Real-world view benefits investors
John Green, the chief commercial officer of global manager Ninety One, was on a trip to Australia recently to speak about a range of topics including implementation of ESG principles, emerging markets and current geopolitical issues.
With its origins in South Africa, an emerging market with a heavy dependence on coal, the separately dual-listed (London and Johannesburg) Ninety One has a strong pedigree in ESG investing dating back to about 2006-2007.
“South Africa and the African continent present an amplified view of the sustainability challenge,” Green said in an interview. “Before ESG became fashionable we committed to the view that private capital was needed to make a meaningful difference in the development of the African continent, and we still do that. It gave us a real-world view of the impact. We learned the need to think about the on-the-ground activity rather than just the portfolio activity.”
According to Green, a lot of managers will wash portfolios to reduce the overall carbon emissions level by selling out of high emitters and buying more of the low emitter companies, which doesn’t improve the efficacy of the portfolio, nor help the environment.
An emphasis on positive investment decision making, rather than negative screens across a portfolio, is also influenced by Ninety One’s roots as a subsidiary of Investec financial services group.
“Focus makes a big difference,” Green said. “You need to crystallise the question down to its key components. In 2018-2019, one of our global hubs, Cape Town, experienced the most severe drought for a major city in living memory up until then. We had this concept called ‘Day Zero’. That was the day that when we turned on the taps, no water came out. That brought to life two things: the climate challenge is real and will affect everyone; and you have to focus on real-world actions. During that time, the residents of Cape Town reduced their water consumption by 60 per cent.”
He said that, with only a few notable exceptions, companies wanted to change the way they operated. Ninety One invested in about 1,200 companies and saw the challenge as a big opportunity. It was a frustration for like-minded investors when governments had policies which retarded that desire, hindering the capacity of corporates to take action.
An example of such interference, which was probably an unintended consequence, was a regulation in South Africa which did not allow companies to generate their own power. That was changed and then crystalised a lot of investment.
Ninety One also has a strong pedigree in fixed income, especially in emerging markets, and recently started a piece of research in the context of the Russian invasion of Ukraine, the consequent global market gyrations and economic consequences.
While it is not yet completed, the research has reaffirmed the added value from emerging markets investing generally. Emerging markets have proven adequately priced, and investors compensated for the risk premium through the ups and downs.
Green says that EM debt strategies have delivered excess returns in many periods, including during the Russian-Ukraine war. “The risk of loss seems to be over-assessed,” he said. “Investors have regained their earlier losses in fixed income. Currencies are a bit more complicated but in hard currency terms, the premiums paid have been more than compensated.”
He said the excess returns from EM equities had been a little disappointing but there was still a positive correlation between revenue and profit growth, which over time paid off. “So, it still rewards investors to seek out that risk premium,” he said.
Justin Cowper, Ninety One’s Sydney-based head of institutional business for APAC and the Middle East, said there was a sense of frustration, though, for both the manager and some of its Australian clients, that the index used to measure performance for the YFYS test, the Bloomberg Global Aggregate Index (Global Agg), does not include all opportunities, notwithstanding the fact that it accounts for about 10,000 securities and 30 currencies.
For instance, Ninety One’s ‘energy transition’ strategy for fixed income portfolios has proved very popular for fiduciary investors globally but would introduce extra volatility against that index. Green also said he had struggled to understand that regulation because the investor’s risk budget had become “the all-dominating question” in a portfolio. “Good investors take risks,” he said. “And over time we respect the investment judgement of the organisations we engage with.”