Peter Rutter on global equity investing amid recovery uncertainties
Focus is a publication that brings you face to face with a selection of the most in-demand asset managers in the UK and across the globe.
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The investment world is trying to guess what shape our reopening economies might take and what this means for selecting stocks and investment styles. But the road to recovery could have unsettling switchbacks along the way, making predictions potentially dangerous.
IN THIS EDITION
For Professional Clients only, not suitable for Retail Clients. This is a financial promotion and is not investment advice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and are not investment advice.
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In this Focus, we hear from Peter Rutter, Royal London Asset Management’s Head of Equities, about the range of scenarios his team is considering and what they might mean for various investment styles. He explains how RLAM uses investment frameworks sensitive to the Corporate Life Cycle to try to build style neutrality into selected portfolios, including the Royal London Global Equity Select Fund – which we profile further on in the guide.
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© 2019 Incisive Business Media (IP) Limited
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.
Mike Fox, Head of Sustainable Investments
RLAM’s Independent Advisory Committee
Royal London Global Sustainable Equity Fund
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George Crowdy, Fund Manager
THE INTERVIEW
The Royal London Global Equity Select Fund is a sub-fund of Royal London Equity Funds ICVC, an open-ended investment company with variable capital with segregated liability between sub-funds, incorporated in England and Wales under registered number IC000807. The Authorised Corporate Director (ACD) is Royal London Unit Trust Managers Limited, authorised and regulated by the Financial Conduct Authority, with firm reference number 144037. For more information on the fund or the risks of investing, please refer to the Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.co.uk. Issued in October 2021 by Royal London Asset Management Limited, 55 Gracechurch Street, London, EC3V 0RL. Authorised and regulated by the Financial Conduct Authority, firm reference number 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.
Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Concentration Risk: The price of funds that invest in a reduced number of holdings, sectors, or geographical areas may be more heavily affected by events that influence the stockmarket and therefore more volatile. Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss. Efficient Portfolio Management (EPM) Techniques: The Fund may engage in EPM techniques including holdings of derivative instruments. Whilst intended to reduce risk, the use of these instruments may expose the Fund to increased price volatility. Emerging Markets Risk: Investing in Emerging Markets may provide the potential for greater rewards but carries greater risk due to the possibility of high volatility, low liquidity, currency fluctuations, the adverse effect of social, political and economic instability, weak supervisory structures and accounting standards. Exchange Rate Risk: Changes in currency exchange rates may affect the value of this investment. Liquidity Risk: In difficult market conditions the value of certain fund investments may be difficult to value and harder to sell, or sell at a fair price, resulting in unpredictable falls in the value of your holding.
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For professional clients only, not suitable for retail clients. This is a financial promotion and is not investment advice. The views expressed are those of the authors at the date of publication unless otherwise indicated, which are subject to change, and are not investment advice.
The value of investments and the income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested.
Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Credit Risk: Should the issuer of a fixed income security become unable to make income or capital payments, or their rating is downgraded, the value of that investment will fall. Fixed income securities that have a lower credit rating can pay a higher level of income and have an increased risk of default.
Derivative Risk: Derivatives are highly sensitive to changes in the value of the underlying asset which can increase both Fund losses and gains. The impact to the Fund can be greater where they are used in an extensive or complex manner, where the Fund could lose significantly more than the amount invested in derivatives.
Efficient Portfolio Management (EPM) Techniques: The Fund may engage in EPM techniques including holdings of derivative instruments. Whilst intended to reduce risk, the use of these instruments may expose the Fund to increased price volatility.
Emerging Markets Risk: Investing in Emerging Markets may provide the potential for greater rewards but carries greater risk due to the possibility of high volatility, low liquidity, currency fluctuations, the adverse effect of social, political and economic instability, weak supervisory structures and accounting standards.
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He says that understanding how the financial economy and risk buckets within global equities interact with the real economy – from step changes in digital acceleration to the tenfold increase in container rates on some international shipping routes – is where much of the team’s energy is going. But he’s not betting on one particular future.
“The Roaring Twenties scenario would mean a rip-roaring synchronised global recovery with stimulated fiscal policies and fairly accommodating monetary policies, and inflation proving sticky,” says Rutter. “In that environment, rising rates and strong cash flows are likely and you might want to be in value and certain types of quality stock.”
