The Quoted Managed Fund is a separate class of units in the unlisted Concentrated Australian Share Fund, a Morningstar Gold-rated, high conviction fund that invests in a select group of 20-30 high-quality, undervalued companies listed on the ASX. It has been managed by Hugh Giddy since the fund’s launch in 2010.

Hugh has worked in financial markets since the 1990s, honing his craft with some well-known investors including Allan Gray, Anton Tagliaferro and Kerr Neilson. He is supported by a team of 10 portfolio managers and analysts who undertake rigorous fundamental analysis on every stock in the fund.

IML Chief Executive Damon Hambly says the listing is due to client demand.

“We continue to hear from our clients that they want choice. Choice not only in the assets they invest in, but also the way they invest. We are offering the Concentrated Fund as an active ETF to suit our financial adviser clients that like to invest this way, as well as retail investors who manage their own portfolios.

“As passive investing continues to rise in popularity we are seeing an increasing demand for funds like the Concentrated Fund that offer something significantly different to passive index investing.”

Hugh says he enjoys the constraint and rigour required in choosing a concentrated portfolio.

“Due to the small number of stocks in the fund I select from among the highest quality companies on the ASX, and those I can buy at a reasonable price. The quality of the stocks has meant the fund tends to drop less than the benchmark in tough times, only falling half as much as the benchmark on average*. Low drawdowns have contributed to the fund outperforming over the long term, despite the fund sometimes lagging more frothy markets. Because the fund performs quite differently to the benchmark, it offers diversification benefits for investors while still investing in Australian equities.”

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Damon Hambly

IML’s two flagship funds, the Australian Share Fund and Australian Smaller Companies Fund, this month celebrate a 25-year track-record of delivering better returns than their benchmarks, with better downside protection and lower volatility^[1].

The funds launched on June 30, 1998, in the same year Anton Tagliaferro founded IML, with a singleminded focus on providing attractive long-term returns for clients, with lower volatility than the sharemarket. IML has achieved this by consistently investing in high-quality businesses that are undervalued by the market.

The Australian Share Fund has returned 9.8% per annum since 1998, after fees, 1.3% above its benchmark while, on average, falling 35% less than the market on months when it falls. $10,000 invested with the fund in 1998 would now be worth $103,757 after fees, $26,783 more than its benchmark^[2].

The Australian Smaller Companies Fund has returned 12.3% per annum since 1998, 6.7% above its benchmark while, on average, falling 54% less than the market on months when it falls. $10,000 invested with the fund in 1998 would now be worth $179,779 after fees, $140,960 more than its benchmark^[3].

IML Chief Executive Damon Hambly, says that IML’s investment philosophy is just as relevant today as it was in IML’s early days: “IML’s style of investing is particularly well suited to periods of higher sharemarket volatility and economic uncertainty, like we are experiencing right now. We have a strong track record of both protecting clients’ capital during market declines and delivering returns with lower volatility. We are also proud of our history of active ownership – of standing up for shareholders, and challenging boards and senior management when we believe shareholders’ best interests are not being served.”

Back in 1998 Google was founded, the ‘Tech Boom’ was in full swing and unprofitable dot.com stocks were becoming all the rage. It was a tough time to attract investors to a value and quality fund. It wasn’t until the ‘Tech Wreck’ started in March 2000, and share markets plunged around the world, that many investors started returning to investment fundamentals. In 2002, as the fallout from the Tech Wreck continued, the ASX 300 fell 8.64%, while IML’s Australian Share Fund was up 4.25%.

Simon Conn is Senior Portfolio Manager for the Australian Smaller Companies Fund. He has been at IML since the company launched, working with Anton to put in place the investment processes and frameworks that continue to this day. Speaking about the fund’s 25th anniversary, he said: “New funds are launched all the time, so to have achieved such a great track record of returns over 25 years is a real vindication of our investment style. What is more satisfying to me than the numbers though, is the way these returns have been delivered.

There are a lot of low-quality companies in the smaller end of the market, so our disciplined focus on quality companies with a strong competitive advantage, recurring earnings and capable management which are trading at reasonable prices has helped us grow capital over time, while protecting our clients’ capital during more difficult times.

Another pleasing outcome of the fund has come from our focus on profitable companies that pay dividends, this has allowed the fund to continually generate income from its underlying investments and enabled us to pay a distribution every six months since 1998.

I’d like to thank all of our clients who have trusted us with their hard-earned savings for so many years, we hope you will continue to trust us for many years to come.”

