Skytop Strategies: Reflection on ESG Trends, Hurdles, Generating Alpha

Navigating through the evolving landscape of sustainable investing and its obstacles dominated recent chatter by some environmental, social and governance (ESG) buffs. Trends within the ESG investing realm and understanding potential risks/opportunities were key focuses of attendees at Skytop Strategies’ Generating Alpha conference held on October 30 in New York City. Here are some insights from conference attendees on the sustainable investing markets:

“ESG is a long-term driver for top performance. ESG is a competitive advantage either for picking better companies or running better companies.”

—David Yeh, managing partner, Capitol Hill, and former senior advisor to the White House

“Incorporating ESG in emerging markets can help investors both mitigate risk, but also unlock a lot of the alpha opportunities. Today, the most dynamic growth area in emerging markets happens to be where the ESG practices can add value or [provide a] competitive edge.”

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—Liz Su, emerging markets portfolio manager, Boston Common Asset Management

“Governance was the most important factor explaining US stock returns from 1990 to 2009. Since 2013, the relationship has been a little bit less, but has not been a contra-indicator. The research would say that the S and G are as or more meaningful than E.”

—Herb Blank, a senior consultant at Global Finesse, citing numerous studies.

“Active contrarian ESG investors win. …The active asset managers rule, because as you know, [in] passive indexing, they can’t do any buying and selling, they’re just following the active asset managers who are doing the buying and selling. So, this actually increases the influence of active asset managers.”

—Hazel Henderson, president and founder, Ethical Markets

“We think of ESG and sustainability in a holistic way, it’s not about governance or environmental against social issues. All of them have a part to play in our risk management and alpha generation [strategies] in our sustainability portfolio.”

—Mariela Vargova, senior vice president, sustainability and impact investments, Rockefeller & Co.

“ESG is in their DNA. …This is the wave of the future.”

—Robert McGarrah, a corporate sustainability attorney, when speaking of millennials.

“We’re trying to take the culture of a company, turn into a score, feed into a risk model, and hit the button, and we’re told what to buy or sell. That is not what investing is about. …You have to do your homework. This industry is careening towards this idea that we can just [use] big data and it’s just not so. …We are all chasing the shiny data box and that’s just not going to deliver returns, it’s not going to manage risks because you’re not paying attention to the right things.”

—Bruce Kahn, portfolio manager, Sustainable Insight Capital Management

Tags: Conference, ESG, Risk, Skytop Strategies

Danish Pension fund ATP’s investment portfolio generated an 8.9% return for the third quarter of 2017, its best quarterly performance in the past five years. For the first three quarters of the year, the fund earned DKK24.6 billion ($3.84 billion), which is equivalent to a 24.4% rate of return, the company said.

The strong performance was mainly driven by equity investments. Over the past five years, the fund has reported an average return of 4% per quarter in the investment portfolio, and earned positive returns for 18 out of 20 quarters.

“Our long-term return—over the one-, three- and five-year horizons—remains stable at a high level,” said ATP CEO Christian Hyldahl in a statement. However, Hyldahl added that “a measure of caution is called for. Despite the strong performance, the outlook is for lower returns in the future as central banks tighten liquidity and raise interest rates.”

Listed Danish equities were major performance contributors, generating a return of DKK5.3 billion during the first three quarters, as were private equity and listed international equity investments, which returned DKK4 billion and DKK3.5 billion, respectively, over the same time period.

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“While global economic growth seems to be firmly on track, geopolitical uncertainty has increased,” said Hyldahl. “We have leeway to take risks, but we will do so based on an extremely disciplined approach to both portfolio construction and risk management.”

In an attempt to provide stable returns while maintaining independence from cyclical variations, ATP allocates the risk associated with each investment according to four risk factors—equity factor, interest rate factor, inflation factor, and “other” factors—based on the types of risk to which the investment is exposed.

ATP says the factor investing approach informs investment decisions, and allows analysis and comparison of investments without reference to asset type. Over the past three quarters, ATP has adjusted its investment portfolio’s risk allocation, which resulted in a de-emphasis on equities. As of Sept. 30, it lowered its equity factor risk allocation to 44% from 50% of the investment portfolio as of Dec. 31, 2016, while raising its interest rate factor to 33% from 25%. It also increased its inflation factor allocation to 14% from 9% at the end of last year.

The fund also deemed is hedging strategies a success. The value of the guaranteed benefits fell by DKK17.7 billion in Q1-Q3, while ATP’s hedging portfolio generated a negative return after tax of DKK16.4 billion. Overall, hedging activities resulted in a loss of DKK1 billion on pension guarantees with a total value of DKK638 billion.

Tags: ATP, Denmark, Pension, return

Danish Pension ATP Returns 8.9% for Q3