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Corporate bonds vs. term deposits

Posted On:Apr 16th, 2019     Posted In:Rss-feed-market    Posted By:Provision Wealth

Invest in a corporate bond fund or put your money in a term deposit? It’s a question more pertinent now than ever, as market interest rates push towards new lows.

Both term deposits and managed bond funds are suitable for investors who want a reliable income stream, liquidity and capital preservation. But they have different risk and reward outlooks. We consider

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Invest in a corporate bond fund or put your money in a term deposit? It’s a question more pertinent now than ever, as market interest rates push towards new lows.

Both term deposits and managed bond funds are suitable for investors who want a reliable income stream, liquidity and capital preservation. But they have different risk and reward outlooks. We consider each in detail below.

Corporate bond funds

Corporate bond funds can provide an attractive, low-risk alternative for investors seeking a reliable, consistent income stream with returns typically higher than cash, while also providing investors with a return stream which has historically protected against falling equity prices.

They typically suit investors with a longer-term investment horizon willing to take on slightly more risk.

A corporate bond fund will typically generate income above cash and term-deposit levels, as owning the bonds issued by banks and corporates earns investors an additional premium over cash to compensate for the additional risk of not being repaid. It may be structured to have sensitivity to changes in interest rates (typically measured as ‘duration’), and so the returns earned by owning units in a fund may be impacted by this.

An actively-managed corporate bond fund may provide additional returns to investors by increasing or decreasing the sensitivity to credit spreads and interest rates based on the manager’s views on whether these markets are over or under-pricing the associated risks. This may mean changing exposures to certain sectors like banks, utilities or telecommunications, and by focusing investments in key issuers that are expected to improve in credit quality.

An actively-managed corporate bond fund may also reduce the sensitivity to changes in interest rates by managing the duration of the fund. If the portfolio manager’s expectation of future changes in interest rates differs from that of the market, then they may choose to position the portfolio to potentially profit from this. For instance, if the portfolio manager expects yields to rise by more than the market is currently pricing, then they may choose to reduce the fund’s sensitivity to higher yields (which cause bond prices to fall). Conversely, if the expectation is for interest rates to fall, the portfolio manager may choose to increase the fund’s sensitivity to interest rates, to benefit from falling bond yields (which lead to higher bond prices).

Bonds can help reduce risk within an investment portfolio by providing a buffer in times of market stress. They provide a diversification benefit to an investor’s overall portfolio and historically, bond returns have been negatively correlated with riskier assets such as equities. This has meant that bond prices have usually risen in value when share prices are falling (and vice versa).

Most investment-grade corporate bond funds publish unit prices every day, unlike term deposits which do not. This provides the appearance that there is greater volatility in the unit price of a bond fund, relative to cash or term deposits. However, an investor with a longer-term investment horizon should achieve better returns over time when compared with a term deposit or an exposure to cash.

Term deposits

Term deposits are popular with investors wanting security in the return that they will receive over a period of time, and certainty that their capital will be returned at this time. They are a good option for those with investment horizons of less than 12 months, provided that investors do not wish to access their investment before the end of the term, as additional fees can apply for early access.

Term deposits typically generate a higher rate of return for an investor compared to leaving their money in a transaction account. Investors in term deposits also benefit from the government guarantee on deposits (which protects deposits up to $250,000), which can provide comfort to an investor if the viability of the bank the term deposit is with were to ever come into question.

Investors also need to be aware that term deposits come with their own set of risks. Primary amongst these is the risk for investors that when they come to roll their investment at maturity, the interest rate may have fallen. This is called re-investment risk. In recent years, the returns offered on term deposits have been relatively stable, and re-investment risk has not been an issue. This is because the market’s expectation for the future path of interest rates has been reasonably stable. However, sustained falls in bond yields may mean banks choose to offer lower term deposit rates in future periods, as those banks may be able to finance themselves at better interest rates elsewhere. This can have a substantial impact on the returns generated from a term deposit roll-over strategy, if subsequent term deposit rates materially fall.

Ready access to a term deposit is also restricted through the term of the contract. If an investor requires access to their funds – for whatever reason – this can take up to 31 days from the date of request. The issuing bank will also usually charge an “interest adjustment”, which is a penalty charge for breaking the conditions of the term deposit prior to maturity and may reflect a combination of fees and forgone interest.

