Interview – Border to Coast
cash over the next five years. So, on a rela- tive value basis, a diversified pool of assets looks attractive versus cash, albeit they may not be that attractive versus their own respective histories. We have seen a sharp recovery from the Covid crisis, which has been induced by the injections from central banks and treasuries, which have driven up valua- tions. Most assets are fully valued, but the relative valuations versus cash is an important component.
There are some asset classes: emerging market equities are a slightly cheaper val- uation versus developed and the curren- cies also look slightly cheap. So, for a long-term investor that could be some- thing to be aware of. Chinese equities have underperformed year-to-date, so a starting point for a long-term investor looks slightly more attractive. Credit spreads have come down and are relative- ly tight. Across the alternatives we are seeing valu- ations that are expensive, but if you pick your points, we are trying to focus on spe- cialised strategies where there is added operational value as opposed to taking market beta. The market we are going into is a much more dispersed market – you have to be a bit more selective. There may be a few things that are cheaper than others, but I would not say there is any- thing that screams value.
You also have funds focused on China, what is your interest there?
I have been investing onshore in China since 2005 and in the private markets for the past 10 years. We have private strate- gies in China through our alternatives programme.
One of the areas we are focused on in the country is healthcare, which we believe will be a new trend over the next five to 10 years. If you look back at the past 10 years, you had to be invested in technology – over the next 10 years it will be healthcare, which we have been exposed to for the past five years.
14 | portfolio institutional | November 2021 | issue 108
You are going to get a negative real return hold- ing cash over the next five years.
On the equity side, we split out our Emerging Market Equity fund into a hybrid fund. So, we were managing that in-house and what we have done is take the non-China element and retained that for in-house management, but the China element was outsourced to external managers. We did this because the non-China ele- ment is going to be overweight large cap quality, so we want the China element to be in high growth innovative companies. We wanted a local partner who under- stands the market and can spot high- growth companies.
Are you seeing similar opportunities in the US? We also see a hub of innovation, of tech- nological-driven changes there. We are quite active in the venture space in the US in the private programme and have man- agers on the equity side.
What will be the challenges in your portfo- lio going forward?
There is a big push for investors to divest. If you divest you lose your ability to influ- ence and pass on the problem to other people. We want to engage with compa- nies and improve standards across the board and across all our programmes. So, we are active on the corporate side, on equity and bonds, but also in the alterna-
tive space, through our own endeavors as well as working with our consultant to improve standards in the alternatives industry, which are at an earlier stage than the traditional asset managers. Asset owners have a big role to play and are, in many respects, ahead of the mangers.
asset
What is a decent timeframe to engage? A year? Five years? 10 years?
The most important thing is a willingness to listen and understand what the issues are as well as a willingness to respond and proactively work with us and our part- ners. We want to be a collaborative asset owner with the industry and the underly- ing companies.
How important is ESG to Border to Coast? ESG is not a separate discipline. It has always been integrated into the invest- ment process. It is now just a bit more explicit.
ESG is a risk factor we review and assess when making investments. We do it at a position level in our internal research templates. So, when we are selecting bonds or equities, we have a section on responsible investing and ESG as part of that investment template to assess those criteria. We do quarterly benchmarking at the portfolio level for our internal and external mandates on ESG and carbon metrics.
ESG and climate data is important to you. Is this a simple case of what gets meas- ured gets managed?
Data quality is an issue for everybody. A lot of carbon readings are implied, so the correlation between a company’s actual numbers and implied numbers is pretty low.
On carbon, it is self-reported. There are no standards or oversight. So, you could be rewarding companies for aggressive assumptions and penalising those that are conservative – which is the opposite of the behaviour you want to promote.
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