As interest rates and inflation are rising globally, investors now are facing unprecedented challenges and need to be more selective and focused than ever in their investments.
Speaking at the Fund Selector Asia Investment Forum Philippines, four investment experts discussed their views on how to identify the right strategies for equities, fixed income, and sustainability.
In the fixed income space, Jupiter Asset Management favours contingent convertibles, or Cocos, which are bonds issued by financial institutions, predominantly across Europe.
“Financial Cocos offer high coupons and yields compared with most fixed income products and sectors, with an average duration which is relatively short and also generally with better ratings than high yield corporate bonds,” said Luca Evangelisti, fund manager and head of credit research, Jupiter Asset Management.
During times when rates fluctuate, the elevated carry and low rates sensitivity of Cocos can provide a cushion to absorb market shocks, while the solid fundamentals of the European banking sector can protect investors from downside risks, he added.
They can provide stable income with high coupons and at a lower risk than equity investments in a balanced portfolio. Cocos can also provide diversification benefits to a traditional investment grade bond allocations or to a riskier high yield corporate bond exposure in a balanced portfolio.
Nonetheless, the Jupiter AM fund manager noted that investors should be mindful of the trigger, coupon cancellation and extension risks when investing in Cocos.
“However, banks have so far always paid Coco coupons, even throughout the Covid crisis and during the Russia-Ukraine war, whereas they had to cancel equity dividends in 2020 for example and at other times in the past,” Evangelisti said.
He believes these three risks can be well managed by careful fundamental analysis and an active approach in investing in this asset class.
Diversification in the credit universe
Also addressing challenges in investing in fixed income, Pimco believes it is important for investors to get comfortable with significant uncertainty and volatility.
It is essential for investors to broaden their investment opportunity set geographically, and be willing to give up some liquidity to generate higher returns, or generate returns with more resiliency or downside protection.
“This means moving out of more generic forms of corporate and sovereign credit and into less-liquid segments of the market, such as global commercial and residential real estate (both debt and equity), select opportunities in direct private lending, and other more complex asset-backed instruments,” said Naveen Gulati, senior vice president and credit product strategist at the US bond specialist.
These sectors provide additional yield premium, but also the type of resiliency that’s hard to source in the more traditional public markets today. Gulati also believes that targeting select opportunities within emerging markets will be attractive over the course of the next several years.
While many ESG investors note the importance of carbon emissions, biodiversity should also play a greater role within investment portfolios as they inextricably linked.
“We believe that the optimal way to make a tangible positive impact on the planet while generating attractive long-term returns is to invest directly in the ‘environmental solutions’ companies that are producing the goods, services and systems to deliver the green transition,” said Mike Jennings, senior investment strategist at TT International.
Jennings expects the environmental solutions investment universe will provide opportunities for investors as it could realistically be 10-to-100 times larger in a couple of decades,
Moreover, environmental solutions companies typically have far higher “carbon returns on carbon employed” than simple low carbon companies, with some environmental products such as insulation saving 100 times the carbon used to produce them over the course of their life cycle, he added.
While environmental equities in aggregate tend to be skewed to growth and mid-cap stocks, active managers can build portfolios that are diversified by factor, market cap, geography and themes.
Commenting on technology equities, Janus Henderson Investors echoed Jennings on the importance of investing in low carbon and sustainable names.
Tim Brown, senior product specialist at the firm, identified a continued shift in global attitudes towards sustainability, catalysed by the Russia-Ukraine conflict and the implementation of taxonomy and carbon disclosures as the greatest drivers to dominate the tech market this year.
Over 30% of technology stocks are set to be unprofitable over the next year, and the sector has been more adversely impacted as there has been a significant sell off of unprofitable names,” he noted.
“But, by investing in a low carbon, technology portfolio we can naturally access the largest and longest runway growth markets and navigate the ‘hype cycle’,” Brown added.
“This limits our exposure to those stocks more vulnerable to this market inflection, but we still expect volatility given this backdrop.”
For investors in the Philippines and other parts of the world alike, portfolios also need to factor in the trends reshaping global societies and economies – in the form of decarbonisation, new demographics, digitalisation, and more.
Despite the recent volatility, the speakers at the event all believe investors should not be too pessimistic as economies reopen with staunch governmental policy support.