Divided politics surrounding ESG investing have not deterred managers from pursuing an integration approach.
96% of asset managers have or plan to have (2%) an ESG integration approach and are using material ESG information when evaluating underlying investment portfolio companies to identify risks and opportunities, according to The Cerulli Report—U.S. Environmental, Social, and Governance Investing 2022: Social Issues Come to the Forefront.
The U.S. political environment has become increasingly polarized, with disparate views on timely environmental and social-related issues, in particular on climate change.
“On one hand, institutional investors and asset managers often feel the heat from moving too slowly on divesting fossil fuel assets, coupled with pressure from radical divestment campaigns,” says Michele Giuditta, director. “On the other hand, pension plans and asset managers, addressing the risk of climate change, could fear penalization by states and politicians who view ESG practices as ideologically driven.” The responsibility of navigating the complexities of these demands falls on asset managers and plan fiduciaries, as these asks do not typically consider the challenges of managing the assets.
Three-quarters of asset managers cite that clients believing that environmental, social, and governance (ESG) investing is driven by political views is at least a moderate challenge to increasing client receptivity of ESG issues, up from 49% in 2021. The political polarization is also impacting distribution, with 46% of financial advisors citing the perception that ESG investing is politically motivated as a significant deterrent to ESG adoption, compared to just 16% in 2021.
These recent pressures faced by investors have not impacted asset managers’ responsible investing plans, with climate change remaining a top strategic focus. According to the research, 83% of managers are making climate-related factors a top priority for new product development, ESG integration (93%), and active ownership activities (94%). Climate change and other environmental issues are also top themes asset owners seek to address when allocating to responsible investment strategies. Climate change/carbon reduction (71%), environmental sector (65%), and sustainable natural resources/agriculture (55%) are top areas of focus.
To alleviate near-term skepticism from investors caused by recent political backlash, Cerulli believes that asset managers need to discuss the merits of ESG and sustainable investing with their clients and reinforce how and why they are using relevant ESG data to drive long-term economic value. Transparency and reporting that validates how ESG information is additive will also be key.
Morningstar published its inaugural Global Investor Portfolio Study, which examines how individual investors in 14 markets construct portfolios. The study finds there is a wide divergence in portfolio preferences based on where an investor is located.
“Our inaugural global study of portfolio construction shows that there is no such thing as an average investor,” said Wing Chan, lead author of the study and head of manager research for Europe and Asia Pacific. “As investors around the world demand more personalized portfolios, it’s important to understand the factors that drive investing behaviors in order to improve the investing experience and empower investors’ financial success.”
The study analyzes how local market practices and investment culture, retirement safety net, and regulatory landscape drive investors’ financial needs and their appetite to take risks in their portfolios. It also considers the availability of financial products, how investors approach portfolio construction, the overall asset allocation of portfolios, and the magnitude of home-market bias – when a portfolio’s geographic exposure is skewed towards the investor’s home market.
Investors are more willing to take risks in their portfolios when they begin investing early in life. This is seen in markets with a higher prevalence of defined-contribution retirement schemes, where investors tend to build or are defaulted into more aggressive portfolios with higher equity weightings and less bond and cash exposure. This includes markets such as Australia, New Zealand, the United Kingdom, and the United States.
In contrast, in markets such as France, Germany, and Japan, which have defined-benefit schemes and, in some cases, are supported by universal healthcare and a comprehensive social security net, there is less incentive for investors to make their own financial planning decisions. As a result, these investors tend to have conservative portfolios.
Real estate makes up most non-financial asset wealth globally and is the primary reason investors take on significant debt, especially in highly indebted markets such as Australia, Canada, China, Hong Kong, and New Zealand.
Home-market bias is prevalent in all markets, though there are often additional drivers beyond traditional reasons such as familiarity, accessibility, and avoiding currency risk. These include the size of the domestic equity and bond markets, capital controls, and tax benefits.
U.S. investors generally have a high appetite for risk, as U.S. households hold the least amount of cash and deposits. Investors in Japan, however, represent the most conservative cohort, with more than 50% of households’ assets sitting in cash or deposits, despite more than two decades of close-to-zero interest rates.
While sustainable investing is most popular in Europe and is gaining interest in Australia, New Zealand, and North America, ESG issues have yet to become top considerations when investors construct portfolios in Asia. In the U.S., sustainability plays a supporting role in investment selection, but ESG considerations appear to be particularly important to younger investors.
Cryptocurrencies are included in portfolios across the globe but continue to be used by a minority of investors, with a heavy concentration among younger cohorts. The most cryptocurrency-friendly investors are in Singapore – which is home to several prominent cryptocurrency companies, Hong Kong, and Canada – which has over 14% of assets allocated to the space.