Conclusion

Investors in an actively-managed corporate bond fund may reap the benefits of combining a portfolio of bonds to achieve a stable, diversified income stream to longer-term investors during different market cycles. A skilled active bond manager may deliver above-average returns through the market and interest rate cycle while lowering overall portfolio risk. Term deposits also remain a viable investment strategy for shorter-term investors, depending on their role within a broader portfolio allocation, though investors need to be mindful of the risks.

 

 

 Corporate bond funds

 Term deposit

 
 

Typical investor type

 Longer-term investors

  Shorter-term investors

 
 

Main pros

Monthly income

Daily liquidity

Diversification

Defensiveness

Professional management

Deposits up to $250,000 are guaranteed by government

Guaranteed interest rate

Security

Higher rate of return than a transaction account

 
 

Main cons

Investment value changes alongside yields

Volatility in daily price movements

Higher level of risk compared to term deposits

Illiquid asset; normally need 31 days’ notice to access funds

Penalties may apply for accessing money early

Reinvestment risk if yields fall

 

Please call us on |PHONE| if you would like to discuss.

 

Author:  Nathan Boon, Sydney, Australia

Source: AMP Capital 11 April 2019

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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AREITs: harnessing the real estate tailwinds of digital disruption

Posted On:Apr 16th, 2019     Posted In:Rss-feed-market    Posted By:Provision Wealth

Moving towards the end of the business cycle, investors are increasingly seeking exposure to assets with defensive attributes. Australian real estate investment trusts (AREITs) is a defensive asset class that has shown its ability to deliver strong returns over a variety of market conditions, having outperformed equities over the past one and five-year periods, by 11.81 per cent and 5.7

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Moving towards the end of the business cycle, investors are increasingly seeking exposure to assets with defensive attributes. Australian real estate investment trusts (AREITs) is a defensive asset class that has shown its ability to deliver strong returns over a variety of market conditions, having outperformed equities over the past one and five-year periods, by 11.81 per cent and 5.7 per cent respectively1. And as the Australian 10-year bond yield hits new all-time lows, the demand for long duration assets like real estate are likely to be well bid.

The influence of positive global trends and long-term contractual income streams, usually in the form of rental income, means that a well-constructed property portfolio can offer stable cash flows even through periods of high volatility and weak economic growth.

Rise of the boomers

Some of the trends responsible for this strong performance are as fundamental as the profound demographic shift affecting western society, as retiring baby boomers re-allocate their not-inconsiderable resources to better suit their changing needs.

Given the swelling population of over 65s and their increasing need for health-care services that will inevitably follow, there is a substantial tailwind for property offering high-quality health care facilities that cater to this demand, such as aged care facilities.

Digital disruption

Some of the other opportunities appearing in property are less intuitive, such as those afforded by digital disruption – the replacement of old ways of doing business, of communicating, of storing information – with new online platforms.

Historically commercial property has benefited from the physical presence of businesses and it might seem counter-intuitive to think that it might profit in some way from the forces that are disrupting those traditional models. However, the drive to online and cloud solutions are providing opportunities for listed real estate investors to capture some of the positive value from that disruption through stakes in the real estate and infrastructure required to support it.

Datacentres

With the Internet of Things making its way into fridges and kettles across the globe, the ever-increasing uptake of data-hungry streaming services such as Netflix and YouTube and corporate servers continuing their relentless transition to the cloud, demand for data storage will continue to grow for the foreseeable future. Whilst the term “cloud” conjures images of an esoteric, intangible repository, the space it now occupies is no less real (if somewhat more compact) than the mountains of DVDs, CDs, hard drives and server stacks it has replaced.

Between 2016-2021 global datacentre workloads are set to increase by 27 per cent compound annual growth rate2, more than tripling over that period, and demand for the real estate and infrastructure to support this extra volume will grow in tandem.

As landlords to the internet and the cloud, datacentres will profoundly benefit from this fundamental shift in our society, in a way that should prove resistant to cyclical influences in the wider economy. The highly-specialised nature of the properties involved also presents high barriers to entry, insulating existing investments from oversupply, and typically long-term lease arrangements for big tenants offer consistent cash flows that are largely independent of cyclical factors.

