Bicentenary London Investment Conference
In celebration of our bicentenary, our high conviction investment capability was showcased in London at our Investment Conference at Skinners' Hall.
Mirabaud Bicentenary Investment Conference
13 November 2019
Welcome note by Lionel Aeschlimann - Managing Partner of Mirabaud SCA & CEO of Mirabaud Asset Management
Thank you to everyone that attended Mirabaud’s investment conference this November, our bi-centenary year. We were delighted to see so many faces, both familiar and new.
The UK is a key market for Mirabaud and we have had a presence here for over 40 years. We have experienced much change over our 200-year history, but some things remain the same. Our culture and values, for example, are as strong today as they were when we were first founded.
Responsibility has always been a key word for us. We see our role as not only preserving and growing this generation’s assets, but the assets of future generations as well. Throughout our long existence we have also learned the lesson of sustainability. We think in terms of years not quarters, and our interests are always fully aligned with those of our clients. Indeed, our managers invest alongside our clients.
As active managers, we take our role very seriously, engaging with the companies in which we invest, backed up by our strong voting record. We also have a dedicated Environment, Social & Governance (ESG) team that oversees and integrates our policies.
At Mirabaud, we believe that human talent can make a difference. We therefore foster a highly collaborative environment in which our managers feel passionate and responsible about what they do. Most importantly, we provide our managers the freedom to express themselves freely in the portfolios they manage.
Finally, I want to thank you all for your support and commitment to Mirabaud. We look forward to working alongside you on the next stage of our exciting journey.
Misconceptions in Emerging Market Debt
Daniel Moreno - Head of Emerging Market Debt
Daniel Moreno - Head of Emerging Market Debt, discusses the many misconceptions he sees within the asset class
Dan began by explaining that there were many misconceptions about Emerging Market Debt (EMD). Much of them, he continued, have their roots in what we now call behavioural finance.
To illustrate this point, Daniel Kahneman’s best-selling book, Thinking Fast and Slow, highlights ‘our almost unlimited ability to ignore our ignorance’. This starts with the term Emerging Market (EM), which, Dan observed, often means different things to different people.
Dan explained that the term ‘emerging market’ was first coined in 1981, when economists came to the conclusion that there was enough positive evidence to merit investing in them. Bizarrely, when it was first pitched in the US it was called The Third World Equity Fund, prior to being renamed emerging markets.
Quoting again from Kahneman’s book, there are two systems at work in the brain. The first is quick and automatic – the second is slower and more logical. Both are useful, but to rely on only one would be foolish. From Dan’s perspective, therefore, we need to focus a little more on system two.
In some quarters, there are still some investors who think emerging markets are irrelevant. Yet, according to the IMF World Economic Outlook (2019), emerging markets now represent more than 60% of World GDP and are set to grow still further.
There is also a view that EM debt is a niche market, but in fact the emerging market debt universe is almost a quarter of the global fixed income market.1 However, only a small percentage of all EMD is represented in benchmarks. Dan added that EMD now has little to no correlation with the Fed Funds rate. When there’s a Fed hike, for example, emerging markets may still fall, but there’s little correlation in the long term. He concluded that for local debt, only the US Dollar matters. Indeed, currency explains only 22% of long-term returns and interest has a much larger impact.2
1 BIS as of March 2019 2 JP Morgan as of November 2019
Themes: Long-term Investments or Concepts?
Anu Narula - Head of Global Equities
Anu Narula - Head of Global Equities, discusses how thematic investing can help drive long-term, sustainable returns
Anu Narula began his presentation by explaining that he would briefly cover the team’s core beliefs, how it defines a theme, and how it goes about investing for the long term.
Take infrastructure and real estate, for example. By 2040 the global population will have grown by almost 2 billion, representing a 25% increase. Over half of the population currently lives in urban areas and by 2050 this will have risen to 68% of the population.1 As a result , there is a huge demand for infrastructure and housing is rapidly rising up the priority lists of many governments. In India, for example, Anu looks to capture this theme through investing in HDFC, India’s leading provider of housing finance.
Another theme Anu and his team are exploring is the world’s rapidly ageing population. For example, the global population aged 65 and over will have grown by 60% by 2030.2
The team seeks to capture this theme by investing in companies such as Edwards Lifesciences, a pioneer in Aortic Valve Replacement and AIA, which is growing rapidly in insurance and retirement savings.
The third major theme the team are following is the service economy. Anu observed that in most major economies, the service sector now represents 60% of GDP with emerging markets not far behind on 50%.3 The service industry is now expanding into areas such as finance, insurance and technology. The team expresses this theme by investing in companies such as Ecolab, a global leader in water, hygiene and energy technologies.
