Fidelity’s locally-based Asian equities team discuss the next chapter of the region’s growth story
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Like all emerging markets, Asia is not immune from periods of heightened volatility and swings in sentiment. While this naturally warrants a certain risk tolerance, the opportunities being created by the region’s long-term structural growth story remain significant. With valuations also attractive - particularly relative to some developed markets - could now be an opportune time to increase or initiate exposure to Asian equities?
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Investment is subject to risk, including the possible loss of the money invested. Diversification does not ensure a profit or protect against a loss. Past performance is not a reliable indicator of future results. Currency movements can affect your investment returns. For more detailed information about the NN (L) Multi Asset Factor Opportunities fund, please refer to the prospectus and Key Investor Information Document available at www.nnip.com. This is a communication issued by NN Investment Partners B.V. (the “Company”), a Dutch limited liability company registered as an overseas company (registration number FC032623) and as a branch (registration number BR017698) in the register of companies for England and Wales, with its registered address at 25 Old Broad Street, London EC2N 1HQ. The Company is authorised by the Netherlands Authority for Financial Markets and subject to limited supervision by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. The research by AF Advisors has been prepared independently without influence of NN Investment Partners. NN Investment Partners cannot be held liable for the accuracy, correctness or completeness of the content thereof. The full report of AF Advisors ‘NN Investment Partners Multi Asset Factor Opportunities, Peer Group Analysis, June 2019’ can be downloaded from the website mafo.nnip.com.
Important information
IN THIS EDITION
CAPITAL: All investors should consider the risks that may impact their capital, before investing. The value of your investment may become worth more or less than at the time of the original investment. The Fund may experience high volatility from time to time. CONCENTRATION: Concentration of investments within securities, sectors or industries, or geographical regions may impact performance. CREDIT: The value of a bond may decline, or the issuer/guarantor may fail to meet payment obligations. Typically, lower-rated bonds carry a greater degree of credit risk than higher-rated bonds. CURRENCY: The value of the Fund may be affected by changes in currency exchange rates. Unhedged currency risk may subject the Fund to significant volatility. INTEREST RATES: The value of bonds tends to decline as interest rates rise. The change in value is greater for longer term than shorter term bonds. BELOW INVESTMENT-GRADE: Lower rated or unrated securities may have a significantly greater risk of default than investment grade securities, can be more volatile, less liquid, and involve higher transaction costs. EMERGING MARKETS: Emerging markets may be subject to custodial and political risks, and volatility. Investment in foreign currency entails exchange risks.
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In this guide, we review how Fidelity’s Asia range offers a different and distinct way of accessing an exciting region.
What is the most urgent dilemma that investors face? Surely it is the need to pursue attractive rates of return while remaining conscious of risk. Portfolios may soon need to withstand end-of-cycle macroeconomic and geopolitical turbulence. In this guide, we look at one potential solution to these contradictory needs. NN Investment Partners Multi Asset Factor Opportunities (MAFO) fund is an absolute return factor fund that strives for capital growth and low correlation to traditional asset classes in investor portfolios. Willem van Dommelen, head of factor investing at NN IP, and Stan Verhoeven, lead portfolio manager in the factor investing team, explain their reasoning and tell the story of MAFO’s performance since 2016 in the face of Brexit worries, US-China trade wars and market volatility.
NN IP’s Willem van Dommelen and Stan Verhoeven on how investors can look beyond economic uncertainty to target long-term returns
What is the most urgent dilemma that investors face? Surely it is the need to pursue attractive rates of return while remaining conscious of risk. Portfolios may soon need to withstand end-of-cycle macroeconomic and geopolitical turbulence.
In this guide, we look at one potential solution to these contradictory needs. NN Investment Partners Multi Asset Factor Opportunities (MAFO) fund is an absolute return factor fund that strives for capital growth and low correlation to traditional asset classes in investor portfolios. Willem van Dommelen, head of factor investing at NN IP, and Stan Verhoeven, lead portfolio manager in the factor investing team, explain their reasoning and tell the story of MAFO’s performance since 2016 in the face of Brexit worries, US-China trade wars and market volatility.
Important Information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Fidelity’s range of Asian equity funds have the potential of having high volatility either from their composition or the techniques used to manage them. The funds can use financial derivatives which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Investments in small and emerging markets can be more volatile than other more developed markets. Changes in currency exchange rates may affect the value of investments in overseas markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Investments in Fidelity funds should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM1019/25049/SSO/NA
This material and its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase, shares or other securities. Investing involves risk and an investment may lose value. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed are those of the author(s), are based on available information and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. Except where registered for public sale, Fund units are offered only to qualified or professional investors on a basis that it does not require the registration of the Fund for public sale. The Fund only accepts professional clients or investment through financial intermediaries. Please refer to the latest Key Investor Information Document (KIID), the Fund offering documents for further risk factors, pre-investment disclosures, and the latest annual report (and semi-annual report) before investing. KIIDs are available in the official languages of each country in which the Fund is registered for sale (please visit www.wellington.com/KIIDs). UCITS Funds are authorised and regulated as a UCITS scheme by the Commission de Surveillance du Secteur Financier-Wellington Management Funds (Luxembourg). This material is provided by Wellington Management International Limited (WMIL), a firm authorised and regulated by the Financial Conduct Authority (FCA) in the UK. CAPITAL: All investors should consider the risks that may impact their capital, before investing. The value of your investment may become worth more or less than at the time of the original investment. The Fund may experience high volatility from time to time. CONCENTRATION: Concentration of investments within securities, sectors or industries, or geographical regions may impact performance. CREDIT: The value of a bond may decline, or the issuer/guarantor may fail to meet payment obligations. Typically, lower-rated bonds carry a greater degree of credit risk than higher-rated bonds. CURRENCY: The value of the Fund may be affected by changes in currency exchange rates. Unhedged currency risk may subject the Fund to significant volatility. INTEREST RATES: The value of bonds tends to decline as interest rates rise. The change in value is greater for longer term than shorter term bonds. BELOW INVESTMENT-GRADE: Lower rated or unrated securities may have a significantly greater risk of default than investment grade securities, can be more volatile, less liquid, and involve higher transaction costs. EMERGING MARKETS: Emerging markets may be subject to custodial and political risks, and volatility. Investment in foreign currency entails exchange risks.