E-commerce

Much in the same way as we discount the bricks-and-mortar implications of sending our data to the cloud, it can be easy to forget that the disruption of physical stores by e-commerce retailers has positive implications for real property as well.

Consumption trends have been shifting for many years from retail stores to online platforms, spearheaded by the rise of e-commerce titans Amazon and Alibaba.

But while the storefronts have moved online, physical storerooms have taken on a new significance. Logistics facilities have been nicknamed ‘cheap malls’ in certain real estate circles, for the way in which they have taken over the role of shopping malls in e-commerce transactions, providing storage and access to goods. Online retailers are investing heavily in their logistics centres, with automation and proximity to transport hubs such as airports and intermodal rail becoming vital assets in their quest to beat their competitors on price and delivery speed.

The resulting improvements in cost and convenience are only increasing the trend to online. The UK is one of the leaders of this structural trend, with e-commerce penetration (excluding food) approaching 40 per cent and forecast to move towards 50 per cent in the coming three to five years3. This is driven in part by the proliferation of mobile technology, with 47 per cent growth in online sales via mobile devices in 20164.

Concurrently, industrial floor space in major cities now comes at a premium, as industrial property has been re-zoned over the last twenty years to higher-value land use, such as residential. This is causing an inflection point today in the logistics market, squeezing rents, capital values and occupancy to all-time highs in modern facilities located close to the consumer.

Conclusion

Despite broader market fluctuations, the relentless march to online services will continue to create value in selected real estate sectors into the foreseeable future, even as it disrupts real-estate business models in other sectors. High-performing REITs are able to identify these trends at an early stage and use them to capture the crucial defensive positioning sought by investors at times of uncertainty and late in the business cycle.

If central banks further loosen monetary policy over the next twelve months, lowering bond yields, the case for investment in those AREITs which are taking advantage of global tailwinds and which offer the security of long-term income streams will become even more compelling.

Please call us on |PHONE| if you would like to discuss.

 

1 AMP Capital, 2019
2 Cisco, Global Cloud Index, 2018
3 CBRE Global Research, 2016 (data represents non-food shopping)
4 IMRG Capgemini, eRetail Sales Index, 2016

Author:  James Maydew, Head of Global Listed Real Estate Sydney, Australia

Source: AMP Capital 27 March 2019

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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The changing role of benchmarks

Posted On:Apr 16th, 2019     Posted In:Rss-feed-market    Posted By:Provision Wealth

Benchmark-aware and index investing will likely always have a role to play in the investment world, but as markets have evolved and diversification has become progressively more important, investors are increasingly looking for approaches that are benchmark unaware.

The background to benchmarks

A benchmark is any definable market cross-section. Most are weighted by market capitalisation, but they can also be equal-weighted or

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Benchmark-aware and index investing will likely always have a role to play in the investment world, but as markets have evolved and diversification has become progressively more important, investors are increasingly looking for approaches that are benchmark unaware.

The background to benchmarks

A benchmark is any definable market cross-section. Most are weighted by market capitalisation, but they can also be equal-weighted or fundamentally-weighted, among other measures.

Australia’s first share price index was established in 1938. But it wasn’t until December 31, 1979 the All Ordinaries was created as Australia’s first national index. It soon became the default instrument against which fund performance or individual stock performance was measured, however this was never its intent.

To address this, almost 20 years ago, the S&P/ASX 200 equity benchmark index was created, which focussed on addressing the investability of the index
reflecting both the size and liquidity of the top 200 stocks in the Australian market.

Equity benchmarks help explain the risks and returns that stem from equity investments. They also help investors understand fundamental factors such as profitability when trying to figure out average corporate performance. They provide context for investors to help judge fund manager success and compare their performance. Given they are published and highly rules-based, they can be easily tracked.

Challenges with benchmarks

Of course, benchmark-aware investing is only one approach. This is important, as large parts of a benchmark may be inappropriate to meet an investor’s requirements. Income is one example.