Unicorn Strategic Partners(UnicornSP) and iCapital announced an exclusive partnership to distribute private market and hedge fund investments to financial advisors in Latin America and intermediaries in the US servicing non-resident LATAM clients.
UnicornSP will serve as a local distribution partner and product specialist introducing funds available on the iCapital flagship platform to wealth managers in the region.
UnicornSP will add new senior hires fully dedicated to private markets to its teams in Argentina, Brazil, Chile, Colombia, Mexico, Uruguay, and the United States.
On the other hand, iCapital will provide UnicornSP with product support through its in-house research and diligence team, and a bespoke suite of educational tools.
“This is a new chapter for Unicorn Strategic Partners and its clients. It underscores our commitment to providing wealth managers and their clients broader access to an array of diverse investment opportunities,” said David Ayastuy, Managing Partner at UnicornSP. “In launching our partnership with iCapital, we are powering our ability to meet high-net-worth investors’ growing demand for private market and hedge fund strategies, and better support their desired portfolio outcomes.”
UnicornSP services clients including private banks, broker-dealers, registered independent advisors, multi-family offices, and external asset managers across the Latin American markets and financial intermediaries in the US servicing non-resident LATAM clients.
iCapital and UnicornSP see significant demand for private market and hedge fund investments in LATAM alongside a desire for comprehensive educational support.
“We are delighted to strengthen our presence in the Latin American market in partnership with Unicorn Strategic Partners,” said Marco Bizzozero, Head of International at iCapital. “Latin America is of strategic importance to iCapital. This partnership represents our commitment to the wealth managers in the region by providing them with the relevant private markets and hedge fund investment solutions, expertise, and education to help them achieve their clients’ investment objectives.”
Daniel Viera has been hired by UBS International for its wealth management division in New York, the company reported on LinkedIn.
“We’re pleased to announce that Daniel Vieira has joined our International Division as a part of the New York International Wealth Management Office,” posted Catherine Lapadura on LinkedIn.
Viera, with more than 20 years in the industry, comes from Delta National Bank and Trust Company in New York where he worked for more than 15 years.
Prior to Delta, he worked for more than 6 years in Sao Paulo, first as a financial advisor and then portfolio manager, according to his LinkedIn profile.
“Backed by the extensive intellectual capital and the expertise of UBS Wealth Management, Daniel is positioned to help UHNW families and individuals in Latin America, simplify their complex financial lives, maximize the value of their businesses, and create lasting family wealth,” the release added.
He studied business and finances at Columbia Business School and the New York University.
Roberto Martins has been promoted to head of International Solutions at Itaú Asset Management.
Martins, with more than 20 years in the industry, posted on LinkedIn about his new role at the Brazilian firm.
He worked in Credit Suisse between 2001 and 2003.
Subsequently, he worked for a decade at Citi where he became head of Private Bank of Brazil.
In 2013, he landed at Itaú where he headed GWS International private banking until now he assumed the position of head of International Solutions.
Martins holds an MBA from the University of California, Berkeley, Haas School of Business and, among other studies and certifications, the Data Science Program of the Massachusetts Institute of Technology.
Reinsurers facing shrinking balance sheets amid rising rates and increasingly volatile catastrophic losses have effectively utilized the insurance-linked securities (ILS) market to manage risks and topay insured losses. However, ILS investors not properly compensated for risk or facing elevated losses amid fallout from Hurricane Ian may choose to reinvest capital elsewhere, which would exacerbate the demand/supply imbalance of the reinsurance sector, which is especially acute in the Florida property market, Fitch Ratings says.
ILS include catastrophe (cat) bonds, collateral reinsurance, sidecars and industry loss warranties, representing around 20%, or $100 billion, of global reinsurance capacity. Cat bonds are approximately 30% of the ILS market. Commentary from the Monte Carlo Rendezvous 2022 indicated a pipeline of ILS deals of $5 bil. of additional reinsurance capacity, which would benefit insurers facing a hardening market.
However, the ILS market will assume a fair share of losses from Ian, with Fitch estimating total insured losses of $35 billons.-$55 billons., second only to Hurricane Katrina at $65 bil. ($90 bil. in 2021 dollars).
As frequency and severity of losses have increased in the past 10 to 15 years, modeling catastrophic losses and pricing risk effectively is challenged by secondary peril costs and potential effects of climate change on catastrophe events. Escalating inflation and litigation expenses also make controlling claim costs more difficult.
Major hurricanes have hit Florida in five of the past six years, following a 10-year reprieve after Katrina (2005). The state remains attractive with its population growing over 16%, or three million people from 2010 to 2020. Estimated losses from Ian will make the tenuous Jan. 1 renewal season much more difficult.