Portfolio Managers Teera Chanpongsang, Jochen Breuer and Hyomi Jie give their market views and discuss how their portfolios take an active, bottom-up approach which maximises the group’s research-led philosophy and seeks to deliver consistent client returns.
Campe Goodman on how impact bond investors can shift the world into a better trajectory
Sustainable investing is growing fast and one of its newest tools – impact bonds – further increases the opportunities available to investors. By using impact bonds, debt investors can pursue returns while putting their money to work on solving the world’s biggest social and environmental challenges.
In this Focus, Campe Goodman, portfolio manager at Wellington Management, discusses the key issues surrounding impact bonds including how capital can be steered towards the most beneficial projects. He also introduces the Wellington Global Impact Bond Fund, which has the goal of addressing some of the world’s most pressing challenges while seeking to provide strong financial returns.
Risks
such as Brexit and the US-China trade war. But will fretting about headlines help them earn decent long-term returns? NN Investment Partners’ Stan Verhoeven thinks not. He argues investors distracted by short-term events should refocus on long-term return targets by building more diversified portfolios.
Asia's maturing leaders
From disruptive beginners to maturing market leaders
Teera Chanpongsang, Portfolio Manager, Fidelity Asia Fund
Inflation outlook
Source: FactSet
Alasdair Ross, Lead Manager - Threadneedle (Lux) Global Corporate Bond Fund Alasdair is Head of Investment Grade Credit, EMEA. Alasdair is lead portfolio manager across various global, euro and sterling corporate credit portfolios including Threadneedle (Lux) Global Corporate Bond Fund, Threadneedle European Corporate Bond Fund, Threadneedle UK Corporate Bond Fund, and is also co-manager on the Threadneedle Credit Opportunities Fund. Between joining the company in 2003 and becoming a portfolio manager in 2007, he was a credit analyst responsible for covering the TMT, utility and energy sectors, as well as the sterling whole business securitisation sector. Prior to joining the company, Alasdair worked at BP plc in a rotation of commercial roles. Alasdair has a first-class honours degree in Politics, Philosophy and Economics from the University of Oxford. He also holds the Chartered Financial Analyst designation.
In March a portion of the yield curve inverted for the first time since July 2007 – and some investors are twitchy. Led by US treasuries, short-term government debt around the world has been offering higher returns than long-term bonds, a trend widely seen as the most reliable sign of oncoming recession. Consensus is hard to find, however. A particularly decisive flattening in the US market in March led Morgan Stanley to issue a warning to its clients. In the opposing camp, JPMorgan Chase’s Jamie Dimon struck a more upbeat note. He believes the yield curve’s value as an indicator has been muddied by the actions of central banks and regulators.
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(4) It can be difficult to draw a firm conclusion about the green premium across markets and issuers. For some discussion, see Maria Jua Bachelet, Leonardo Becchetti and Stefano Manfredonia, ‘The Green Bonds Premium Puzzle’, February 2019; Suk Hyun, Donghyun Park and Shu Tian, ‘The Price of Greenness’, August 2018; The Climate Bonds Initiative, ‘Green Bond Pricing in the Primary Market’, May 2018.
Building common standards and ways to report KPIs is Challenge Number 1
Stan Verhoeven From 2007 to 2011, Stan worked at Kempen & Co as a quantitative analyst and (exotic) derivatives trader. He joined RBS in London in 2011 and moved to PGGM in 2012, where he was responsible for research into alternative risk premia. In 2015, he joined the Factor Investing team at NN Investment Partners, where he develops and manages a broad range of rule-based strategies, in addition to being Lead Portfolio Manager of MAFO. He is a CFA charterholder and holds an MSc in Business Administration from Radboud University, Nijmegen.
Diversification in any portfolio is most critical in uncertain times. But investors need to focus on the effect any additional investment has on their existing portfolio, rather than simply making sure that any new fund they add is diversified in itself. Traditional investor portfolios are often already biased towards long equity and fixed income. Multi-asset funds shouldn’t add to those concentrations. Instead, Verhoeven argues that multi-asset funds should be portfolio “building blocks” that target attractive absolute returns, on the one hand, and diversification in relation to traditional investments, on the other. “So we make sure our Multi Asset Factor Opportunities (MAFO) fund has no long bias towards equities”, he says, or indeed towards fixed income or any other asset class.