In the run up to the global financial crisis of 2007/2008, the banking sector produced more than a third of the total dividend income for the UK’s FTSE 100 index. An income investor following a benchmark strategy would have lost 35 per cent of their income as the share market fell following the financial crisis. As a result, this strategy would have been inappropriate for an investor seeking income security.

Additionally, smaller, evolving sectors tend to have a lower weighting in benchmark indices versus mature industries such as banking, energy and mining. Compared to smaller businesses, companies in these sectors may be relatively more cyclical, competitive and capital-hungry, and the ability to generate value (and therefore future market returns) may be more limited.

Benchmark unawareness

As a result, some investors are seeking alternatives to benchmarks. Becoming benchmark unaware does require a shift in mindset and in the focus of an investment team. In contrast to benchmark investing, fund managers are tasked with finding stocks they believe will deliver the outcome clients are seeking.

In this approach, analysis is focussed almost entirely upon the stocks that are likely to meet the client’s needs, since the need to “cover” a stock because it is in a benchmark is removed. This typically increases the depth of research and insights on stocks that are potential investments for the fund.

Importantly, becoming benchmark unaware is liberating. It offers a freedom to find great ideas for clients with a flexible approach. Often teams work within a more generalist model, rather than as sector specialists, which can lead to more collaboration on investment decisions, aiding objective decision making.

Tracking performance

Being benchmark unaware is, however, no excuse for failing to outperform an index over time. But ignoring the benchmark in the near-term in some circumstances may to lead to stronger performance longer term versus the benchmark.

The key is to be clear about the investment process and what’s needed to drive an asset’s long-term performance. For an income fund, that may be cash flow and dividend cover. For a fund seeking capital growth, earnings and cash flow growth may be the salient factors to measure.

Teams can track these underlying drivers for clients and demonstrate they are moving in line with the client proposition. This will help provide comfort that the outcome they are seeking – income or capital growth, for instance – should be delivered over time.

Ultimately what matters to clients is absolute outcomes after all costs. Research suggests that this is often more often achieved via less benchmark awareness – it seems clear that our industry is increasingly heading this way.

Please call us on |PHONE| if you would like to discuss.

 

Author: David Allen – Meng (Chemical Engineering) Global Chief Investment Officer, Equities London, United Kingdom

Source: AMP Capital 29 March 2019

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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Statement by Philip Lowe, Governor: Monetary Policy Decision, April 2019

Posted On:Apr 02nd, 2019     Posted In:Rss-feed-market    Posted By:Provision Wealth

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The outlook for the global economy remains reasonable, although growth has slowed and downside risks have increased. Growth in international trade has declined and investment intentions have softened in a number of countries. In China, the authorities have taken steps to ease financing conditions, partly in

Read More

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The outlook for the global economy remains reasonable, although growth has slowed and downside risks have increased. Growth in international trade has declined and investment intentions have softened in a number of countries. In China, the authorities have taken steps to ease financing conditions, partly in response to slower growth in the economy. Globally, headline inflation rates have moved lower following the earlier decline in oil prices, although core inflation has picked up in a number of economies. In most advanced economies, unemployment rates are low and wages growth has picked up.

Global financial conditions remain accommodative and have eased recently. Long-term bond yields have declined further, consistent with the subdued outlook for inflation and lower expectations for future policy rates in a number of advanced economies. Across a range of markets, risk premiums remain low. Equity markets have also risen and are being supported by growth in corporate earnings. In Australia, long-term bond yields have fallen to historically low levels and short-term bank funding costs have moderated further. The Australian dollar has remained within its narrow range of recent times. While the terms of trade have increased over the past couple of years, they are expected to decline over time.

The Australian labour market remains strong. There has been a significant increase in employment and the unemployment rate is at 4.9 per cent. The vacancy rate remains high and there are reports of skills shortages in some areas. The stronger labour market has led to some pick-up in wages growth, which is a welcome development. Continued improvement in the labour market is expected to see some further lift in wages growth over time, although this is still expected to be a gradual process.

The GDP data paint a softer picture of the economy than do the labour market data. GDP rose by just 0.2 per cent in the December quarter to be 2.3 per cent higher over 2018. Growth in household consumption is being affected by the protracted period of weakness in real household disposable income and the adjustment in housing markets. The drought in parts of the country has also affected farm output. Offsetting these factors, higher levels of spending on public infrastructure and an upswing in private investment are supporting the growth outlook, as is the steady growth in employment.