Daniel Moore and Hugh Giddy are the portfolio managers for IML’s Australian Share Fund, both joining the firm in 2010. Commenting on the fund’s anniversary Hugh said: “It’s a responsibility that Daniel and I take very seriously, managing a fund with such a long, proud history that has played a key role in many of our clients’ investment portfolios.

I think the key to our success over so many years has been sticking to the investment philosophy that we know works – our relentless focus on both quality and value – while at the same time continuing to improve our investment processes.”

——–

Notes:
[1] Benchmark for the Australian Share Fund is the ASX 300 Accumulation Index and benchmark for the Australian Smaller Companies Fund is the ASX Small Ordinaries Index, excluding property trusts. Stats are from 1 July, 1998 to 1 July, 2023. Sources: Morningstar Direct, IML. Past performance is not a reliable indicator of future performance.
[2] Ibid.
[3] Ibid.

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Louise Watson

Natixis Investment Managers has published the results of its annual Global Survey of Fund Selectors, which found that, against the backdrop of continued market volatility and negative interest rates, professional buyers are positioning portfolios to capture the upside potential in 2021.

The survey of 400 fund selectors at independent financial advisors, registered investment advisors, insurance company investment platforms, private banks and family offices around the world, representing $12.7 trillion in assets, was conducted in November and December 2020.

A risky world continues to struggle with Covid

Despite the newfound optimism provided by the approval of the Pfizer and Moderna vaccines towards the end of 2020, six in ten fund selectors believe the Covid ‘new normal’ is here to stay and two-thirds predict the global economy will not recover from Covid in 2021.

Significant concerns about the pandemic and politics have not necessarily translated into a negative view on markets and the majority (80% of those surveyed) believe central banks will support the market in the event of another downturn.

According to respondents, volatility and negative rates were considered the first and second portfolio risks for global fund buyers in 2021, at 49% and 39% respectively. Other risk concerns included inflation (37%), a credit crunch (34%) and liquidity issues (25%).

With more fiscal and monetary stimulus likely to come from policy makers, fund selectors think stocks have even more room to run in 2021 and will look around the globe for opportunities. Projections at the end of Q4 2020 favoured a risk-on strategy, with 61% calling for small-caps to outperform large-caps, 60% predicting emerging markets to outperform developed markets, and 66% saying aggressive portfolios will outperform defensive in 2021.

Fund selectors will be focusing on finding the potential bright spots in difficult markets and 70% forecast active investment will outperform passive in 2021. Damon Hambly, CEO for Natixis Investment Managers in Australia, commented: “2020 marked a year of extreme challenges for markets that went beyond the health pandemic, including climate events and natural disasters, political tensions and the fastest market correction in history. Uncertainty continues and concerns are mounting that financial markets may have entered bubble territory. However, fund selectors surveyed view market risk as an opportunity, while acknowledging close analysis is required to uncover the opportunities to generate alpha for clients.”

The glimmer of hope sheds light on opportunity

According to the survey results, optimism carries over into sector views and pro buyers are particularly bullish on healthcare, with 56% of those surveyed calling for the sector to outperform, followed by consumer discretionary (46%), information technology companies (45%) and energy (44%) and financials (44%).

ESG investing has remained a consistent focus area for global fund buyers. ESG strategies were a proven winner from the market turmoil in 2020 and 57% of respondents believe outperformance will continue in 2021.

To access the full breadth of opportunities in the market, more than half of fund buyers intend to add to their model portfolios offering and enhance their lineup with specialty strategies for ESG and thematic investing.

Louise Watson, Managing Director: Head of Distribution for Natixis Investment Managers, Australia & New Zealand, said: “It’s clear these findings show us that moving into 2021, fund selectors will embrace the fact that Covid has fast-tracked the case for ESG and impact investing. Not only has the pandemic spurred an economic crisis, but it has also highlighted a growing social awareness and eagerness for ESG-friendly investment products. This means we’ll likely see fund selectors respond to this demand by increasing their ESG offerings over the next two years.”

Adapting asset allocation

In an environment of low to negative interest rates and slow growth, the survey revealed that value investing is making a comeback in 2021. Entering 2020, fund buyers focused their attention on sectors with strong secular growth drivers, while conversely, in 2021, 63% of fund buyers anticipate that value stocks will outperform growth.

Over one third (36%) of fund selectors surveyed intend to reduce their US equity holdings to capitalise on the opportunities presented by market performance in other territories, with 55% planning to acquire APAC stocks.