Building blocks
MAFO trades a breadth of assets including commodities – an asset class outside the stamping ground of most traditional multi-asset funds. The nice thing about commodities, says Verhoeven, is that while equity markets are dominated by speculators, commodities markets attract additional participants such as producers managing risk and end consumers. In effect, MAFO, through investing, provides services such as market liquidity, to these participants and receives a return compensation for facilitating this. MAFO doubles up on diversification by applying multiple factor strategies across the various asset markets based on value, momentum, carry, flow and volatility. Factor strategies often have low correlations to traditional investments and low correlations to each other. “If you have one strategy with a Sharpe of 0.25, that may not sound amazing, but if you can create 16 of those with zero pairwise correlations your portfolio would have a Sharpe of 1,” says Verhoeven. Of course, MAFO can feel short-term pain from market ups and downs, with Verhoeven citing energy market volatility in November 2018 as a recent example. But over the longer term, he says, its returns should not be dominated by specific market or geopolitical events. Other segments of the alternatives industry such as hedge funds do access the same markets as MAFO but lack its transparency. “Our strategies are the opposite of a black box: we show a lot of detail about what we are doing and why, which a typical hedge fund will never do”, Verhoeven says. The goal is that investors can place MAFO in their portfolios and understand what might happen.
Doubling up diversification
ASIA'S MATURING LEADERS
I am a bottom-up stock picker and I use a mosaic approach to investing, where I search for companies with a potential for sustainable growth that trade below intrinsic value as mentioned above. This can take the form of improving fundamentals not reflected in the price, growth potential not fully understood, restructuring and turnaround opportunities, and cyclical turns in certain industries.
Can you discuss the fund’s approach and investment style?
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ASIA - AN INCOME POWERHOUSE
NEED TO KNOW
Propelled by rising income levels and the associated shift to a more sustainable consumption-led growth model, I have witnessed first-hand Asia grow up and mature from a frontier market to a region that is now a key contributor to global growth.
Boston-based Goodman says that impact investing should address three categories of urgent global challenge:
• Life essentials, e.g., access to basic needs such as clean water and housing • Human empowerment, e.g., education, financial inclusion and bridging the ‘digital divide’ • Protection and improvement of the environment, e.g., through renewables and recycling
As a long-term investor in Asia, how has the region evolved since you first started out?
You manage the Fidelity Asia Fund. What is it designed to do?
The fund aims for consistent alpha generation based on a clear investment philosophy that has been tested across a variety of market environments. The strategy is to identify high quality stocks with robust business models and strong management teams, where the current stock price does not reflect these fundamentals.
At the moment, issuer reporting varies in form and quality. “Building common standards and ways to report KPIs is Challenge Number 1 and could help the market grow,” Goodman says.
I am then looking to hold these positions over the long-term to offer structural growth from Asian economies and outperform the benchmark. To achieve this, I rely on my deep experience in these markets, in addition to Fidelity’s extensive proprietary research capabilities.
Other segments of the alternatives industry such as hedge funds do access the same markets as MAFO but lack its transparency. “Our strategies are the opposite of a black box: we show a lot of detail about what we are doing and why, which a typical hedge fund will never do”, Verhoeven says. The goal is that investors can place MAFO in their portfolios and understand what might happen.
I am sensitive to valuation and will not pay any price for growth. Meeting companies and in-depth discussions with Fidelity’s in-house analysts form the basis of my investment decisions. I emphasise company visits to assess profitability, the attractiveness of a business, the track record and suitability of the management structure and the level of returns given to shareholders. This underpins my conviction in stocks and helps build the portfolio with high-quality opportunities in the Asian markets.
Then when Goodman began selecting high-yield issuers for his portfolio, he spotted the water firm’s “great risk/reward and investment characteristics”. So he double checked with the credit analyst and ran the idea past one of Wellington’s experienced emerging markets portfolio managers, before sizing and sourcing the investment.
For Verhoeven, the real success is that MAFO achieved this while demonstrating low correlation with equity markets.** Uncertain times, he argues, are precisely when successful investors should turn off their newsfeed and focus on engineering portfolios to make long-term returns.
Changing Asia:
market outlook
But how can funds like Goodman’s prioritise and measure the impact of investments? And can bond investors help solve social and environmental problems without sacrificing returns?
Supor had a different goal - to establish its brand and stamp its presence on the industry map. In 2004, it listed on the Chinese domestic A-share market and by 2006, it had become the largest company in this area. Its economies of scale, brand visibility and market size as well as its distribution capabilities attracted global suitors. In 2006, the French appliance manufacturer SEB Groupe, which owns well-known international brands like Tefal, acquired a majority stake in Supor.
SEB brought its technical expertise to Supor, which then used its well-established domestic brand strength and expanded into categories like vacuum cleaners and air purifiers. Supor also became a part of SEB’s integrated production base and its Shaoxing facility in China is SEB’s largest small electrical appliance production site.
Critically, the bond’s impact on the world must be measurable through a quantitative key performance indicator (KPI), such as the amount of CO2 or methane emissions avoided, the percentage of charity care provided by hospitals, or the units of additional affordable housing constructed.
Everyone supports the drive for clean water, but some other impact areas are more controversial. “We’d like to help fund the transition of ‘dirty’ industries like metals and mining towards more environmentally-friendly practices because we think that could be incredibly impactful,” says Goodman. But his experience with energy utilities highlights a problem.
“A lot of utilities are issuing green bonds for their wind power,” he says, “but only some are actively shutting down thermal activities and moving towards wind and solar.” Impact investors must be selective. “We want to buy the bonds of firms making a real transition,” he says.