The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft and rent inflation remains low. Credit conditions for some borrowers have tightened a little further over the past year or so. At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.

Inflation remains low and stable. Underlying inflation is expected to pick up gradually over the next couple of years, although this has been taking a little longer than earlier expected. The central scenario is for underlying inflation to be 2 per cent this year and 2¼ per cent in 2020. In the near term, headline inflation is expected to decline because of lower petrol prices earlier in the year, while underlying inflation is expected to remain broadly stable.

The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that it was appropriate to hold the stance of policy unchanged at this meeting. The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time.

Source: Reserve Bank of Australia, April 2nd, 2019

Enquiries

Media and Communications
Secretary’s Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 9720
Fax: +61 2 9551 8033

Email: rbainfo@rba.gov.au

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Monetary Policy Decision – Statement by Philip Lowe, RBA Governor, March, 2019

Posted On:Mar 06th, 2019     Posted In:Rss-feed-market    Posted By:Provision Wealth

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economy grew above trend in 2018, although it slowed in the second half of the year. The slower pace of growth has continued into 2019. The outlook for the global economy remains reasonable, although downside risks have increased. The trade tensions remain a source

Read More

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economy grew above trend in 2018, although it slowed in the second half of the year. The slower pace of growth has continued into 2019. The outlook for the global economy remains reasonable, although downside risks have increased. The trade tensions remain a source of uncertainty. In China, the authorities have taken further steps to ease financing conditions, partly in response to slower growth in the economy. Globally, headline inflation rates have moved lower following the earlier decline in oil prices, although core inflation has picked up in a number of economies. In most advanced economies, unemployment rates are low and wages growth has picked up.

Overall, global financial conditions remain accommodative. They have eased recently after tightening around the turn of year. Long-term bond yields have declined, consistent with the subdued outlook for inflation and lower expectations for future policy rates in a number of advanced economies. Also, equity markets have risen, supported by growth in corporate earnings. In Australia, short-term bank funding costs have moderated, although they remain a little higher than a few years ago. The Australian dollar has remained within the narrow range of recent times. While the terms of trade have increased over the past couple of years, they are expected to decline over time.

The Australian labour market remains strong. There has been a significant increase in employment and the unemployment rate is at 5 per cent. A further decline in the unemployment rate to 4¾ per cent is expected over the next couple of years. The vacancy rate is high and there are reports of skills shortages in some areas. The stronger labour market has led to some pick-up in wages growth, which is a welcome development. The improvement in the labour market should see some further lift in wages growth over time, although this is still expected to be a gradual process.

Other indicators suggest growth in the Australian economy slowed over the second half of 2018. The central scenario is still for the Australian economy to grow by around 3 per cent this year. The growth outlook is being supported by rising business investment, higher levels of spending on public infrastructure and increased employment. The main domestic uncertainty continues to be the strength of household consumption in the context of weak growth in household income and falling housing prices in some cities. A pick-up in growth in household income is nonetheless expected to support household spending over the next year.

The adjustment in the Sydney and Melbourne housing markets is continuing, after the earlier large run-up in prices. Conditions remain soft in both markets and rent inflation remains low. Credit conditions for some borrowers have tightened a little further over the past year or so. At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased further. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.

Inflation remains low and stable. Underlying inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual and to take a little longer than earlier expected. The central scenario is for underlying inflation to be 2 per cent this year and 2¼ per cent in 2020. Headline inflation is expected to decline in the near term because of lower petrol prices.

The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Source: Reserve Bank of Australia, March 5th, 2019

Enquiries

Media and Communications
Secretary’s Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 9720
Fax: +61 2 9551 8033

Email: rbainfo@rba.gov.au

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Top 10 ESG issues for 2019

Posted On:Feb 22nd, 2019     Posted In:Rss-feed-market    Posted By:Provision Wealth

Investors around the world take environment, social and governance (ESG) issues into account when deciding where to invest, how to invest and how to measure returns.The ESG issues most likely to come under the microscope this year include some old favourites and a few new ones.