Roaring Twenties
20 years running global equities,” says Peter Rutter, RLAM’s Head of Equities.
round the world, developed economies are reopening but there are many uncertainties about the timing, style and shape of economic recovery. “How you manage a portfolio through that is as acute a challenge as I’ve experienced in
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Could the road to recovery be full of switchbacks?
Our Corporate Life Cycle framework allows us to map every single company in the investment universe into one of five categories
Peter Rutter, Head of Equities
Mike Fox and Rachid Semaoune on their new global approach to sustainable credit investing
For Professional Clients only, not suitable for Retail Clients. The views expressed are the contributor’s own at the date of publication unless otherwise indicated, which are subject to change and are not investment advice.
Impact bond investing is the segment of sustainable investing that channels debt market capital towards solving these challenges. The size of global debt markets means that impact bonds could be a huge lever for change, says Campe Goodman, who manages Wellington’s first impact bond fund.
Boston-based Goodman says that impact investing should address three categories of urgent global challenge:
Planetary priorities
he world faces diverse challenges from climate change and rising sea levels to the lack of affordable housing in
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Campe Goodman, portfolio manager
Wellington Global Impact Bond Fund
I think a more digital and connected world is here to stay, as is the need for resilient healthcare systems
Companies addressing the world’s greatest challenges should be interesting places to invest
I think it’s very important for investors to know where their style risks are in their investment portfolio
“Our view is that at this juncture a wide range of outcomes is possible, from the Roaring Twenties to a much weaker recovery with bumps along the way,” he says, pointing out that each has different implications for investment styles such as ‘value’ and ‘growth’.
But his team are considering many alternative scenarios including a much more muted recovery if Covid evolves further and vaccines are less effective over time than people hope.
That less broad recovery, with bumps along the way, and no real rise in interest rates, would give leadership to a very different cohort of stocks and investment styles.
“We’re also intrigued by the Covid-19 bill: somebody has to pay, so do governments inflate, or tax, the bill away?” he asks. It could end up being a bit of both, but there are implications.
Pay day
“If we inflated the bill away by running inflation at 3% for a period of time,” says Rutter, “that would be more of a distortion on financial assets and the relative pricing of them. Alternatively, we could raise taxes to pay for the bill but that impacts the real economy and sectors that are more easily taxed: consumption, property, and physical domestic are sources of revenue.”
The continuing uncertainties mean that style bifurcation is likely to continue to be a theme in equity markets, Rutter argues, “with quite significant style rotations because of the wide range of possible real-world outcomes.”
Rotating styles
“So, I think it’s very important for investors to know where their style risks are in their investment portfolio because that’s likely to be quite a key determinant of relative performance and absolute performance,” he says. Investors who don’t want to make a bet on a particular macro or style outcome might need to consider a relatively style neutral approach, he argues, whether by making sure portfolios contain the right mix of styles, or by investing in relatively style-neutral strategies.
Rutter argues that RLAM’s Global Equities team has key strengths in this area, including a framework that allows managers to take better account of the stage in the Corporate Life Cycle that a company has reached.
Life Cycle
“Our Corporate Life Cycle framework allows us to map every single company in the investment universe into one of five categories, depending on where the company is in a Corporate Life Cycle running from Acceleration (innovation) and Compounding (growth) to Slowing, Mature and Turnaround following distress.”
In RLAM portfolios where the Life Cycle framework is applied, “we can triple diversify, that is, not just by sector and region but also by Life Cycle exposure, to allow us to build a relatively Life Cycle and style neutral portfolio with the potential to outperform when growth is outperforming, when there is a cyclical crash, and in recoveries of various shapes.”
“Bonds are a lot more complex than equities,” says Semaoune. “You can lend money to a company either on a secured or unsecured basis; to different parts of the capital structure; or to a ring-fenced entity or bankruptcy-remote SPV. That has to be taken into account in your ESG analysis as well as your credit selection.”