In other industries, he says, it can be even more of a challenge to try to make sure “we aren’t providing any capital to negative impact activities at all.” The answer may be future innovation in the form of ‘transition bonds’ structured to meet a high bar of transparency and sustainability goals. (3)
Creative controversy
Must fixed-income investors necessarily sacrifice returns in order to support impact bonds? No, says Goodman, citing two arguments:
He fears negative thinking might slow the flow of capital to critical projects. Goodman hopes to build a track record of strong returns and measured impact that changes the sceptics’ minds.
Sidestepping sacrifice
• All investors constrain themselves in some way. “We’re focusing on issuers providing services and goods such as alternative energy that will be in demand in the future,” he says. • Green bonds, and other bonds in Wellington’s impact universe, do not seem to trade at a substantial premium, in Goodman’s experience, though empirical evidence is mixed. (4)
However, Goodman is worried about one thing: “I’m amazed at the number of sceptics who still think impact funds will fail to make an impact and fail to make returns,” he says.
Building belief
(2) See Goodman’s biography in Fund Q&A for details of his recent community service work.
(1) See UN World Water Development Report 2019, Leaving No One Behind, p.18: http://bit.ly/2l7c4En
Looking at their use in social media and online purchases, it was evident that phone upgrades were here to stay.
Campe Goodman, portfolio manager, Wellington Management
(3) For example, see discussion in Tom Freke, How ‘Transition Bonds’ Can Help Polluters Turn Green, Bloomberg Businessweek, 14 July 2019: https://bloom.bg/2lFwh4k
uncertainty
quantitative easing, a possible bear market in equities, and geopolitical events such as Brexit and the US-China trade war. But will fretting about headlines help them earn decent long-term returns?
or the next couple of years, uncertainty is king. Investors are worrying about the end of the economic cycle and
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Campe Goodman, portfolio manager
THE INTERVIEW
Wellington Global Impact Bond Fund
FUND SNAPSHOT
FUND Q&A
In 1994, cookware and small appliances company Zhejiang Supor was set up in China. These were fragmented market segments with many players and little to distinguish one frying pan from another.
Could you provide an example of a company that you feel has managed this transition particularly well?
I have seen the changing consumption patterns in smartphone purchases evolve first hand over the last decade. Our on-the-ground research in China highlighted at an early stage the increasing penetration of smartphones and looking at their use in social media and online purchases, it was evident that phone upgrades were here to stay.
Asia’s consumption story is well-known - how have you played this theme at the company level?
Against this backdrop, I zoomed in on smartphone camera manufacturer Sunny Optical - identifying it as a small-cap opportunity with a strong product proposition with potential to grow into a future leader. Back in 2013-14, Sunny operated in a market dominated by Apple-focused Taiwanese player Largan Precision.
At the time, Largan ruled the 8 mega pixel (mp) lens arena and enjoyed substantial margins. It was clear that there was room for another player. Sunny took the challenge and scaled-up from 3mp to 8mp image quality. The smartphone market itself matured from single phone cameras to dual cameras and now tri-camera phones are gaining traction. Sunny is a clear beneficiary of this trend and has matured over recent years into a market-leader in the camera module space in the Android phone segment.
The rise of China’s local leaders
This change has also unfolded at ground level - where beginners have matured into market leaders and at the same time, I have witnessed the collapse of giants. What remains a key distinguishing factor is decisive and astute management teams that are willing and able to evolve in response to changing market dynamics.
Supor is now the largest Chinese cookware company and ranks second globally. It offers a unique growth profile as a combination of domestic presence and international revenues. Over the last decade, Supor has grown its revenues at a compounded annual growth rate of 17.5% and it continues to earn higher returns than industry averages.
Sunny’s prospects extend further into optoelectronics as it is uniquely positioned in the vehicular camera arena as well. Increasing adoption of sensing modules in automobiles, for example, will benefit both volume growth and price increase, potentially supporting its revenue growth.
Planetary priorities
Can bond investors help change the world?
Name xxxxxx xxxx xxxxx xxxxxxx
Measurable Impact
We want to buy the bonds of firms making a real transition
Asia - an income powerhouse
How dynamic Asian economies continue to lead global growth
Jochen Breuer, Portfolio Manager, Fidelity Asian Dividend Fund
Can you discuss the fund’s approach and investment style
Propelled by rising income levels and the associated shift to a more sustainable consumption-led growth model, I have witnessed first-hand Asia grow up and mature from a frontier market to a region that is now a key contributor to global growth. This change has also unfolded at ground level - where beginners have matured into market leaders and at the same time, I have witnessed the collapse of giants.
I am sensitive to valuation and will not pay any price for growth. Meeting companies and in-depth discussions with Fidelity’s in-house analysts form the basis of my investment decisions. I emphasise company visits to assess profitability, the attractiveness of a business, the track record, suitability of the management structure and the level of returns given to shareholders. This underpins my conviction in stocks and helps build the portfolio with high-quality opportunities in the Asian markets.
SEB brought its technical expertise to Supor, which then used its well-established domestic brand strength and expanded into categories like vacuum cleaners and air purifiers. Supor is now the largest Chinese cookware company and ranks second globally.
This is generally supported by a more progressive regulatory environment. For example, in China we are generally seeing improving dividend pay-outs, especially by the state-owned enterprises. Another example is in Korea, where companies face tax penalties for sitting on too much cash and tax incentives for putting this cash to work for shareholders. As a result, we have seen superior dividend growth in Asia versus other markets in recent years.