Against a backdrop of continued market volatility, fund buyers seek to reorientate portfolios to take advantage of the emerging markets opportunity beyond Asia, with 65% of participants stating that emerging markets are more attractive now than they were before Covid-19. Moreover, 52% of participants confirm that they will be increasing their emerging markets positions.

Concerns about investor risk appetite

Given that fund selectors see the potential for greater volatility and are projecting value stocks to outperform growth, 83% believe markets will favour active investments in 2021. Commitment to active strategies was likely reinforced last year, when two-thirds say active investments on their firm’s platform outperformed during the market downturn.

There is growing concern amongst professional buyers that individual investors will be able to successfully navigate the risks they face in 2021. The strong market performances throughout the pandemic is likely to have caused retail investors to take on risk more carelessly than before Covid-19 and 78% of fund buyers have concerns that increased volatility will cause individuals to liquidate their investments prematurely.

As a result, fund selectors see their firms transforming the investment offering to achieve greater consistency across client portfolios to better meet client needs, with 80% saying the emphasis is on quality rather than quantity. Given the focus on riskier, more volatile assets and concerns about potential liquidations, more than half (54%) among the 295 professional buyers whose firms offer clients model portfolios anticipate that they will move more clients to model portfolios in 2021.

Mr Hambly, concluded: “In order to adjust to the new Covid normal, fund selectors have altered both their allocation strategy and product offering to better adapt to the pandemic market and new client needs, such as growing investor demand for ESG strategies. Whilst fund selectors may not think the economy will recover to pre-pandemic levels this year, they are taking on these “unprecedented” times with a clear, measured plan that will lay the groundwork for years to come.”

Read the full report.

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Damon Hambly

Natixis Investment Managers has announced that its global macro affiliate, H₂O Asset Management, has been awarded an $80 million mandate. 

The mandate was awarded to the newly created H₂O Australian Dollar Share Class Adagio Fund.

Damon Hambly, CEO for Natixis in Australia, said: “We are delighted to announce a new client for our affiliate, H2O Asset Management. The client’s decision shows further recognition in the expertise of H2O in generating alpha.”

H2O CEO, Bruno Crastes, commented: “The share class was created for Australian wholesale investors looking for the ability to generate alpha across FX, rates and credit with a proven process and a 20 year track record in the industry”.

Louise Watson, Managing Director for Natixis in Australia, said: “In a time when investors are seeking differentiated sources of alpha for a compelling fee, H2O’s returns in global macro – from bonds and currencies in particular – have outstripped some of the world’s best performing managers.

“H2O has built a high-performance culture where ideas are generated through deep research and long track records of analysing investor behaviour, investing across regions and financial instruments.”

H2O Adagio is an absolute return strategy managed with an annual ex-post volatility target comprised between 2% and 4% over the recommended investment horizon of two years. It invests in fixed income (sovereign debt, investment grade credit, high yield) and currency markets. The H2O Adagio Fund has delivered investors a 4.31% p.a. return (after fees) since inception August 23 2010 to October 31 2018, generating 4.26% p.a. above the fund’s benchmark, EONIA, over the same time period.

H2O is a specialist in global macro multi-strategy investments. It was launched in 2010 and has US$29.8bn of assets under management as of end of September 2018. The London-based manager’s investment philosophy is based on a top-down, unconstrained approach​. It has a strong currency contribution and limited exposure to credit.

———-

[1] Cerulli Quantitative Update: Global Markets 2017 ranked Natixis Investment Managers (formerly Natixis Global Asset Management) as the 15th largest asset manager in the world based on assets under management as of December 31, 2016.
[2] Net asset value as at September 30 2018, Assets under management (“AUM”), as reported, may include notional assets, assets serviced, gross assets and other types of non-regulatory AUM.

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Damon Hambly

Australian retirees’ wellbeing is again ranked 6th in the world for the third year running, according to new research from Natixis Investment Managers. Australia’s ranking is largely attributed to an improvement in the “Finances” sub-indices, and stability in the “Health” and “Material Wellbeing” sub-indices, where it ranked 4th, 13th, and 21st respectively.

The 2018 Global Retirement Index (GRI), released today, assesses 43 countries on factors that drive retirement security, providing an overall ranking and percentage score as an indicator of the attractiveness of a country’s retirement environment. The index is made up of four sub-indices – Material Wellbeing, Quality of Life, Health, and Finances in Retirement – based on 18 indicators, including life expectancy, income per capita, old age dependency, inflation and real interest rates, among others.

