claims Mr Monier, with work in progress to reach 100 per cent. “We see a constant rise in demand for personalised sustainable investing solutions among private clients.”
Many investment themes that have been reinforced by the pandemic are related to technology or digital transformation.
“Digital transformation was the defining market trend of 2020. Businesses, consumers and families learned how to live in an online world. Yet, we are at just the beginning of a long-term shift to digital,” says David Stubbs, head of global investment strategy at JP Morgan Private Bank.
The bank expects the number of 5G smartphones purchased by consumers to double to 450m. But, as significant as 5G is for the consumer market, the real opportunity could lie in enterprise applications. Manufacturing will account for just under 20 per cent of 5G-enabled revenue opportunities over the next decade, the second largest contributor behind healthcare.
The factory of the future will likely use 5G-technology to design and assemble products virtually, with AI predicting when a product needs maintenance.
“The pandemic accelerated our move to automation, as robots do not get sick or spread viruses. Automation can also drive cost savings and increase productivity, which are key to profit recovery, and the recent trade tensions between the US and China have incentivised producers to localise supply chains,” states Mr Stubbs.
“If the past decade was about investing in the technology sector itself, the next decade will reward investing in disruptors in sectors undergoing technological transformation” says UBS’s Mr Haefele. The Swiss bank recommends investors reallocate existing technology exposure into “the next big thing”, which will materialise within the healthtech, fintech and greentech spaces, or to be enabled and accelerated by the global rollout of 5G technology.
Telehealth plays a critical role
In healthcare, new business models have gained traction during the crisis, making the sector more efficient. “One trend we have seen set in motion amid the coronavirus outbreak is the rise in telehealth platforms and apps,” observes Mr Haefele. To manage hospital capacities, telemedicine has offered an option of keeping routine medical care without risking exposure to the virus or further straining the healthcare system. Also, health technology will play a critical role in improving the efficiency and quality of healthcare in the decade ahead.
Global healthcare spending reached $7.8tn (10 per cent of gross domestic product) in 2017, according to the World Health Organization. Yet a significant proportion of this — up to 25 per cent in the US, according to JAMA — was wasted in 2019 due to failures of coordination, pricing, or delivery, or overly complicated processes and treatments. Against this backdrop, and with the global over-65 population set to grow by 60 per cent, to one billion by 2030, there is significant growth potential for healthtech.
The pandemic has also triggered a dramatic shift toward contactless and mobile payments. The pandemic will likely accelerate the shift toward fintech-based digital solutions as the experience of lockdown is encouraging consumers to adopt, or increase their use of digital services, such as e-commerce, video streaming, food delivery and online education, usually paid for via mobile or online payments. Technological innovation is facilitating banking and financial services, spurring significant growth of fintech firms.
The rollout of 5G creates opportunities in several industries. “Many of the changes we have experienced during the crisis will require increased reliance on technology and improved IT infrastructure to support increased connectivity, and 5G enables myriad business models,” explains Mr Haefele.
Potential applications enabled by 5G’s high speeds and low latency include fixed wireless access, autonomous driving, immersive augmented and virtual reality technologies, telesurgery, industrial internet of things, distributed computing, artificial intelligence, data-driven agritech and highly connected smart cities.
Several institutions highlight how lockdowns imposed by the pandemic have strongly accelerated digital consumption trends. “The pandemic has brought about a serious change in consumer behaviour, and we think it is pervasive,” states Moz Afzal, global CIO at EFG AM, estimating Covid has catapulted us five years forward in consumer digital spending.
In China, the proportion of online retails sales in goods and services rose has risen to 30 per cent, with the UK growing to more than 25 per cent. While the UK, the US, Germany and France will start to reach China’s penetration rates over time, the next leg of opportunity may well be in Italy and Spain, with less than 10 per cent in online penetration rates today, predicts Mr Afzal. The initial public offerings of Airbnb, DoorDash and various fintech companies around the world in late 2020 show that consumer services are undoubtedly a very big aspect of the trend for consumers to adopt digital solutions.
One emerging sub-theme is ‘click-and-collect’ shopping, where consumers can support local businesses by ordering online and picking up at local shops. This business model is also more environmentally friendly than online shopping, requiring less packaging and transportation.
“It is important to identify which trends are emerging, but these are not always the obvious trends,” says Mr Shing. “Online retail is interesting, but click-and-collect has potential to grow even faster.”
Once themes and sub-themes have been identified, the challenge is to find the solutions which capture their essence. “That could be quite challenging, but is very important because there is no point in identifying the right theme and getting the implementation wrong.”