1. Climate change

Three years after the Paris Agreement promised to cap global temperature rises to

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Investors around the world take environment, social and governance (ESG) issues into account when deciding where to invest, how to invest and how to measure returns.The ESG issues most likely to come under the microscope this year include some old favourites and a few new ones.

1. Climate change

Three years after the Paris Agreement promised to cap global temperature rises to below two degrees celsius, there is little agreement among governments on how or what to do to lower carbon emissions

Nevertheless, businesses have started investing for a lower carbon economy and investors are calculating how exposed their investments are to changes in global temperatures. The investment risks can be grouped into four key categories:

Physical risks  Indirect risks  Policy risks  Transition risks

Damage due to physical impact of volatile and extreme weather.

 Secondary financial impacts of extreme weather, such as lower crop yields.

 The financial impact of regulators altering

climate change policies.

 The changing of the value of a business as

economies transition to renewables.

These risks are not clear-cut or easy to measure but investors in 2019 are asking companies to set goals around a transition to a renewables economy.


2. Regaining community trust

Following the Financial Services Royal Commission, investors are focusing more on issues at the core of the Commission: culture, remuneration and enforcement activities by the regulators.

Investors will consider processes and culture, especially where sales and profit targets rank against customers’ best interests. Attention is placed on regulators enforcing breaches of the law through the courts, which may impact companies’ profits and potentially their business activities.

3. The ethics of investing in social media

Social media users are typically happy to provide their personal information in exchange for free use of a platform. They provide this information assuming it will be handled and used in ways they expect. Trust is key. If user data is sold, stolen or mishandled, consumers question the safety of their information, undermining the social media companies’ business models.

The way social media companies respond in 2019 to laws and regulations being passed by governments to deal with privacy and the protection of users’ data will be critical to the success of the companies.  

Most popular social networks, January 2019, ranked by number of active users (in millions).

 

4. Access to medicine

Most Australians have access to affordable medicine, thanks to the pharmaceutical benefits scheme. Residents of many other countries, both rich and poor, are not so fortunate.
Some investors have been supporting a right of access to medicine for many years. AMP Capital signed the Investor Statement on Access to Medicine in 2016, an initiative that ranks global pharmaceutical companies on their efforts to balance profit with purpose, acknowledging the tension between affordable access to medicine, the need to cover expensive research and development costs, and a financial return to shareholders.

5. Investing for impact

Impact investing, whereby an investor looks for a social return as well as a financial return, is growing rapidly in Australia. The size of the local market more than quadrupled between June 2015 and December 2017, mostly in green bonds. 

The global market for impact investing is now worth around US$228 billion in assets under management. The majority is invested in food and agriculture, financial services and energy.

Many projects are in emerging markets including Asia and Africa. But there are a growing number closer to home. The next frontier in Australia is set to include affordable housing. 

6. Palm oil and deforestation


Palm oil is the most commonly used vegetable oil in the world because it has a long shelf life, can be used in everything from detergent to chocolate, and is higher yielding than most other oils. It is also the most controversial because it is produced in tropical rainforests and has led to some significant rainforest and biodiversity destruction in Asia.

Deforestation has led to a range of negative environmental impacts: carbon dioxide emissions, loss of pristine forests, soil erosion, air pollution, loss of habitat for animals including the orangutan, elephants, rhinos and tigers.
While some global initiatives have been put in place, challenges remain and investors are responding. They have started calling for better auditing and tracing of palm oil right back to the plantation.

7. The war on plastic


In 2018, waste became a key environmental issue for Australians. China stopped taking our recycling leading to huge stockpiles in warehouses all over the country. Around the same time, our largest supermarkets – Woolworths and Coles – banned single-use plastic bags.

At current rates of urbanisation and population growth, global waste is estimated to rise to 2.2 billion tonnes per year by 2025, which translates into 1.42 kilograms of waste per person per day. Australians generate 53 million metric tonnes of waste every year, or about four kilograms per person per day.

Waste management hierarchy

 

Source: Waste Management Association of Australia, “Never waste a crisis: the waste and recycling industry in Australia”, Senate Environment and Communications References Committee, June 2018.