Global high regard for Australia’s superannuation policy

Commenting on Australia’s overall ranking, Damon Hambly, CEO Australia at Natixis Investment Managers, said: “Australians should be proud of our ranking, largely attributed to our compulsory superannuation policy, considered among the best retirement systems in the world. We have performed better as a country in terms of the strength of our Finances in Retirement. However, the nation ranked 21st for Material Wellbeing, due to lower scores for income equality and income per capita indicators.
“Despite the country’s good results overall, revelations from the Royal Commission show that Australia still has further to go in terms of improving standards in our financial services sector, which is central to the quality of retirement outcomes.
“Strong social programs, widely accessible healthcare and low levels of income inequality are the hallmarks of high-ranking countries, and these are all evident in Australia. However, no country is immune from the challenges associated with an ageing population, higher life expectancies and low interest rates, all of which strain government resources and put more of the financial burden on individuals.”

Australia’s environmental performance maintained

Despite being in the top 10, Australia still has work to do on the environmental front. In 2017, Australia moved up significantly due to declines in CO2 emissions and the increased prevalence of renewable energy. While Australia has maintained its ranking, it is now ninth-lowest for environmental performance, despite holding the highest overall air quality score.

“The GRI shows that Australia’s environmental results are decidedly mixed. But we know from this year’s Natixis Global Institutional Investor Survey that the intention is certainly there, so things should change for the better. The Survey revealed that investor focus on environmental factors is stirring demand for ESG investment, which 59% of institutions say contributes to performance. And 71% of millennials say they would save more if they knew their investments were going towards a social good.

“So offering more ESG options could be one way that fund managers encourage young people to contribute more to their superannuation and engage with their money. From a local perspective, we’ve certainly seen a rise in investor demand for ESG offerings within superfund offerings, and a strong interest from local institutions in Natixis affiliate manager Mirova, which specialises in ESG and impact investing.” said Damon Hambly, CEO Australia, Natixis Investment Managers.

Investors urged to take a long-term view, embrace alternatives

One of the key themes to emerge from the GRI is the need for stakeholders in the financial services sector to re-evaluate old assumptions in order to improve retirement outcomes. A long-term view of investing is considered essential, and investment managers are urged to refrain from encouraging a focus on daily and quarterly returns that obscure long-term thinking and encourage emotional investment decisions.

“As an industry, we must have the ability to help investors navigate the complex factors which contribute to retirement security, and that means building portfolios with a focus on risk, rather than short-term performance goals.

Our latest survey of institutional investors showed that 70% look to alternatives to diversify portfolio risk and 73% of financial advisers say the same. Changing demographics have increased the burden on governments, and this means that asset managers need to work with investors to understand how they can diversify their portfolio and navigate changing economic conditions over the long term,” said Damon Hambly, CEO Australia, Natixis Investment Managers.

Global trends

Policy makers are encouraged to learn from the following major variables which, when well-managed, help ensure a more secure retirement.

• Economics:  Monetary, fiscal and healthcare policies all play a critical role in ensuring retirees are self-sufficient. This security extends beyond savings vehicles, and must focus on the fact that a growing population will need to live on a fixed income for many years.
• Access: As more of the responsibility for funding falls to individuals, they must be encouraged to start early and contribute more. Policy makers and employers need to work together to help them succeed.
• Incentives: Favourable tax treatment of savings has been shown to be a powerful tool to encourage positive behaviour. The asset management industry needs to provide better long-term solutions and take steps to keep investors on track.
• Engagement: Encouraging individuals to engage in their retirement plan, including super as well as any other savings. When they fully understand their goal, they can make better decisions around risk and long-term outcomes.

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Damon Hambly

Keeping clients’ irrational emotion in check is a challenge for eight out of ten Australian financial advisers, but keeping up with changing regulation is causing headaches for nine out of ten, according to the 2018 Natixis Investment Managers Global Survey of Financial Professionals, (the Survey).

Seventy-eight percent of global financial advisers say they think the prolonged bull market has made investors too complacent about risk, and just over 80% of Australian financial advisers say the same thing. Even more concerning is the fact that 57% of Australian financial advisers say they are worried their clients don’t understand the risks in the current environment, whereas only 43% of global advisers are similarly concerned.

Almost three-quarters of Australian investors don’t even recognise risk until it has been realised in their portfolio, according to their advisers, slightly below the almost eight in ten globally

Active management front and centre in ‘very challenging’ low-yield worl

Australian financial advisers agree that active management is the best antidote to choppy and uncertain markets, but they remain more confident than their global counterparts in their ability to find returns in a low-yield world. Only 5.3% of Australian advisers said that it was ‘very challenging’, whereas 25.3% of global advisers did.