ILS investors are compensated for possible principal loss due to natural catastrophe risk. Since 2017, with insured losses from Hurricanes Harvey, Irma and Maria, the number of cat bonds not returning full principal to investors totals 55 individual tranches with either a full or partial loss to investors, a dramatic increase compared to 75 tranches in totality since 1990.
Nearly 33%, or $10 billons (bil.) of outstanding cat bonds, have some exposure to Florida wind damage. ILS investments exclusively or predominantly exposed to Florida wind or the southeast region and Hurricane Ian are $2.9 bil.
Without proper compensation, investors will look elsewhere. Cat bonds become unattractive if investors perceive they are not adequately compensated for “loss creep” and “trapped capital” due to settlement delays, which can last three to four years. During this time, Cat bond investors may forego investment opportunities from other asset classes or be stuck with ILS deals at lower spreads. ILS-trapped capital from Hurricane Ian is estimated at $15 bil. – $18 bil. according to Trading Risk.
Fitch rates two catastrophe bonds, Stratosphere Re Ltd., 2020-1 and Long Point Re IV Ltd., 2022-1. These bonds are not at risk of principal loss given the former’s structural features and the latter’s predominantly northeast U.S. insured property value.
Several cat bond indices provide initial market reaction to Ian, reflecting preliminary estimates based on pricing sheets and not reported claims from sponsors. September sequential-month returns for Swiss Re Global Total Return, Eurekahedge ILS Advisers Index and Plenum Indexes were -8.6%, -7.6% and -5.2%, respectively, versus the ‘BB’ High Yield index return of -3.8%.
ILS indices prior to September were positive and performing very well in 2022 to financial asset classes, showcasing non-correlation benefits. However, ILS performance has trailed the 3 to 5-year ‘BB’ rated High Yield Index over the past five years. Spread attractiveness and diversification benefits for ILS investors may fall with rising interest rates, which may reduce investor appetite in dedicating time and resources to a sector that has plateaued between $90 bil. and $100 bil. of outstanding issuance.
Northern Trust Asset Management (NTAM) announced that Antulio Bomfim has been hired as head of Global Macro, a newly created position within its global fixed income group.
The expansion of NTAM’s global fixed income team, responsible for $470 billion in fixed income assets under management, is designed to enhance capabilities as the team serves the evolving needs of fixed income investors worldwide, the firm said.
Bomfim joins NTAM with nearly 30 years of experience spanning roles within investment management and the Federal Reserve Board System.
Most recently, he served as special adviser to the Fed Board as well as special adviser to Chairman Jerome Powell.
Previously, Bomfim was with Macroeconomic Advisers as a senior managing director, co-head of Monetary Policy Insights. Prior to that, he served as a portfolio manager and co-head of interest rate strategy for OFI Institutional Asset Management, a division of Oppenheimer Funds.
A longtime advisor, consultant and award-winning author, Bomfim brings deep practical and theoretical knowledge of the economy and financial markets. His fields of research include asset pricing, monetary policy, macroeconomics, investments and financial markets. He holds a Ph.D., MA and BA in Economics from the University of Maryland, as well as a MS in Mathematical Finance from the University of Oxford.
In his newly created role within NTAM’s Global Fixed Income Group, Bomfim has overall oversight responsibility for the Global Macro Group, which is responsible for interest rate strategy, systematic volatility, liquidity, and monitoring systemic risk globally. Bomfim is also responsible for the firm’s global liquidity management business.
He reports to Chief Investment Officer of Global Fixed Income Thomas Swaney.
“Within the Global Fixed Income team, our fundamental tenet that investors should be compensated for the risk they take manifests itself in our management of four key risks – interest rate, volatility, prepayment and credit,” Swaney said.
Assets in managed accounts programs grew 23.8% in 2021, reaching a high of $10.7 trillion, according to Cerulli’s latest report, U.S. Managed Accounts 2022: The Future of Personalized Portfolios.
As sponsors evaluate drivers for long-term growth, they are prioritizing helping advisors manage portfolios more effectively and developing personalized investment solutions through direct indexing.
A majority (56%) of managed account sponsors are prioritizing providing better portfolio construction resources to advisors. This comes as securing consistent investment outcomes and scaling advisory practices have long been competing goals at sponsor firms.
“Sponsor firms realize that discretion is a powerful tool for advisors. Instead of trying to take it away from underperforming advisors, they are instead giving their advisors tools to be better portfolio managers,” according to Matt Belnap, associate director.
“This has become an important selling point for sponsors, especially as advisor mobility becomes an increasing threat,” he added.
At the same time, nearly all managed account sponsor firms plan to increase their direct indexing and separately managed accounts (SMA) customization capabilities.