Crucially, dividends are supported by strong balance sheets, which can be traced back to the 1997 Asian financial crisis. During this period companies learned a hard lesson in what happens if you do not allocate capital correctly and borrow for domestic ventures in foreign currency. Consequently, Asian companies now enjoy some of the most solid and stable balance sheets in the world, creating a strong foundation for dividend pay-outs.
Lessons from 1997
In running the Fidelity Asian Dividend Fund, I aim to provide investors with an attractive dividend-based total return, whereby they enjoy capital growth driven by the structural growth opportunities in Asia, but via some of the region’s most solid and stable companies with developed capital allocation policies. As a result, investors should expect lower volatility and drawdown relative to the broader market. The fund also aims to provide investors with an attractive yield and an underlying dividend that grows above the rate of inflation.
We concentrate the portfolio into approximately 40 names and construct it with no reference to an underlying index. I aim to hold position sizes of 1% - 5% based on factors such as downside risk, company fundamentals, liquidity and dividends. All of this is managed with a strict valuation framework that looks to widen the margin of safety for the underlying holdings in the portfolio.
We have seen superior dividend growth in Asia versus other markets in recent years
by a combination of investor demand, regulatory change and more disciplined capital allocation by companies as they mature. Whilst growth is still a key goal for Asian companies, management are rewarding shareholders via increasing dividends and buybacks.
sia has typically been viewed as an investment destination for those seeking growth and willing to accept higher bouts of volatility. Over the last few years we have seen significant dividend policy developments for Asian companies, driven
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Ultimately, I see my role as portfolio manager in three parts: stock picker, risk manager and income generator.
If people see strong returns, they’ll gain confidence they can meet both investment and impact objectives
developed economies. Some challenges threaten the planet, others threaten people – three out of ten people in the world lack safely managed drinking water. (1)
he world faces diverse challenges from climate change and rising sea levels to the lack of affordable housing in
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Fidelity
fund launch
Risk target/budget
Base currency
23 March 2016
10% long-term volatility
USD
Source: Columbia Threadneedle Investments at 31 March 2019.
Ahead of the curve: reading the runes on risk
• Value • Momentum • Carry • Flow • Volatility
• Equity • Fixed income • Currencies • Commodities
return objective (1 month US Libor)
+ 6%
KEY FACTS
“All peers realised cumulative three-year returns between 0% and 10%, whereas the NN IP strategy is the only factor-based strategy that yielded substantial returns even given its relatively high volatility.” AF Advisors (2)
NN IP Multi Asset Factor Opportunities
“In summary, NN IP’s relatively lean and mean approach towards alternative risk premia investing enables it to charge lower fees versus its peers, but at the same time it is achieving attractive returns against an acceptable risk. As such, NN IP may be considered an attractive alternative within this segment.” AF Advisors
Fund size (mid-basis)
Value, momentum, Carry, flow, & volatility
5 factors
Investment philosophy
NN (L) Multi Asset Factor Opportunities
Gross returns over relevant risk free rate of NN (L) Multi Asset Factor Opportunities versus direct peers (1)
Factor performance (1)
Source: (1) Morningstar Direct (3 year, May 2019) via AF Advisors. (2) AF Advisors, NN Investment Partners Multi Asset Factor Opportunities, Peer Group Analysis, June 2019
NN (L) Multi Asset Factor Opportunities: Key statistics (2)
Source: (1) NN IP Factor Investing team. As at 30 April 2019. (2) NN IP, Bloomberg. Data from April 30, 2016 – April 30, 2019 and quoted in USD. Equities is MSCI World Net Total Return (NDDUWI) and Fixed Income is the Bloomberg Barclays Global Agg. Government Total Return Index (LGAGTRUU). MAFO refers to NN (L) Multi Asset Factor Opportunities I-share USD (gross of 0.81 bps annualized ongoing charges). The indices mentioned here are presented for the purpose of comparing with equities and fixed income, and should not be considered benchmarks.
Heritage in Asia
MARKET OUTLOOK
NN (L) Multi Asset Factor Opportunities: Factor performance
Gross returns over relevant risk free rate of NN (L) Multi Asset Factor Opportunities versus direct peers
NN (L) Multi Asset Factor Opportunities: Key statistics
Source: NN IP Factor Investing team. As at 30 April 2019.
Source: Wellington Management as at 30.06.2019. For illustrative purposes only.
Correlations of NN (L) Multi Asset Factor Opportunities and direct peers vs equity and fixed income benchmarks
Source: AF Advisors calculations based on Morningstar Direct data (3 year, May 2019).
Source: AF Advisors, NN Investment Partners Multi Asset Factor Opportunities, Peer Group Analysis, June 2019.
Source: AF Advisors, NN Investment Partners Multi Asset Factor Opportunities, Peer Group Analysis, June 2019
Source: Fidelity International, 30 September 2019. Data is un-audited. Research professionals include equity analysts and associates.
“All peers realised cumulative three-year returns between 0% and 10%, whereas the NN IP strategy is the only factor-based strategy that yielded substantial returns even given its relatively high volatility.” AF Advisors
FACTORS
ASSET CLASSES
5
4
(Gross)
49
China offshore manager by equity AUM*
#2
Years of doing business in Asia
30 April 2019
INCEPTION DATE
Strategy launched in 2017
Equity research analysts in Asia Pacific ex Japan
40
Asian regional manager by equity AUM*
Key facts
Impact themes invested in (market value %)
Our investment themes
Wellington has identified 11 areas of pressing social and environmental need, grouped under three categories, where we believe a real impact can be made. These themes are broadly aligned with the United Nations’ Sustainable Development Goals (SDGs).