He says RLAM’s long track record of closely analysing bond documentation and covenants packages helps the team. “For example, some US utility companies issue bonds secured on their assets, so we take that into account when we do our ESG analysis. Likewise, UK social housing bonds may be secured on the properties themselves.”
eventually be bigger than sustainable equities,” says Mike Fox, one of sustainable investing’s most experienced practitioners, “and market practices might only take another two or three years to catch up.”
That fast-paced maturation will be packed with challenges. “There’s huge opportunities within sustainable credit but you are entering a much more virgin territory, with a lot of formation of ideologies and approaches – you have to be able to work with that,” he says.
“One key difference between global sustainable credit versus equity,” says Semaoune, who manages the new fund, “is that there are large market areas you can only access within global credit, such as social housing, because there is no publicly-listed equity.” He says that a big advantage of RLAM’s proprietary ESG research is that it helps uncover opportunities in credit areas not covered by third-party equity-oriented ESG ratings.
Social housing, which provides affordable decent housing for the wider population that cannot afford to buy a property, also demonstrates how a company’s sustainable and credit characteristics can interact.
Credit challenges
The UK has a significant social housing sector but Semaoune says that, in some investment sectors, the only way to access a wide opportunity set is to look across national boundaries.
Building a global portfolio is still hard work. “One of the challenges was trying to find the right renewable energy companies in North America,” says Semaoune. “Europe is well ahead of the US in transitioning to a decarbonised economy. You can find attractive renewable energy companies and utilities in the US, but it took deep analysis and help from our ESG team.”
Carbon conundrums
Some investors try to short-circuit the fundamental research by relying on third-party ESG ratings or bonds labelled as environmentally green or socially positive. But Fox and Semaoune have doubts.
Losing labels
Life Cycle neutrality is potentially useful not only because crises are unpredictable, he says, but because the way in which each crisis disrupts or benefits a Life Cycle segment can also surprise: “In the Covid-19 crisis, a lot of the Accelerators were disruptive technology companies and performed well because of the swing towards remote working and digitisation – counter to how you might traditionally have expected that part of the Life Cycle to perform in a downturn.”
A life cycle approach is also very important in supporting RLAM’s stock picking, says Rutter, by allowing the RLAM team to develop and continually refine stock picking approaches and metrics specially tailored to each of the Life Cycle stages.
The approach is also helping the team understand the impact of sustainability. “We’re noting that ESG issues correlate to different Life Cycle categories,” says Rutter. “Early-stage growth parts of the Life Cycle are often dominated by social and governance issues and mature parts of the Life Cycle by environmental topics.”
For example, Accelerators in disruptive sunrise industries like artificial intelligence are often doing something potentially socially useful – while at the same time raising new questions for society and operating in areas where regulators are playing catch up.
For Rutter, this points up the value of the Life Cycle framework: “We can become experts in Accelerators, in Turnarounds, and so on, across many dimensions – how you value them, how you identify wealth creation, but also how you approach aspects such as ESG analysis.”
ESG insights
Royal London
Global Equities
For information purposes only. Source: RLAM
Corporate Life Cycle Concept
Experienced team
Structured investment process
Continuous improvement
Royal London Global Equities – our structured approach
The Corporate Life Cycle Concept
The Royal London Asset Management Global Equities team apply a structured investment process that includes our Corporate Life Cycle Concept.
Meet the team
Corporate Life Cycle and ESG
Source: RLAM
Should sustainability
go global?
Assets under management
Past performance is not a reliable indicator of future results.
Introducing the Global Sustainable Credit Fund
Source: RLAM as at 28 February 2021. AUM includes the sustainable fund range and segregated mandates.
Our comprehensive, rigorous and efficient process is designed around investment advantages.
Process
Idea Generation
Research and Stock Selection
Portfolio Construction
The Corporate Life Cycle Concept helps us understand the most appropriate strategy that companies can pursue to create wealth for shareholders at different stages of the Corporate Life Cycle.
Shareholder Wealth Creation at each stage of the Life Cycle
Portfolio characteristics and holdings are subject to change without notice. This does not constitute an investment recommendation.
ESG factors continue to gain importance and profile and we’ve noted that their significance typically varies across the Life Cycle, with social factors tending to be more important to younger companies and environmental factors tending to impact more mature companies.
