Kathryn McDonald
Income investors can implement a low-carbon strategy without sacrificing income, according to new research from AXA Investment Managers (AXA IM).
Hosting a series of roundtables for Australian institutional and wholesale clients and consultants across the country this week, AXA IM presented evidence showing that global equity dividend strategies can incorporate preferences for high environmental, social and governance (ESG) performance and reduced carbon without sacrificing yield.
The leading investment manager also provided insights into another rising trend — factor investing — outlining research showing how factors such as value and low volatility perform radically differently across countries and regions.
While momentum investing works particularly well in Australia, for instance, it performs poorly in Japan, challenging the view that factor investing can be implemented globally in a passive manner.
The research presented also highlighted the need for some active management to complement factor investing.
A May survey of 105 Australian investors by AXA IM found that 73% are considering ESG integration across all asset classes, while 54% are using factor investing in their equity portfolios.
Low correlation between carbon and dividends
As part of its research into ESG strategies for income investors, AXA IM analysed 4,200 stocks across emerging and developed markets globally.
The study showed that carbon is heavily skewed towards utilities and materials stocks, two of the sectors that also have high average dividend yields, suggesting at face value that investors might have difficulty cutting carbon investment while maintaining attractive income levels.
However, Kathryn McDonald, Head of Sustainable Investing at Rosenberg Equities, AXA IM, said the study found that most of the carbon is concentrated in a handful of high emitters that exhibit a variety of payout profiles.
Ms McDonald noted that if these high emitters are removed from high dividend strategies, overall dividend yields remain high while carbon emissions are approximately halved, showing there is little real correlation between carbon and income.
“This is proof that you can achieve a very attractive income while avoiding high carbon intensity stocks,” she said.
“For anybody who is committed to a low-carbon stance, the message is don’t think that you need to sacrifice on the income front, because you absolutely don’t.”
A related study also analysed the implications for income investors of targeting green opportunities, such as companies associated with green technology, green buildings and renewable energy. Again, it revealed that in almost every sector—including financials, industrials and even utilities—it is possible to find green opportunity stocks that also deliver high income.
Another element of the study looked at the relationship between good corporate governance and dividend yields or payout ratios. The study found that higher dividend paying stocks on average performed better on corporate governance measures such as protection of shareholder rights, transparency and management incentives. However, it did not find that investing in stocks with better corporate governance on average reduced the likelihood of dividend cuts and dividend cancellation, a major risk for income investors.
“As Australia enters a phase of superannuation decumulation, investors are increasingly preoccupied with how to generate income, as they look to deliver sustainable returns over a longer-term horizon,” said Craig Hurt, Head of Australia and New Zealand at AXA IM.
“Most ESG research to date has focused on growth assets/strategies in the accumulation phase. We focus instead on the role of ESG investing in the retirement phase where income generation is key. We find that dual preference for income and ESG considerations is very important when funds assess their members’ income needs in retirement.
“Our latest research shows that ESG investing can be used to avoid unwanted and uncompensated risks that might harm returns in the future, without hurting short term yields. “
Around the world in less than 80 factors: regional differences matter
In separate research on factor investing across the globe, AXA IM found that native factors —such as value, quality, sentiment and low volatility — varied in behaviour across different regions. Indeed, sometimes the same factor had little correlation across different regions of the world.
For instance, the research found that returns from momentum investing vary markedly from country to country. Over the last 20 years, the most successful place to ‘follow the herd’ has been Australia, whereas investors in Japan have been much less likely to follow market trends.
Similarly, while low volatility investment has paid off in the U.S. over the past two decades, the returns from employing such a strategy in Asia have been about half the magnitude.
Michael Kollo, Head of Strategic Research, AXA IM Rosenberg Equities, said the findings highlight the diversity of the factor ‘ecosystem’:
“Factor investing is sometimes represented as a ‘plug and play’ way to boost global portfolio performance, something that you would do in a passive manner.
“This is evidence that how you realise your factor strategy, for example which factors you employ in a particular region, critically impacts the long-term success of that strategy. In other words, factor investing still requires active management to work well. Algorithms need guidance too.”
Locally, AXA IM is managing AUD75 million in an Australian domiciled pooled fund, AXA IM ACWI SmartBeta Equity Fund – a fully integrated ESG equity fund offering local investors a more efficient way of capturing long term equity market returns while incurring lower volatility than a capitalised weighted benchmark.