Digital divide
Education and job training
Financial inclusion
Safety and security
HUMAN EMPOWERMENT
Human empowerment
Environment
Life essentials
Affordable housing
Clean water and sanitation
Health
Sustainable agriculture and nutrition
ENVIRONMENT
Alternative energy
Resource efficiency
Resource stewardship
LIFE ESSENTIALS
Data shown as of 2018. This work is illustrative of research carried out by Wellington Management. Developed on an issue by issue basis, leveraging, company/issue reports, publications and data-bases. The examples shown are presented for illustrative purposes only and are not to be viewed as representative of actual holdings. It should not be assumed that any client is invested in the (or similar) example, nor should it be assumed that an investment in the example has been or will be profitable. Actual holdings will vary for each client and there is no guarantee that a particular client’s account will hold the examples presented. Source: company/issue reports
Measuring impact in fixed income – illustrative examples
Campe works with a seven-strong team based in Boston and London. The team includes specialists in fixed income and ESG analysis, taking full advantage of Wellington’s wider resources, including expertise in investment grade credit, emerging markets debt and local agency debt.
Meet the Wellington Global Impact Bond Fund team
BOSTON
LONDON
Marc Piccuirro, CFA
Jennifer Rynne, CFA ESG analyst
Campe Goodman, CFA portfolio manager
Virginie Pelle
fixed income portfolio manager
fixed income credit analyst
investment specialist
Jake Otto, CFA
Meredith Joly
IMPACT
0.022% of annual global CO2 emissions avoided.
OUTCOME
7,434,091 metric tons of CO2 equivalent avoided.
OUTPUT
13,957,000 MWh of clean energy produced.
ACTIVITY
Allocate 81% of proceeds to wind and solar energy production projects and 19% to projects that improve efficiency in transportation.
ISSUER
European green bond
0.0031% of cost-burdened households provided with affordable housing at the national level.
Affordable housing stock increased by 0.45% on average by state.
644 affordable rental units constructed.
Mortgage loan issued to provide financing for construction of multi-family rental property.
Low-income multi-family rental property
CLICK TO VIEW THEMES
CLICK ARROWS TO VIEW
Fidelity’s research footprint across the region
1 Portfolio Manager 4 Research Professionals 1 Trader
16 Research Specialists
AUM in Asia Pacific ex Japan
£58bn
QFII quota, amongst the highest allocated to a foreign buy-side asset manager
£975m
companies under active research coverage in Asia Pacific ex Japan
725
Dalian
Shanghai
3 Portfolio Managers
Taiwan
13 Research Specialists
Delhi
1 Portfolio Manager 8 Research Professionals
Mumbai
6 Portfolio Managers 9 Research Professionals 2 Shorting Analysts
Singapore
4 Portfolio Managers 8 Research Professionals 1 Technical Analyst
Sydney
9 Portfolio Managers 3 Multi-asset Portfolio Managers 13 Research Professionals 1 Derivatives Analyst 10 Traders
Hong Kong
Source: Fidelity International. 30 June 2019, Assets quoted include Assets under Administration. AMAC = Asset Management Association of China; WFOE = Wholly Foreign Owned Enterprise; *Broadridge (formerly Lipper) 31 August 2018, data includes active funds only; China Equity funds are those listed in Broadridge sector equities Greater China. Includes funds from all domiciles that Broadridge cover which currently excludes US but does include some Asian domiciled funds. AUM and QFII quota figures calculated in GBP based on exchange rates as at 30 June 2019.
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Changing Asia
Strategies to access Asia
Source: Fidelity International, 31 October 2019. Data is un-audited. Research professionals include equity analysts and associates.
Click on a fund name to view the information on that fund
Fund
12.8%
Index
9.3%
Excess
+3.5%
Past performance is not a guide to the future. Source: Morningstar, 31 October 2019. Basis: bid-bid, income reinvested in GBP. The funds’ primary share class according to the IA is shown. Holdings can vary from those in the index quoted. For this reason the comparison index is used for reference only. All OCFs are estimated for the W GBP share classes and actual expenses may be higher in the future. These figures may also vary from year to year.
Discrete five year period performance overview
For more information on Fidelity’s fund range please visit professionals.fidelity.co.uk
Fidelity Asia
Fidelity Asia Pacific Opportunities
Fidelity Emerging Asia
Fidelity Asian Dividend
Fidelity China Consumer
Teera Chanpongsang
Portfolio Manager since 1 January 2014
Over 24 years of investment experience
Annualised performance over tenure
93%
Peers beaten
Fund details
Fund launch
13.10.84
Fund size
£3bn
Holdings
Comparative index
80-100
MSCI AC Asia ex Japan
Ongoing charges
0.94%
as at 30.09.2019
• A core fund of quality well-run companies that are positioned to benefit from ongoing structural change and reforms across the region.
• Teera adopts a disciplined investment process to identify stocks trading below their intrinsic value. He looks for companies where improving fundamentals are not reflected in the price, or where the growth potential is not fully understood.
• Teera also favours restructuring and turn around opportunities, as well as cyclical turns in certain industries to find overlooked potential.
