Asmooth sea never made a skilled sailor.” The recent market correction may be a good reminder of the comeback of volatility and the importance of diversification. Schroders, the winner of this year’s Best Multi-Asset Investment House (Hong Kong), stresses downside risk management in navigating the elevated volatility in 2018. Patrick Brenner, Head of Multi-Asset Investment, Asia, shared with BENCHMARK how his firm helps deliver a smoother investment journey to clients over time.
BENCHMARK (BM): Congratulations on your achievements in Multi-Asset Strategies for consecutive years! What defines your investment philosophy and how do you create value for investors?
Patrick Brenner (PB): Thank you! Helping our clients achieve their financial goals has always been the focus when we design investment solutions. From strategies that aim to beat inflation to funds that focus on generating a diverse income stream, we deliver outcomes to suit a variety of investment needs.
It is also our philosophy to constantly challenge ourselves by looking for innovative ways to continuously enhance outcomes for investors. This ranges from evolving our research process as markets change, sharpening our tools for portfolio construction and improving the efficiency of idea implementation. All these are extremely important elements in delivering high quality investment solutions to our clients.
BM: Is your investment success attributable to your investment approach? In what ways are your strategies different from those of your peers?
PB: Yes, I believe that our forward-thinking and innovative approach is what has led us to be one of the first asset managers to introduce multi-asset solutions to the market. Our active asset allocation process is benchmark-unconstrained and focuses on the true return drivers behind asset classes, which differentiates ourselves from the more traditional, benchmark-constrained approach of asset allocation. In addition, the holistic view of risk management through assessing risks in multiple dimensions, as well as harnessing diversification across different asset classes, has helped our multi-asset solutions to achieve lower volatility and drawdowns. Ultimately, this improves our clients’ experience as they can enjoy investment outcomes, such as capital growth or income generation, with a smoother ride along the way.
BM: Looking ahead, what challenges will 2018 present and how do you overcome them by using active asset allocation? Can you tell us your latest portfolio positioning?
PB: I think the most difficult problem for multi-asset investors in 2018 is that valuations of both equities and bonds are expensive, and thus the diversification benefit of having exposure to both asset classes could become challenged, especially if an equity market correction is triggered by rising bond yields.
The equity market is also likely to see more volatility this year as central banks start to unwind their ultra-loose monetary policies. As such, a strong focus on downside risk management using tools like put options will become more important. These strategies help reduce the downside impact but allow participation when markets rise, thereby delivering strong risk-adjusted returns and income to our clients.
Across our multi-asset portfolios, we have maintained an overweight in equities as the cyclical environment and corporate fundamentals remain supportive, while we have also kept an underweight in duration assets given the potential of rising inflation and monetary tightening.
BM: We have noticed that ESG is an important consideration in your investments. Given the growing emphasis on ESG globally, have you observed a change of attitude among Asian companies and investors towards sustainable investing?
PB: You are right. Schroders has been incorporating ESG considerations into our fundamental research and security selection process for 20 years. We see ourselves as long-term stewards of our clients’ capital, and this philosophy naturally leads us to focus on the long-term prospects for companies in which we invest.
European investors have traditionally led the way in sustainable investing. However, there has been significant progress in Asia over recent years. Since 2014, stewardship codes and principles have been adopted in Japan, Malaysia, Hong Kong, Taiwan, Singapore, Korea and Thailand. In addition, the growing number of stock exchanges introducing sustainability reporting standards, as well as increasing scrutiny from investors, all combined to change companies’ attitudes towards ESG.
Among asset owners in Asia, there is also a growing commitment to integrate ESG considerations across their investments. In Schroders’ 2017 Global Investor Study, Asian investors stated that they had increased their sustainable investments over the past five years, and they believe sustainable investing will become more important in the coming years. With sustainability firmly in focus in the region, there is potential for Asia to leap ahead. BM