Within the direct indexing sphere, sponsors are most interested in tax optimization (93%) and tax management (83%).
“This makes intuitive sense; tax savings are a tangible story that advisors can explain to their clients to easily highlight the benefits of the product,” remarks Belnap. How direct indexing evolves beyond taxes will depend on which target market the sponsor firm intends to prioritize.
Sponsors also realize the importance of personalization as they seek to attract the next generation of investors through ESG investing.
In four of five managed account program types, the share of ESG assets increased from 2021 to 2022. Cerulli sees this as an indication that advisors and clients are showing an increased interest in ESG, and that products on managed account platforms are proliferating to service this demand.
In an increasingly crowded wealth management space, with fee awareness growing and differentiators more difficult to identify, sponsors need to offer advisors and investors flexibility and customization.
MFS is enhancing its Fixed Income Department’s leadership team with the addition of two co-chief investment officers. Pilar Gomez-Bravo and Alexander Mackey will join current CIO Bill Adams to form a global leadership team of co-CIOs to lead the department.
“Pilar and Alex are experienced and highly regarded members of our global research platform and have demonstrated the leadership skills necessary to help lead the department to continued success globally,” said MFS CIO Ted Maloney. “Together with Bill, they will lead the continued execution of MFS’ multidecade strategic priority of growing its presence in fixed income markets around the world to the benefit of our clients,” he added.
With more than 25 years of investment experience overall, Gomez-Bravo joined MFS in 2013 and has been instrumental in establishing the firm’s London-based fixed income team. She is a portfolio manager on several fixed income strategies and serves on investment committees and working groups across asset classes.
Mackey began his career in 1998 with MFS and in 2001 joined the firm’s Fixed Income Department, where he has worked as both an analyst and portfolio manager. During his tenure, he has helped guide the firm’s US high grade corporate credit research process and portfolio management efforts.
“Having worked closely with both Pilar and Alex during their time at MFS, I’ve seen firsthand the positive impact their leadership has had on the fixed income team globally. I look forward to working with them in this role and to sharing our collective expertise and experience as we take fixed income at MFS to the next level,” added current Fixed Income CIO Adams.
Adams, Gomez-Bravo and Mackey will report to Maloney.
As of June 30, 2022, MFS managed more than US$94 billion in fixed income assets worldwide. The firm offers global, international, emerging market and domestic fixed income strategies for clients around the world. Since 2017, MFS’ fixed income assets have increased by more than 23% following a buildout that began more than a decade ago that has seen the firm double the size of its fixed income team globally while adding new capabilities and enhancing existing strategies to meet client needs, according the firm information.
“Today, with nearly 100 years of investment experience behind us, we have the people, capacity and strategies we need to create value for a diverse set of fixed income clients around the world. Markets will always present new challenges, and we look forward to the continued guidance Pilar and Alex provide the investment team as we work together to help our clients meet those challenges,” said Maloney.
Principal Financial Group announced its investment unit will be doing business as Principal Asset Management as the company intensifies its focus on asset management. This name will highlight the firm’s deep, local knowledge, and global perspectives across all asset classes to help drive long-term investment outcomes for clients, the press release says.
“Asset management is a core growth driver for Principal, adding significant value to the company both financially and strategically in our goal to provide holistic financial solutions,” said Dan Houston, chairman, president, and chief executive officer for Principal. “As markets mature and fluctuate, and demand for global investment solutions increases, Principal Asset Management is well positioned to help our clients achieve their financial goals.”
Principal Asset Management has been working to unify and strengthen its investment teams, processes, distribution model, and products to execute on a forward-looking strategy that reinforces its specialized investment expertise, the release adds.
“The $507.1 billion asset manager is leveraging talent, technology, and its global footprint to bring the firm’s public and private market capabilities together to best serve its diverse client-base, which includes more than 800 institutional, retirement, retail, and high net worth investors across more than 80 markets”, according the firm information.
Resources have been devoted to building new products and alternative investment options such as model portfolios and direct lending, respectively, the company said. Strategic hires have been made to support growth initiatives like global wealth alternatives and liability driven investments. And the client experience is being transformed with a digital strategy that combines data analytics with market insights from Principal Asset Management investment experts to help clients optimize portfolios and to deepen their relationships.
“We’re building and strengthening relationships with investors in over 80 markets, aligning our growth strategy to their needs and the evolving market opportunities to solidify a consistent global identity,” said Kamal Bhatia, chief operating officer for Principal Asset Management. “Principal remains focused on identifying compelling opportunities by providing clear perspectives that are harnessed by the power of our diverse, local investment talent. A global asset management platform that brings deep, specialist capabilities will continue to actively unlock insights and opportunities for all our clients.”