Geopolitical events were judged likely to have a negative impact on performance by 75% of Australian investors, whereas globally, only 58% were said they would. At the same time, Australian advisers were more bullish when it came to return expectations, citing likely long-term performance as 6.4%, compared with 5.5% globally.

Financial advisers globally are focused on managing clients’ emotional responses to what are expected to be volatile markets. Active management as well as increased exposure to alternative investments to mitigate risks were cited as the primary tools at their disposal

Despite indicating in Natixis’ 2016 survey that they would moderate their active allocation to 63%, financial advisers around the world actually increased allocations to active strategies slightly over the past two years, from 68% in 2016 to 69% this year.

Australian investors, on the other hand, are slightly less exposed to active strategies, at 63.5% of their portfolio. Eighty-two percent of Australian advisers said they used passive investments because of their lower fees, but at the same time, 73% said that investors have a false sense of security when it comes to passive investment.

Damon Hambly, CEO for Natixis Investment Managers in Australia said: “In light of on-going revelations from the Royal Commission, and the increased focus on regulation in Australian financial services, it is not surprising that over 90% of financial advisers say keeping up with regulation is challenging, compared with only 83% of their global counterparts. At the same time, and despite the volatility that has returned to the markets after nine years of steady growth, Australian financial advisers are more bullish than their international counterparts about their ability to find returns.

Active management is in the spotlight as the means to achieve portfolio diversification, risk management and return generation, as are alternatives, and the top two choices for Australian adviser are infrastructure (55.4%) and real estate & REITs (35.3%).

Alternatives gaining favour globally

Almost a third (73%) of global advisers recommend alternatives, with different strategies advocated for different desired outcomes.

For diversification, respondents most commonly cited multi-alternative strategies (48%) and real estate (39%) and for fixed-income replacement, the top choice to provide a source of stable income was real estate (22%). Fifty-four percent of Australian advisers said that real estate was also an effective portfolio diversifier.

In conclusion, Mr Hambly said:“Financial advisers globally see rising rates, the threat of geopolitical events and asset bubbles as the biggest potential threats to the market, and Australian advisers are no different.

When advisers were asked about their top portfolio concerns, 68% of Australian advisers said asset price volatility spikes were their biggest worry, followed by interest rate hikes (59.3%) and low yields (41.3%).

It is interesting that globally as well as here at home advisers said that acting as the voice of reason, helping clients make rational decisions, and guiding them through the emotional side of investing was a major part of their role, with over 50% of Australian advisers saying this was very important. However, for Australian advisers, this had to be balanced with justifying fees ,which 69% said was important or very important to their success.

Advisers’ grasp of the risks inherent in volatile markets combined with their ability to look beyond short-term performance will be key to success. And here in Australia, where 90% of advisers already find dealing with regulation challenging, the on-going impact of the Royal Commission is likely to provide them with yet more to focus on.”

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Damon Hambly

While some investors may have been surprised by turbulent markets at the start of 2018, professional fund buyers have been expecting a spike in volatility for quite some time.

Almost eight in ten (78%) said they have been surprised that volatility had remained so low for so long and nearly half of them (49%) cited asset price volatility spikes as one of their top concerns for 2018. However, they are split on the impact volatility has on their portfolios, with 39% who see increasing volatility as a threat, while 38% anticipate a positive effect on portfolio performance.

Among the other main findings of the study: professional fund buyers are turning to active management and as 78% of individual investors worldwide1 want their investments to align with their personal values, professionals are starting to see as much alpha benefit as risk management in ESG investments.

Natixis Investment Managers surveyed 200 professional fund buyers – responsible for selecting funds included on private bank, insurance, fund of fund, and other retail platforms – and publishes the results today. Damon Hambly, Australian CEO at ‎Natixis Investment Managers commented, “The split in opinion over the impact volatility will have can be interpreted in two ways. The downside opinion is likely built on the view that after a long period of steady growth, we are due for a correction that will bring security prices back down to earth.

However, on the upside, increasing volatility could signal higher return dispersions and greater potential to generate alpha. Interestingly, whatever the interpretation may be, overall professional fund buyers are turning to active management to diversify their portfolios, mitigate risk and enhance return”.