Dominant issues tend to vary by Life Cycle category
Social
Environmental
Governance
Peter is Head of Equities at RLAM as well as the Global Equities team, and a Senior Portfolio Manager with over 16 years of experience. Prior to joining Royal London Asset Management, Peter was Head of Global Equities at Waverton Investment Management, where he worked alongside Will Kenney and James Clarke under the same team construct. Prior to this, Peter was a partner and global equities fund manager at IronBridge Capital Management for six years, where he co-managed the £3bn IronBridge Global Select equity strategy. Previously, he worked in the global equities team at Deutsche Asset Management. Peter graduated from Christ’s College, Cambridge University, with a starred double first class degree in Geography, is a CFA charterholder and a chartered management accountant (CGMA).
Will is a Portfolio Manager with over 20 years of experience. Prior to joining Royal London Asset Management, Will was a Portfolio Manager at Waverton Investment Management, where he worked alongside Peter Rutter and James Clarke under the same team construct. Prior to this, Will had previously been a partner and portfolio manager at Spencer House Capital Management (SHCM). Prior to joining SHCM in 2006, Will worked at Deutsche Asset Management for seven years as a member of the global equity team. He graduated from Durham University with an honours degree in Economics and Politics and is a CFA charterholder.
Will Kenney, Senior Fund Manager
James is a Portfolio Manager with over 17 years of experience. Prior to joining Royal London Asset Management, James was a Portfolio Manager at Waverton Investment Management, where he worked alongside Will Kenney and Peter Rutter under the same team construct. Prior to this, James was a partner at IronBridge Capital Management for six years, where he co-managed the £3bn IronBridge Global Equity strategy with Peter Rutter. Previously, he worked in the global equities team at Deutsche Asset Management. James graduated from Warwick University with an honours degree in Economics and is a CFA charterholder.
James Clarke, Senior Fund Manager
Find out more about the Global Equities team at rlam.co.uk/equity
Royal London Global Equities
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Name xxxxxx xx xxxxxxx
What is the key goal of the Royal London Global Equity Select Fund?
The key goal is to outperform across multiple market environments with the performance driven by differentiated and genuine stock selection, rather than by investing style. We’re relatively style neutral from a traditional style sense – some slight tilts occur around our valuation discipline and the form of quality that we look for in stocks.
Our Life Cycle framework helps when we are stock picking
The fundamental factors that determine if companies make money all vary by Life Cycle stage
George Crowdy tells how the corona storm is reshaping sustainability and why his new fund embraces emerging markets
He thinks the S in ESG – the social side – is taking on a new prominence. “Sustainable brands are made through crises like this,” says Crowdy, who co-manages the new fund with Mike Fox, RLAM’s Head of Sustainable Investments. “People will want to purchase from, and work for, companies who show they really care about their employees and broader society at critical times.”
Social sustenance
For professional clients only, not suitable for retail investors. The views expressed are the contributor’s own and do not constitute investment advice.
We call it triple diversification: sector, region, and notably also company Life Cycle. Triple diversification and the unique tools we’ve built around it allows us to build portfolios where the dominant risk exposure is the stock selection itself, not the sector, region or Life Cycle waves.
How do you attempt to gain outperformance across multiple environments?
Our Life Cycle framework maps every single company in the investment universe into one of five categories, depending on where the company is in the Corporate Life Cycle – from an early Accelerator phase through potentially to a Turnaround phase after a period of distress – and it helps us both in portfolio diversification and when we are stock picking.
The fundamental factors that determine if companies make money all vary by Life Cycle stage. With early phase Accelerator companies, you may need to examine the disruptive nature of the Accelerator business, the incremental cash burn, the size of the addressable market it’s expanding into, and so on.
How does it help your stock picking?
By contrast, in the most mature or Turnaround phase of the Life Cycle, we might be focusing on how much a company could sell its assets for; how big is the cost-cutting programme; how can they repair the balance sheet? As a team, we’ve built up 20 years of experience in what it takes to deliver in each Life Cycle category.
You can think of it first as fairly automated data management using Life Cycle insights, then a phase of deeper qualitative analysis that’s again Life Cycle specific, and then proprietary portfolio construction and risk management toolsets, also using the Life Cycle. But really these all work together in a continuous flow for the investment team.
