Shifts in risk appetite (need for preservation of principal) and return expectations – both at the retail and institutional level have created the need for product manufacturing and research in alternative investment areas. Recent events shaping these shifts include the following:
- Portfolio values of investors globally have shrunk to less than half during the financial crisis.
- The global crisis brought to the fore significant risk of investing into complex and opaque structured instruments.
- Due to limited return possibilities from developed economies, the investment focus had already begun to shift to the high growth emerging economies.
- Rising awareness among investors about responsible investing is influencing their search for alternative investment themes.
These have influenced investors to look beyond traditional investment approaches and themes to generate sustainable returns.
Search for alternative investment areas is intensifying
The three areas which have significantly expanded the frontiers of investment management include:
- Increased investor interest in aligning investment goals with the larger interests of society has given rise to “Socially Responsible Investing (1)” (SRI) – There are many sub sets of this kind of investing – including, but not limited to Green-themes, ESG (Environmental, Social, Governance), Climate change, CSR (Corporate Social Responsibility)
- A general resurgence of faith in influencing a broader sphere of activity, including investments – Islam, Catholic, Jewish funds, Dharma funds, etc
- Newer and emerging investment areas (such as property derivatives, asset-based lending).
The factors driving interest in and growth of investment products which fall under above categories reflect a mix of socio-political trends – corporate governance, awareness of societal obligations, heightened concerns around environment and climate change challenges, innovations in technology and processes, advances in product structures and evolving regulation around all these areas. Adding to the increasing awareness is the better returns (than on the mainstream investment themes) seen on the socially aligned investments. For example, according to a recent Thomson Reuters highlights that performance of 160 SRI funds selected from the Social Investment Forum (SIF) indicated that throughout 2009, SRIs regularly outpaced benchmark funds, often by significant margins. This is true for SRI funds across the world.
Investing world is creating capability in alternative/emerging areas
There is continuing pressure on fund managers to generate alpha and consequently the separation between alpha and beta is getting wider. In order to achieve such separation, funds are also looking at investment opportunities internationally and across asset classes, particularly alternative assets. This has diverted some managed funds from traditional investment assets like equities, balanced and fixed interest securities to alternatives. Apart from introducing innovative products to capture the changing the investor sentiments, new investment vehicles are also emerging.
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Indicative list of funds launched in Europe |
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|
Fund name |
Country origin |
Type |
| BNP Paribas’ Moné Etheis cash fund | France | SRI Fund |
| Aviva Investors Sustainable Future Global Equity Fund | Luxemborg | SRI & Green Fund |
| KBC’s EquiMax Eco Water 04 fund | Belgium | SRI Fund |
| Pioneer’s Global Ecology fund | Italy | Green Fund |
| Bank Sarasin’s Investmentfonds Oekosar Equity – Global fund | Switzerland | Green Fund |
| HSBC Global Investment Funds – Climate Change | UK | Sustainability Fund |
| Source: ValueNotes Research | ||
- The global investment market has witnessed a rise in the number of SRI products launched and indexes tracking them. Many global investment fund houses have launched SRI funds offering a wide range of investment products. Many of the major stock markets have established SRI or sustainability indices that assemble companies in the relevant areas. Some of the most popular SRI or sustainability indices are the Dow Jones Sustainability Index (DJSI), the FTSE4Good Index, and the DAX global Sarasin Sustainability Index. These indices track the performance of companies globally whose core business is in the development and deployment of environmental technologies, including renewable and alternative energy, energy efficiency, and water technology and waste & pollution control.
- There is growing interest to invest in companies whose businesses and technologies focus on goods and services that mitigate the environmental impacts of commerce. According to Global Trends in Sustainable Energy Investment 2009, released by the UN Environment Programme’s (UNEP), an estimated US$155 billion was invested in 2008 in clean energy (more than a four-fold increase since 2004) companies and projects worldwide. UNEP estimates that between 2009 and 2011 a minimum of $750 billion is needed to finance sustainable economic recovery.
- There are funds that invest according to Islamic, Catholic, Jewish, Hindu and Buddhist values, among others. Faith-based offerings have gained traction since the late 1990s and currently represent more than half the total of all SRI funds. Various industry estimates peg the managed assets in faith-based funds at over US$30 billion currently, showing a growth of over 50x over the last decade.
Asset managers are focusing on creating products targeted at different customer segments, moving away from the open architecture (product hypermarkets) model. Vendors are rationalizing their product portfolios, choosing instead to focus on fewer segment centric products, which apart from providing greater scope for innovation, also go to further client relationships.
Demand for actionable research to support emerging investments ideas is increasing
Growing investor interests and matched up products by the investment managers around these evolving themes are creating increasing demand for credible and timely research and competitive intelligence. Fund managers who weave research and intelligence into their operational strategies will find themselves at an advantage as they are able to leverage research-driven insights proactively to spot and address evolving market needs. As a corollary, credible third party research providers, play a crucial role in enabling decision-making at investment management companies.
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[1] Socially responsible investing refers to an investment strategy where the aim is to increase financial return through investments which either positively impact society or do not engage in activities socially/morally/ethically harmful to society.