David Stewart – Interview
third of NAPS’ portfolio is invested in equi- ties and you pride yourself in being an active shareholder. Can you give me some examples of recent engagements? Over the past two quarters a lot of our engagement has been driven by Covid-19. The portfolio managers have been spend- ing a lot of time with investee companies to make sure we understand how they are being impacted and how they are dealing with their employees, customers and sup- pliers to keep a clear view on how they are reacting. Outside of that we have worked with sev- eral mining and energy companies to ensure that the industry associations they are aligned with are in turn aligned with those companies stated climate goals. In many cases the industry associations that mining and energy companies are funding are known for lobbying against climate action. This is not appropriate for corporates who have themselves signed up to the Paris Agreement. We are also active in ensuring non-execu- tive directors are right for the board they are going to join. We focus particularly on addressing the issue of over-boarding.
The activity we run is primarily executed by the portfolio managers, whether that is in equities, fixed income or alternatives. Our stewardship and engagement activi- ties are then tracked and pulled together by the responsible investment team.
How do you implement ESG investing in fixed income as well as alternatives, such as real assets and property? For corporate bonds we monitor risk exposure at the security and portfolio lev- els, the same way as we do for equities. Again, the portfolio managers lead the activity on stewardship and engagement with the responsible investment team working alongside them. Where we use third-party managers in alternatives, for example, the focus is on understanding their ESG policies and processes and how they address specific issues that may arise.
We have already talked about the broader structural challenges for the economy. What do you think are currently the big- gest risks for investors?
The key risks have not changed. We have
a risk-free rate which is effectively nega- tive. The risk-free rate has dropped much more than the likelihood of risks appear- ing. To that extent risks are being system- atically underestimated.
I remain concerned that many financial assets are being influenced by huge short- term liquidity flows and that the informa- tion content contained within asset prices is therefore a lot less than it was. People who are a lot cleverer than I am spend a lot of time trying to work out what the implied risks are in asset class pricing. The point is that asset prices now are telling us a lot less about future pros- pects than they are telling us about these huge liquidity flows that are hitting us. That distorting effect is still very much to the fore of my mind. We need to be able to turn down the vol- ume on what financial markets are sup- posedly telling us and take a view on the long-term prospects of individual companies.
If negative interest rates, huge government borrowing and state- financed raking of financial markets was the route to an economic nirvana, it would have probably been discovered some time ago.
One last question. What will the global economy look like in 12 months time? David Lloyd George once said that the most dangerous thing in the world is to try and leap a chasm in two jumps. That one-year horizon falls right in the middle of the chasm. We know what tomorrow is going to look like. We can probably assume what 10 years’ time is going to look like. One years’ time? Who knows? Will there be second and third waves? Almost certainly. Will there be any more national lockdowns? Personally, I suspect there will not be anymore. Will there be more government assis- tance across developed economies? Almost inevitably. What that gives us on a one-year time frame? I have no idea. But as a long-term investor, I am not too wor- ried about that and I certainly would not make asset allocation decisions in that kind of time frame. So, I don’t know. The more accurate answer is, I don’t think it is relevant for us within this fund.
Issue 96 | September 2020 | portfolio institutional | 21
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