Evolving portfolio strategies to the new reality

They may be split over the impact of volatility on portfolios but more than eight in ten (82%) of professional fund buyers are confident that their average return target of 8.4% in 2018 is realistically achievable, as they evolve investment strategies to meet the new market reality.

The most popular strategies for managing risk include diversifying by sector (91%), risk budgeting (80%) and increasing the use of alternatives (75%), among the professional investor community.

Two in five portfolio professionals (42%) say they will manage duration to mitigate principal losses in bond portfolios. However, three in five (62%) say that fixed income no longer provides its traditional risk management role, with 20% increasing the use of alternative investments and 18% reducing fixed income exposure overall.

Damon Hambly said, “The survey results suggest that professional fund buyers are more likely to make directional shifts in where they invest, rather than wholesale allocation changes. In fixed income they will look to shorten duration on bonds and implement alternatives to enhance income. In equities we’re seeing a preference for European and emerging market stocks. With alternative investments, they turn to private equity to generate alpha and manage volatility with hedged equity and managed futures. They see the long term value that can be generated by active management and they implement it through a broad range of strategies.”

ESG: a different kind of value investing

As they look to deliver on the expectations of end investors, professional fund buyers have an opportunity to incorporate ESG (Environmental, Social, and Governance) investments that will help meet the preferences of the 78% of individual investors worldwide who say they want their investments to align with their personal values and the 72% who say they want their investments to do social good. However, fund buyers are reporting that ESG may not be getting the recognition it deserves, just four in ten (40%) surveyed say ESG is incorporated in their firms’ investment process.  Some of the perceived barriers keeping them from implementing ESG are the lack of transparency (42%), conflicts between short term returns and long-term sustainability goals, and potential green-washing2 by companies selling investments as ESG that do not meet the standards they are claiming (37%).

“These findings are striking and cannot be ignored. The industry as a whole must be vigilant about green-washing and make sure that investors are getting the underlying investments and impacts that ESG products are claiming. So called responsible investing products are now numerous, that’s why we need more transparency, standards and labels. This will help to provide investors with the information they need and the sustainable products they want, the ones truly following ESG principles, meeting clear standards and measuring impact”, explains Damon Hambly.

“We clearly hear from investors that they are concerned about issues that go beyond the balance sheet, they want to own companies that reflect their beliefs. This is particularly important at a time when ESG is at the inflection point where investors starting to see as much alpha benefit as risk management. Indeed, a majority of institutional investors (59% / 45% of fund buyers agree) believe there is alpha to be found in ESG and 56% (45% of fund buyers agree) believe ESG investing mitigates risks”.

Implementing alternative investments

Professional fund buyers are increasingly looking to diversify portfolio risk and 70% believe it is essential to invest in alternatives to do so:

• More than three in five (65%) believe that traditional asset classes are too closely correlated to provide distinctive sources of return
• A range of alternatives can help with broader portfolio diversification, with 52% highlighting managed futures, almost half (47%) commodities, 44% global macro, 43% infrastructure and 38% private equity.

In anticipation of increased volatility, half (51%) of those surveyed see the potential of hedged equity strategies to absorb market shocks while 36% say managed futures are well suited to an increasing volatile market environment

However, alternatives are not only being employed to help diversify portfolios. Over a third of professional fund buyers see alternative investments as an effective strategy for generating alpha:

Almost three in five (58%) report that their organization is increasingly using alternatives as a replacement for fixed income, with a clear preference for real estate (52%) to generate income

Four in ten believe infrastructure is well suited to addressing income objectives, while more than a third (35%) see private debt as an effective income generation vehicle

Over half (58%) identified private equity as an effective strategy to generate stronger returns, with a third (31%) also highlighting private debt

“Professional fund buyers are facing a range of portfolio objectives that are made challenging by the current market environment. Whether they’re looking to generate income in a low yield environment, obtain alpha while correlations are high, minimize the effects of volatility or enhance overall diversification, professional investors favour active management and expand their capabilities with alternative investments”, commented Damon Hambly.

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Damon Hambly

Natixis Investment Managers (Natixis), has announced that its socially responsible investment affiliate Mirova, will offer its Global Sustainable Equity Strategy to Australian institutional investors. The investment will be available via a locally domiciled unit trust vehicle.

Mirova is a pioneering socially responsible investment manager, with over US$10.8 billion in investments in listed equities, infrastructure, green bonds, social impact investing and natural capital strategies. Mirova’s philosophy is based on the conviction that integrating sustainable development themes in investment decisions can create value for investors.