24.09.14
£465m
0.90%
25-35
MSCI AC Asia Pacific ex Japan
16.3%
9.2%
+7.1%
100%
Anthony Srom
Portfolio Manager since 24 September 2014
Over 21 years of investment experience
• Anthony looks for weak sentiment and low valuations, where fundamentals are strong and improving relative to consensus expectations.
• If a stock ticks all three boxes – and liquidity is ample and correlation with other holdings low – he is willing to take a significant active position.
• A high conviction stockpicking approach which brings together the region’s best investment ideas in a concentrated portfolio.
11.07.11
£91m
60-90
MSCI Emerging Markets Asia
12.9%
9.9%
+3.0%
96%
Dhananjay Phadnis
Portfolio Manager since 1 November 2013
Over 17 years of investment experience
• A key characteristic of Dhananjay’s focus is moat stocks. In this approach he looks for companies with sustainable growth prospects with the ability to reinvest at attractive rates.
• Dhananjay favours industry consolidators with improving returns and is cautious on stocks with high regulatory risk.
• Focused exposure to Asia’s true emerging economies such as ASEAN, China and India through a portfolio of high quality growth stocks.
19.08.13
£83m
30-50
MSCI AC Asia Pacific ex Japan High Dividend Yield
10.5%
7.5%
88%
Jochen Breuer
Portfolio Manager since 1 October 2016
Over 11 years of investment experience
• Jochen looks for companies with a good track record of capital allocation and an attractive yield struck off a dividend that will be well-supported throughout a range of economic scenarios.
• Combining characteristics like strong balance sheets and predictable cash flows with a strict valuation discipline also has the potential to provide strong relative downside protection.
• An unconstrained approach which aims to deliver a dividend-focused total return with an emphasis on capital preservation.
14.09.11
£157m
MSCI China
6.7%
2.2%
+4.5%
77%
Hyomi Jie
Portfolio Manager since 1 August 2017
Over 14 years of investment experience
• Hyomi Jie looks for solid cash generative businesses based on bottom-up research and value-chain analysis, as well as looking for incremental change that will drive an improvement in a company’s earnings.
• The portfolio exhibits a structural growth bias and will tend to be more expensive than the broader China market as growth, and especially certainty of growth, comes at a premium.
• Investing in companies related to what China consumers buy and the way they consume; trends underpinned by the long-term structural drivers of China’s growing middle class, rising income, increasing urbanisation and technological innovation.
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Looking beyond
Name xxxxxx xx xxxxxxx
The factors we employ have three distinct drivers of return
What is the purpose of the Wellington Global Impact Bond Fund?
There are a number of industries where local Chinese firms are becoming the leading brand or premium product due to having a deeper understanding of the local market
In short, two objectives: strong financial returns and addressing some of the world’s social and environmental challenges through impact investments.
For us, those challenges fall into 11 themes, divided into three major groups. First, life essentials, which covers things like clean water and sanitation, health, affordable housing; second, human empowerment, which includes improving education, financial inclusion and bridging the digital divide; third, protection and improvement of the environment, which includes alternative energy, recycling and renewable resources, broadly speaking.
Many consumers have that TV or fridge, and they do not need another. Now people want to use their hard-earned cash for experiences such as eating out and travel, and for better products. This combined with higher income, better quality of living, higher sophistication and greater choice, is driving a change in consumer trends.
How do those themes relate to the well-known United Nations Sustainable Development Goals?
These same consumers are now looking to trade up, which means consumer premiumisation and greater brand awareness. The interesting nuance is that there are a number of industries where local Chinese firms are becoming the leading brand or premium product due to having a deeper understanding of the local market and being able to cater to local customs and taste.
Trading up
But we lost out in November on the back of a spike in natural gas prices early in the month and later a huge drop in energy prices. So in Q4 overall we went down, like a lot of funds, but actually not in the same months as equity funds. That’s the big message: we’ve outperformed our target over the full three years while demonstrating low correlation with equities.
Premiumisation is a trend that extends right across the consumer sector, from beer to home appliances to fashion, and we are just at the start of the journey. We are moving from ‘Made in China’ to ‘Designed and Created in China’.
How do you find the best impact investments?
Our focus on simplicity enables us to understand the sources of return (factors) that we harvest and what risks they entail. Our approach is built on a robust research process whereby we regularly re-evaluate our strategies to ensure we are not dogmatic.
The individual factors we apply have proven their worth in practice over the longer term and are here to stay. As mentioned earlier, they pick up different sources of returns and hence are uncorrelated to each other (and to traditional investments). So what drives the ability to target absolute return is the positive expected return of factors over the long term and their low pair-wise correlations.
So what drives that ability to target an absolute return, beyond diversification benefits?
In case factor A does not perform in period X then, since factors are relatively uncorrelated and have long-term positive expected returns, it is likely that factors B and C will perform - so on a net basis there is an absolute return.
MAFO is built on active research to find, assess and review the factors used in the model. We implement the model on a daily basis to optimise its performance. The real point is that factor investing must be systematic: the strategy should deliver the exact same thing in the future as in the past, given the same market environment. Markets never stay the same, of course, but the contrast with traditional discretionary managers is clear: they can change their opinion and react quite differently to similar markets.
So is factor investing passive or active?
There are three key steps to imposing discipline. Every factor strategy we include in our portfolio must have a clear and strong economic rationale and academic underpinning; must have proven itself over the long run, in and out of sample and across asset classes; and must offer attractive returns taking into account implementation costs.