In short, Anu and the team are currently following a number of themes, but they are very pragmatic about their process. If their investment thesis on a theme changes, they won’t hesitate to remove it. Equally, if a new theme emerges, they will add it to their list.
1 World Bank 2018 2 United Nations 3 Deloitte.
Great Expectations: The changing requirements on asset management
David Kneale - Head of UK Equities
David Kneale - Head of UK Equities, highlights the increasing fiduciary responsibilities that managers now face, following their introduction this October.
In October 2019, UK legislation placed new requirements on pension trustees to consider the long-term investment consequences of all ESG factors, and particularly climate change. This firmly places sustainability high on the agenda for portfolio managers.
One route to sustainability is to seek companies that are flexible, resilient and alert. By identifying and promoting these characteristics, they can help to create a competitive advantage.
One such example is Berkley, which is promoting higher standards for biodiversity on its developments to appeal to customers and planning authorities. David emphasises that to deliver the potential benefits, ESG analysis must be integrated into the investment process.
Taking the gambling industry as an example, this is legal in the UK and encompasses a range of business models on attractive valuations. However, it can also be highly addictive, bringing certain risks. An asset manager must therefore identify, model and price the risk of adverse scenarios such as new regulation, litigation and a potential public backlash.
Although it’s not a fund manager’s role to decide the future state of gambling – it is their role to think ahead and engage with company management in an attempt to mitigate the risks through improved business practice. This way, ESG integration can deliver better investment outcomes and better social outcomes.
David concluded by asserting that asset managers must embrace the responsibility for the actions and impacts of the companies they own, citing that “We are responsible for the appointment of boards and management teams, for setting targets, promoting strategies and approving incentives. If we are not responsible for what a business does, then who is?"
Trade War: a long-term opportunity for Global Emerging Market Equities?
Daniel Tubbs - Head of Emerging Market Equities
Daniel Tubbs - Head of Global Emerging Market Equities, discusses the US-China trade war and the opportunities it may pose for the asset class.
Why did the trade war start? Aside from the famous tweet by Donald Trump, Dan feels that many Americans were of the opinion that the US was falling behind in four key areas: innovation; technology; infrastructure; and consumption.
...trade wars are good, and easy to win.
Donald Trump, Twitter
Meanwhile, China has seemingly come from nowhere to become the country with the most patent applications and grants in the world. China is also at the cutting edge of new technology. One example being smartphone technology with Huawei having rapidly overtaken Apple with its competitive prices and considerable market share.
China is also investing heavily in infrastructure with the construction of new roads, bridges and airports while the US is well known for having underinvested in infrastructure.
The trade war has continued to escalate over the last twelve months. However, net imports are only a small drag on growth in China while the US is seeing the impact of higher prices on the consumer. At the same time there is rising unemployment in some key mid-west states. However, Retail e-commerce in China is comparatively strong, driven by the launch of Alibaba’s “Singles’ day” sales, which overtook black Friday events in the US. Indeed, Chinese consumer groups are now predicted to surpass US consumers in terms of total retail sales by 2021.1
Dan went on to explain that there are plenty of options for greater stimulus in China and the impact of the Trade War has been relatively negligible, with net exports representing only a small drag on growth. In fact, GDP growth is almost three times that of the US.2 China also has more leeway than the US to loosen its monetary policy, fiscal policy and to push through structural reforms to support the economy. This was demonstrated by the recent cut to the Reserve Requirement Ratio. The US, however, has far fewer options.
Dan concluded that the net result was not a zero sum game. There were only losers in a trade war, he observed. He thought the end result would quite likely be that China, and Asia generally, would become even more important, both politically and economically.
Indeed, China has been deepening its foreign relationships with developed markets outside the US, notably Russia.
This is in stark contrast to the US, which is becoming more isolationist. We expect Trump to find a partial resolution agreement by 15th December, which is the date at which he has threatened more tariffs. We think that it will become more obvious to the US Consumer, and in particular to Trump’s supporters, that they are paying the price for the trade war.
We are monitoring the situation closely and continue to find new opportunities such as China Gas Holdings, which is working to connect more people to natural gas thanks to a pipeline that extends from Russia into China. This is bringing a stable energy supply and price stability, encouraging more people to switch to natural gas from coal.
Against this backdrop, our Fund is positioned for a partial resolution. We have been using the recent weakness in markets to add to existing positions, increasing our exposure in China and Korea.
1 https://www.emarketer.com 2 Mirabaud Asset Management, IMF
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