Natixis Australia CEO, Damon Hambly, said the move follows increased demand from local investors for environmental, social and governance (ESG) investment options.

“Our 2017 global survey of institutional investors showed that attitudes to ESG investing are changing rapidly – dedicated sustainable investments are playing a greater role in institutional investors’ strategies across all asset classes. We are finding that this is especially the case in Australia right now, and the trend will likely continue to get stronger.

“The really encouraging aspect of the findings is that investing in ESG is now about far more than simply doing the right thing. Nearly two thirds of investors said alpha could be found in ESG investing, and that ESG also significantly mitigates risk,” said Mr Hambly

The Mirova Global Equity strategy invests in global equities which combine strong financial performance with sustainable development. Investment decisions are made with a long term focus, and in line with eight major sustainable development themes: consumption, energy, resources, buildings and cities, ICT, health, mobility and finance.

“Mirova leans on a large Responsible Investment Research team and its teams have been pioneers of several ESG strategies and asset classes . As a result Mirova offers a cross asset expertise and a well diversified range of strategies – something we believe is unique to the market and in demand from Australian investors. That’s why we’re really pleased to be able to offer Australian investors the opportunity of investing in this strongly performing fund alongside their global counterparts,” continued Mr Hambly.

In conclusion, Mr Hambly stressed the disciplined investment process which has allowed the strategy to produce strong returns since its inception in 2013.

“The Mirova investment team assess companies not only on their ESG credentials but on their business model, whether they have a strong management team, robust financials and an attractive valuation.

“There’s no question that the appetite for sustainable investment is growing – investors are seeing first hand that with the right investment manager investing ethically and sustainably can also translate into strong investment returns over the long-term,” he said.

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Damon Hambly

Volatility finally roared back to abnormally tame markets, but most institutional investors were already bracing for impact; their efforts to diversify and build durable portfolios should now pay off, according to new survey findings released by Natixis Investment Managers.

78% of institutional investors expected stock market volatility to spike in 2018, and they are making opportunistic allocations to active management and alternative investments in order to meet average long-term return assumptions of 7.2% this year.

Natixis’ Centre for Investor Insight surveyed 500 institutional investors around the world to gain insight about how they are balancing long-term objectives with short-term opportunities and pressures. Seven in 10 investors agreed that the addition of alternatives is important for diversifying portfolio risk. Yet, they see a number of alternative strategies playing distinct roles in their portfolios.

Alternatives to diversify, manage mounting risks, and pursue returns

The survey found that investors continue to turn to alternative investments with 70% of them saying that it is essential to invest in alternatives to diversify portfolio risk and over half (57%) think investing in alternatives is necessary to outperform the broader market.

Damon Hambly, Australian CEO, Natixis Investment Managers, said: “The ‘lower for longer’ environment means we are seeing institutional investors favouring alternative assets as a means of risk mitigation, and accounting for around 20% of the average institutional portfolio. Looking at the Asia Pacific market specifically, institutions were mostly expecting to increase their allocation to all alternatives, with the most popular being private equity, REITs and real estate and infrastructure.”

When asked to match the best alternative strategies with specific portfolio objectives, institutional investors indicated the following:

• Diversification: Institutional investors most commonly cite global macro strategies (47%), commodities (41%) and infrastructure (40%) investments as best for diversification.
• Fixed-income replacement: Top choices for providing a source of stable income as interest rates rise and the 30-year bond bull market ends include infrastructure (55%) and private debt (47%).
• Volatility management: Institutions cite managed futures (46%) and hedged equity (45%) as best suited to manage volatility risk.
• Alpha generation: Traditional markets have generated attractive returns, but institutions see opportunity to outperform. Seven in 10 (72%) cite private equity as their top choice among alternatives for generating alpha. They also see hedged equity (45%) as useful in meeting this objective.
• Inflation hedge: Institutions view commodities (56%) and real estate (46%) as best for inflation hedging strategies.

Damon Hambly, Australian CEO, Natixis Investment Managers said the challenges faced by local institutional investors were consistent with their global peers.

“The return of market volatility is a timely reminder for institutional investors of the need for a consistent approach to portfolio diversification. As allocations decline for the third consecutive year, investors are questioning the benefits of passive strategies, with nearly 60% saying passive investing artificially suppresses volatility and distorts relative stock prices, 57% fearing it creates risk/return trade-offs, and 63% believing it increases systemic risks (63%). As a result, investors are increasingly turning to active managers and alternatives for the tools and flexibility to diversify their portfolios and mitigate risk,” said Mr Hambly.