In response, businesses and investors are now talking about the circular economy – that is, a system without waste and pollution where materials are used and reused.

There have been some exciting initiatives. In 2017, Apple issued a green bond to fund the research and development of recyclable material for its iPhones. Coca Cola has committed to collecting and recycling the equivalent of all its packaging by 2030 and McDonald’s claims that all of its packaging will come from sustainable sources by 2025.

8. Modern slavery and supply chains


Six years ago, the treatment of workers in clothing factories in Asia was exposed when a factory in Bangladesh burned down, killing 1,100 garment workers. Encouraging progress has been made on worker rights and safety in the country since then, partly as a result of investor engagement. But there is much more work to be done.

Workers are still not paid enough to live above the poverty line and there are many barriers to union representation and collective bargaining.

Minimum wage in A$/hour 

Source: Oxfam Australia, “What She Makes. Power and Poverty in the Fashion Industry.” October 2017.

The Australian government took an important step last year by introducing a Modern Slavery Act which effectively forces large Australian businesses to understand the risk of slavery in their operations and supply chains. We expect even more attention on the treatment of the world’s factory workers in 2019.

9. Child labour in cocoa

Cocoa production is labour intensive. Farm wages are low and the use of child labour is widespread. More than two million children are estimated to work on farms in West African countries Côte d’Ivoire and Ghana, the two countries that account for almost 70% of cocoa production worldwide.
Chocolate producers first started committing to take steps to combat child labour in 2001 and in 2010 committed to reduce the worst forms of child labour by 70 per cent by 20209.
Our Responsible Investment Leaders funds have joined a global investor initiative, alongside investors that have been working with Nestlé, Mondelez, Hershey’s, Lindt & Sprungeli, and Cargill to identify and remediate cases of child labour.

10. Antibiotics in our food supply

This year, antibiotic resistance is estimated to claim about 50,000 lives in the US and another 50,000 lives in Europe. The numbers are much higher in developing countries with high rates of malaria, HIV or tuberculosis.
By 2050, it is estimated that 10 million people globally may die every year because of antibiotic resistance. This exceeds the number of people who currently die from cancer every year.
The potential health and economic impacts are enormous and likely to be key public health issues and a focus for ESG investors in 2019. We expect investors will increase their levels of engagement with companies in the food and agricultural industries, calling for better disclosure and the reduction, or in some cases abolition, of antibiotics use in farming and food production.

Conclusion

The relevance of ESG issues has never been greater. Investors want data on, and progress around, some of the biggest ESG challenges. Get ready to hear much more about it throughout 2019.

 

https://www.independent.co.uk/life-style/palm-oil-health-impact-environment-animals-deforestation-heart-a8505521.html
https://www.abc.net.au/news/2018-02-08/the-demise-of-kerb-side-recycling/9407650
3 Senate Environment & Communications References Committee June 2018
https://www.greenpeace.org.au/blog/trash-selfie/
https://s22.q4cdn.com/396847794/files/doc_downloads/Apple_GreenBond_Report_Feb2018.pdf
https://www.coca-colacompany.com/stories/world-without-waste
https://corporate.mcdonalds.com/corpmcd/scale-for-good/packaging-and-recycling.html#goals
8 United States Department of Labor, Bureau of International Labor Affairs:https://www.dol.gov/agencies/ilab/child-labor-cocoa
9 Framework of Action to Support Implementation of the Harkin-Engel Protocol athttps://cocoainitiative.org/wp-content/uploads/2016/10/Cocoa_Framework_of_Action_9-12-10_Final-1-1.pdf

 

Author: Kristen Le Mesurier – Portfolio Manager, Multi Asset GroupSydney, Australia

Source: AMP Capital February 2019 

Important note: AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMPCFM) is the responsible entity of the Responsible Investment Leaders Fund (Fund) and the issuer of the units in the Fund. To invest in the Fund, investors will need to obtain the current Product Disclosure Statement (PDS) from AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232 497) (AMP Capital). The PDS contains important information about investing in the Fund and it is important that investors read the PDS before making a decision about whether to acquire or continue to hold or dispose of units in the Fund. Neither AMP Capital, AMPCFM nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this document. Past performance is not a reliable indicator of future performance. 

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