How do you apply Life Cycle insights through your investment process?
That’s a really interesting question because, for example, around 75% of the Japanese equity market is in the last two Life Cycle categories and about 60% of the US equity market is in the first two categories. So invariably there are interesting overlaps in risk budget between sector, region and Life Cycle category. But we have proprietary tools to map that at benchmark and portfolio level, so coping with this issue is part of our portfolio construction.
Is there a relationship between company Life Cycles and other dimensions such as geography?
We have built proprietary systems and have gained a lot of experience over the years regarding the problem of taking globally variable accounting data – including at times high levels of management discretion – and converting that into globally standardised cash-based metrics. We then make a further improvement through our frameworks and intellectual property of adding or subtracting hidden assets and liabilities.
This gives us a globally standardised, higher quality and more insightful starting point for all of our financial data and metrics on these companies, compared to just using accounting data. That is part of our informational advantage as a team – we’re particularly proud of our culture of continuous improvement of our investment frameworks.
Improvements made in the last decade – for example, seven or eight years ago, a tough year of performance led to us to redesign some of our factor risk measurement tools – really helped in the Covid-19 crisis.
Did that help you negotiate the bumps of the last year or two?
As a team we’ve run billions of pounds for 20 years in institutional equities, but we joined RLAM four years ago, and we’ve been able to launch a pooled vehicle into the UK marketplace.
The fund has reached its three-year mark but I think the team has been developing its approach for much longer?
So in some ways this is a capability that’s been around a long time but that’s only just reached a three year track record in the UK wholesale space.
Mike joined Royal London Asset Management in August 2013 following the acquisition of The Co-operative Asset Management by the Royal London Group. He is Head of Sustainable Investments at RLAM. Mike became a fund manager in November 2003 when he took over managing the RL Sustainable Leaders Trust. Mike originally trained and qualified as a chartered accountant with Ernst & Young in Manchester.
Head of Sustainable Investments
Mike Fox
Senior Fund Manager
Rachid joined RLAM in February 2015 as a Credit Fund Manager within the Fixed Income Team. Rachid joined from UBS Asset Management where he spent three years managing investment grade credit portfolios. Prior to this he was a deputy credit fund manager at Old Mutual Asset Management. Rachid began his investment career in 2001 at Gulf International Bank where he worked as a credit analyst and deputy fund manager. Rachid studied for a PhD in Physics at Imperial College London and holds a Postgraduate Degree in Laser Physics from the Université Paris 13.
Rachid Semaoune
MEET THE team
Our aim is to invest in companies that have a positive impact on the environment and society without compromising on returns and credit quality. The investments have to meet our definition of sustainability and our criteria for financial soundness. It’s not one or the other.
What is the key aim of the Global Sustainable Credit Fund?
We wanted to widen our sustainable range’s offering to include global sustainable credit, so that the range could hope to meet a broader set of client requirements – a lot of people want global sustainable credit as well as the sterling sustainable credit elements that are already available in our sustainable range.
What motivated you to create the fund?
The fund is highly diversified by geography but also in terms of sector and holdings. We typically have more than 200 holdings within the portfolio to try to diversify away the impact of any single default.
Does the global focus help in terms of diversification?
In a year with very strong commodity prices, fossil fuel and mining sectors are likely to outperform versus other sectors. But on a longer-term basis, we’ve seen that the cost of funding in these sectors has gone up and we expect they might continue to underperform versus more sustainable sectors.
Our process has a focus on products and services, and ESG standards within a company. This naturally takes us towards sustainable investments. We also have the ability to analyse individual credit issuers internally which we think helps us identify sustainable opportunities in a timely and effective way.
How does your investment process help you select sustainable investments?
Another challenge must be comparing stock-specific data from around the world?
Refining our frameworks helps us to use the lessons of the past into the future
Refining our frameworks helps us to use the lessons of the past into the future. Our more structured approach, we feel, gives us a higher-than-average chance of repeatability.
Investing is ultimately built on quite simple principles – it’s the execution of those principles, particularly working out what things are worth in the long term, that’s difficult!
Find out more about the Royal London Global Equity Select Fund at rlam.co.uk/equity