And while alternative investments can present a range of portfolio risks, 74% say the potential returns of illiquid investments are worth the risk. That said, two-thirds report that solvency and liquidity requirements has created a strong bias for shorter time horizons and highly liquid assets, and hidden risks lurking with the dynamic macroeconomic and regulatory market makes it even more challenging for institutions to balance short-term opportunities and long-term objectives.

Active allocations continue to rise

Over three quarters (76%) of institutional investors say the current market environment is likely to be favourable to active management in 2018. In 2015, the survey found that institutions expected that 43% of total assets would be invested in passive strategies by 2018, but in reality the figure has been far lower, at 32% by 2017, with institutional investors projecting just a 1% increase in the next three years. More than half (57%) of those surveyed also said they expect active to outperform passive over the long term, despite three quarters (76%) saying alpha is becoming harder to obtain as markets become more efficient.

Nine in 10 institutional investors say minimizing management fees is one of the strongest drivers for passive investment strategies, but three quarters (75%) said they were willing to pay higher fees for potential outperformance.

The survey also highlighted a preference for active strategies in order to gain exposure to non-correlated asset classes, with three quarters (75%) citing it as one of the foremost reasons for a preference for active over passive instruments. Similarly, three quarters (75%) prefer active over passive to access emerging market opportunities, while 69% favour active strategies for providing risk-adjusted returns and more than seven in 10 (73%) for providing downside protection.

Damon Hambly commented, “The ‘active versus passive’ debate doesn’t look set to disappear, as institutions have signalled a gradual shift towards active strategies. The traditional arguments about the cost-saving potential of passive products are being challenged. For example, many institutions already see the long-term value of active management, and the access it brings to a broader range of asset classes.”

New attitudes toward ESG investing

Institutional investors have also signalled a more active approach to managing environmental, social and governance (ESG) issues, with three in five (60%) now integrating ESG investing into their approach.

The number of institutions that see alpha to be found in ESG now outweighs the number focused chiefly on risk mitigation, and their convictions about the efficacy of this approach are strong with the vast majority saying that incorporating ESG into investment strategy will become a standard practice within the next five years.

• 59% say there is alpha to be found in ESG investing
• 56% believe ESG investing mitigates risks (e.g. loss of assets due to law suits, social discord or environmental harm)
• 61% agree incorporating ESG into investment strategy will become a standard practice within the next five years

Whereas a year ago, the top reason institutional investors were integrating ESG was because of their firm’s mandate or investment policy, almost half (47%) say the incorporation of ESG is now driven by the need to align investment strategies with organizational values, while two fifths (41%) say the primary driver has been the need to minimize headline risk, a 21% increase on 2016.

“Attitudes towards ESG investing are changing dramatically, with the vast majority of institutions now saying that ESG leads to alpha generation and will become standard practice in less than 5 years,” said Dave Goodsell, Executive Director of Natixis’ Center for Investor Insight. “Institutional investors have witnessed the impact of environmental, social and governance events at numerous companies in recent years and watched as stock values declined right along with corporate reputations.”

Lower rates mean higher liabilities

One of the long-term challenges cited by institutional investors is longevity, with 85% of insurance companies, 78% of corporate pension plans and 76% of public pension plans all challenged to meet their longevity risk.

Institutional investors have had to perform a balancing act over the past 10 years, navigating low interest rates, while facing rising liabilities and an increasingly regulated environment. While in the short term the majority feel equipped to meet their return expectations, there is an acute awareness that finding returns over the long term will be challenging. In light of this, institutions have adopted a long term investment approach, with few making radical defensive moves today.

“Low rates may have helped to boost returns by increasing the value of bond assets held in institutional portfolios, but – at the same time – the low-rate environment has increased the present value of liabilities, exacerbating the pressure to effectively manage liabilities. The prospect of rising interest rates presents a bright spot for a number of institutions, as it would decrease the present value of their liabilities. This is one of the reasons why institutions cite managing duration as their top strategy for navigating a rising rate environment^[1]”, said Damon Hambly.

However, liability management strategies are not a straightforward solution for institutions. Seven out of ten (70%) said they are incorporating liability management into their portfolio strategy and yet three in five still think organizations will fail to meet their long term liabilities despite adopting LDI techniques. Despite the rising popularity of strategies such as cashflow-driven investing, six in ten (60%) say there is a lack of innovation within LDI solutions, while almost two thirds (63%) say decision makers are placing greater importance on achieving short-term performance results, over meeting long-term liability matching objectives.

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