Is a disciplined approach easy to build given that the growing number of factor approaches include some that seem spurious or that side-step real-world issues, e.g., implementation costs?
You do have to build a rigorous research process – and you do have to stick to it!
OUR RESEARCH PROCESS
Idea generation
Data collection
Testing base model
In-depth research
Implementation
Periodic review
Fully systematic process
Investment process
Efficient implementation and execution
Detailed risk monitoring and reporting
Dedicated factor investing team MAFO is managed by NN Investment Partners’ factor investing team. The seven-strong team of portfolio managers combines quantitative research and portfolio management, working closely with NN IP’s trading team and the centralised innovation and data team. They are led by Willem van Dommelen and Stan Verhoeven.
Click for van Dommelen’s view
Another company is JNBY which has one of the biggest shares among domestic designers in the affordable luxury market and has successfully been able to adapt to fast changing fashion trends. JNBY has also built a loyal and wealthy following here with nearly three million people in its membership programme: shoppers who still spend even when the economic climate is a little weaker. JNBY’s WeChat account is a key way to reach customers; they invite everyday customers to model their clothes and send in pictures. The company then reposts photos as a way to interact with their shoppers and gain authentic promotion at the same time.
From Made in China to Designed in China
One of the most straightforward is metric tons of CO2 and methane emissions that have been avoided. That’s generally a good KPI for clean energy. Other KPIs include units of affordable housing created or, for hospitals, dollars of charity care provided, or the number of people provided with clean water.
What key performance indicators (KPIs) do you use to measure impact?
I’d say there isn’t any skew in the universe of impact bonds that makes it either riskier or less risky than the whole universe of bonds. There’s a range of high-quality impact bonds available – including quality sovereigns and multi-nationals – that provide really great protection in a negative cycle environment. Then there are more risky investments that are great to have in an early or mid-cycle environment. So we feel we’re able to position the portfolio right now as defensively or as aggressively as we want to.
Is there any reason to think impact investing is risky this late in the economic cycle?
First, we’re seeing more issuers, and we’re also seeing more issuers figuring out how to package some of their activities as impact investments. So the supply of investment opportunities is growing, though I’d love to see it grow even faster.
How will impact bond investing evolve over the next 3-5 years?
Second, demand is growing. I’ve been doing fixed income investing for 20 years and, even five years ago, nobody was talking about impact bonds. Absolutely nobody. The growth of interest is amazing.
But because global needs are so great, the big challenge is to get even more investors coming into the space. Hopefully, if people see strong returns, they’ll gain confidence that they can meet both their investment and their impact objectives.
Third, standards and KPI measurement will evolve over time. We’ve got lots of good ideas but other people will have good ideas as well. We want to be sure our reporting is best in class. One thing that won’t change is our twin goal: generating strong investment returns and having a positive social and environmental impact.
Aligned with select UN Sustainable Development Goals
Wellington Management supports the UN SDGs. Our Fund is currently aligned with 13 of the 17 Sustainable Development Goals set by the UN
(1) See United Nations, 17 Goals to Transform Our World: https://www.un.org/sustainabledevelopment
international businesses setting up in China to take advantage of low wages and a large workforce, but now we see local companies adapting and innovating to become industry leaders in their own right and cater for a local population with greater earnings power.
he consumer story has been a dominant theme in China for some time, but the dynamics of this are changing. Since the turn of the century China has seen tremendous growth in wealth due to better paid jobs. This was initially led by
This first wave of the consumer story saw people simply buying everyday goods like TVs, fridges and cars. While there are still vast untapped markets here, such as rural China, we are also entering a new stage of consumption - services and premiumisation.
International brands continue to be popular in areas like autos. There are also a small number of product categories which just fail to gain customers’ trust, especially infant milk formula and wine. It has been interesting to note recently that one of China’s biggest dairy companies, Mengniu Dairy, announced a bid to acquire 100% of Bellamy’s, a popular Australian organic infant formula company. This will enable Mengniu Dairy to see the economic benefits of selling a premium foreign brand to domestic consumers.
On the whole, however, Chinese consumers have a growing appetite for local brands as they become increasingly affluent and proud of their own culture. People are willing to pay more for higher quality everyday items like tissues and paper made of organic materials like bamboo.
Homegrown brands
This has not gone unnoticed, and Chinese companies are responding by implementing multi-pricing strategies. For example, China’s largest brewer, CR Beer, now has a number of brands in its portfolio that tap into different market segments and generate a desire for customers to purchase the next tier up.
Domestic fashion companies are also taking notice and are building premium lines for their brands. Sports company Li Ning, a company well-known in China for functional sportswear, has developed a high-end streetwear line that debuted during New York Fashion Week in 2018. This approach has helped boost sales and its share price.
Hyomi Jie, Portfolio Manager, Fidelity China Consumer Fund
Hyomi Jie takes a closer look at the strategy of successful domestic designer brand JNBY, which is nurturing a growing audience in the affordable luxury market
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higher bouts of volatility. Over the last few years we have seen significant dividend policy developments for Asian companies, driven by a combination of investor demand, regulatory change and more disciplined capital allocation by companies as they mature. Whilst growth is still a key goal for Asian companies, management are rewarding shareholders via increasing dividends and buybacks.
sia has typically been viewed as an investment destination for those seeking growth and willing to accept
