M&G, the advantages offered by long-term sustainable investment

ESG factors can have a material impact on long-term investment outcomes. Focus on factors that should be considered in the selection of the companies and in the construction of a portfolio

In a contest of low interest rates and high market volatility, it is important that investors not expose themselves to riskier products in a desperate search for returns. In this scenario, it has grown the focus on sustainable investments and integrate ESG. Of all this, we discussed to Matteo Astolfi, country head of Italy di M&G Investments.

From an investor standpoint, in a contest of low interest rates and high market volatility, what strategy do you suggest to adopt?
In a climate of persistently low interest rates, clients are looking to multi-asset funds as alternatives to cash and even to fixed income funds, but want the reassurance that their exposure to the equity market is limited. In a period like this one, characterised by very low interest rates and difficulty in finding returns in the ‘traditional’ BTPs and bonds, it is important that investors continue to stick to their risk profile and not expose themselves to riskier products in a desperate search for returns. They should trust their investment consultants and financial advisors to find the best investment solution for their risk profile.
At M&G we have developed some investment strategies that combine a prudent approach with some possibilities of return. For instance, the M&G Prudent Allocation Fund, a multi asset strategy designed for investors who want a multi-asset portfolio but with the comfort of knowing that there is a current internal limit set of a maximum of 35% of the total fund being invested in equities.
It is also important to remember that times of market turbulence may also offer some good opportunities. Sometimes volatility is driven by investors’ emotional responses to specific events. Our multi-asset team applies behavioural finance exactly to spot price fluctuations that do not reflect the fundamentals and are psychological in nature, and which ultimately may offer some great opportunities for investors ready to tolerate short term volatility.

In term of asset allocation, what do you suggest between equity and bonds? In particular, which are the areas and sectors that have more opportunity to grow? Which are the ones to be avoided?
If we look at valuations across asset classes on the basis of their real yields offered, the image is very clear. Real yields offered by equities are well above those from the other asset classes. Our preference is determined by the risk premium and by the unattractiveness of liquidity and fixed income. In our view, an asset class like that of Government bonds from the developed countries does not give an adequate level of protection.
We prefer European equities because of fundamentals that are slowly recovering and because of the depressed valuations that leave room for possible positive surprises. In the United States we have a relative value position: we are short on the equity index, while long on the banking sector as we believe that valuations, the economic context and the market environment make it the most interesting sector in that area. As for Asia and the emerging markets in the area, we are waiting to see improvements in the fundamentals, especially in corporate earnings, before considering equities. We believe Government bonds of the region to be more interesting.
Last but not least, we think that High Yield Global Floating Rates, with their protection towards rises in interest rates, and Global Convertibles, may offer some good opportunities.

In a world where is growing the interest for Sri funds, which are the advantages offered by long-term investment in sustainable companies and which are the opportunities for equity investors?
The focus on sustainable investment and ESG integration has gained prominence in recent years, and will almost certainly continue to do so, but for us these are not new ideas. We have been investing money for individual and institutional clients for over 80 years, and our principles of long-term, responsible, active investment have remained the bedrock of our approach throughout. We believe that environmental, social and governance (ESG) factors can have a material impact on long-term investment outcomes. Our goal is to achieve the best possible risk-adjusted returns for our clients, taking into account all of the factors that influence investment performance. Consequently, ESG issues are integrated into our investment processes, and are incorporated into investment decisions wherever they have a meaningful impact on risk or return.

Which factors should be considered in the selection of the companies and in the construction of a portfolio?
John William Olsen, the fund manager of the M&G Global Select Fund, attended Il Salone Del Risparmio. His presentation, in which he explained how he includes ESG factors in his investment approach, was very well received by the delegates attending it. His investment approach is characterized by a long-term view with a bottom up selection of stocks, and by active management of positions. Alongside traditional considerations (such as the quality of a company’s assets, the strength of its balance sheet and its opportunities for growth), John William’s view is that factors such as the company’s relations with its workforce and its impact on local communities and the broader environment can all be influential contributors to long-term success. It is important to focus on issues that are relevant or material to the businesses or sectors in which we are investing. For example, focusing on pollution and safety issues for oil and gas businesses is of course highly relevant, but carbon emissions for software producers less so.

Let’s talk about M&G as a company how is going 2016? Are you planning the launch of new funds or other initiatives?
We have started 2016 well and recently we have announced three new distribution deals in Italy. The first is the extension of an already existing partnership with Fideuram – Intesa Sanpaolo Private Banking; then we signed a new partnership with Allianz Bank Financial Advisors that not only enables direct distribution of all M&G funds, but also the distribution of some M&G funds through some of Allianz’s insurance policies. Additionally, we have sealed a deal with Banca Aletti, the private bank of Gruppo Banco Popolare, which opens the distribution of all M&G retail funds to the private clients of the bank. These new agreements enable us to strengthen our presence in Italy and is part of our long-term strategy there where we see important opportunities for growth. What is fundamental for us is to continue to work together with our distribution partners, supporting them with information and updates about our funds: for this reason, we are continuing our roadshows in Italy, which started in Turin last January and will end in Palermo at the end of April.