A year in review: 2020 – a year for creative and innovative solutions to managing growth assets
With 2020 having drawn to a close, it can only be described as a tumultuous year. Managing growth assets effectively through these conditions required a sophisticated investment toolkit and constant innovation.
With 2020 having drawn to a close, it can only be described as a tumultuous year. Managing growth assets effectively through these conditions required a sophisticated investment toolkit and constant innovation. One such tool in our toolkit was a new equity solution which we developed over 2019. This solution was designed to offer greater flexibility, lower fees and stronger ESG characteristics and, as set out below, over 2020 we saw these benefits come to fruition. It was also important that we continued to innovate throughout the year, to take advantage of opportunities arising as a result of the crisis. Credit markets posed one such opportunity; broad market credit spreads were attractive, but credit risk had undoubtedly increased. This called for a highly selective approach, unlike most off-the-shelf products, therefore we seeded two new credit funds to give our clients this attractive exposure.
Great flexibility in equity portfolios throughout the crisis
Our enhanced equity solution – the BNY Mellon (R&M) Global Equity strategy – replaced the way we previously invested in passive equities. We designed it to provide us with greater flexibility, so we were no longer tied to using off-the-shelf solutions. This proved to be of significant benefit over 2020, giving us the ability to access nuanced investment themes through the crisis. For example:
As COVID-19 was spreading globally in late Q1, Chinese companies were returning to some semblance of normality. To benefit from this, we wanted to tilt our exposure to Chinese companies, specifically domestic companies with less reliance on the global supply chain. Whilst this would ordinarily be difficult, not to mention costly, to access passively we were able to gain direct exposure through our equity mandate. The China basket returned 31.5% over 2020.
Another objective of introducing the equity mandate was to reduce fees for our clients. The strategy is highly cost-effective when compared to an equivalent blend of passive funds, and by introducing it we generated 10 bps of cost savings for clients over 2020*.
Finally, it was important to us that the new solution allowed us to express ESG views within the portfolio. This was not a case of “ticking a box”; we wanted to genuinely improve our ESG footprint in a way that was beneficial for clients, and we designed the mandate with this in mind. As such, we are pleased to report that the portfolio’s ESG credentials are, as shown below, ahead of comparable equity benchmarks. Furthermore, given our goal of adding value for clients, we are encouraged that the ESG component of the strategy added c.2% to performance of the BNY Mellon (R&M) Global Equity strategy over the year**.
Figure 1: ESG ratings for portfolio vs benchmark
Source: River and Mercantile. ESG rating and data comes from MSCI ESG Research as at 5 January 2021. MSCI All Country World index used as Global Equity Benchmark.
Innovation credit solutions drive returns
At the end of Q1 2020, we saw opportunities arise within credit markets as spreads had increased substantially due to COVID fears. But credit risk had also increased materially, with higher defaults and bankruptcies likely. In this environment, a broad market approach is not always suitable, and we believe a selective approach produces better outcomes. We wanted to focus exclusively on companies who were well-placed to survive the crisis; however, this wasn’t readily available. As a result, we worked with two managers to create opportunistic credit mandates which would enable us to capitalise on market dislocations*** whilst ensuring creditworthiness; the result was two new credit funds.
As well as providing attractive exposure to credit markets, the Funds also proved cost-efficient. As seed investors, we were able to negotiate a preferential fee for our clients. Furthermore, the funds have produced strong returns; from the date of our investment to the end of 2020 they have outperformed comparable high yield and investment grade credit benchmarks.
With credit spreads having been significantly compressed over the last 9 months we believe this selective approach will remain important in 2021. In recent months we’ve seen increased spread volatility, and expect the same going forward as record supply gives way to lower issuance. We anticipate bouts of market volatility to continue alongside corporate credit stress, which should provide ample opportunities for these funds.
Looking ahead to 2021 we foresee a supportive environment for asset prices for the year but believe that short term weakness could remain. Policy support will continue to be needed as restrictions and lockdown measures could stunt spending and weakened growth. We remain vigilant and proactive in identifying opportunities where they arise.
*Source: River and Mercantile, as of 31 December 2020. Cost savings are determined over a 1 year period. Weighted average of previous passive equity exposure/ETFs was 17bps, fee on BNY Fund is 7bp so savings are the difference between the two fees, or 10 basis points.
**Source: Morningstar, as of 31 December 2020. Past performance is not indicative of future results.
***Financial market dislocations are circumstances in which ﬁnancial markets, operating under stressful conditions, cease to price assets correctly on an absolute and relative basis.
This article constitutes a financial promotion and has been issued and approved by River and Mercantile Solutions, a division of River and Mercantile Investments Limited which is authorised and regulated in the United Kingdom by the Financial Conduct Authority and is a subsidiary of River and Mercantile Group Plc (registered in England and Wales No. 04035248).
Please note that this communication is directed at, and intended for, the consideration of Professional clients. Retail clients must not place any reliance upon the contents.
The value of investments and any income generated may go down as well as up and is not guaranteed. An investor may not get back the amount originally invested. Past performance is not a guide to future performance. Changes in exchange rates may have an adverse effect on the value, price or income of investments.
Registered office: 30 Coleman Street, London, EC2R 5AL
Registered in England and Wales No. 3359127
FCA Registration No. 195028
Why ESG is essential for Cash Flow Matching success
Why ESG is essential for ...
River and Mercantile’s fiduciary management portfolios integrate ESG as a core component, aiming to identify…5 min read
The gift that keeps on giving: the pivotal role of the Paper & Packaging industry in the transition to a circular economy
The gift that keeps on ...
An argument that it’s possible to find companies with robust growth drivers and stock-specific fundamentals…6 min read