– Sustainability is already a fact in the portfolio of investors and more and more companies show their social and environmental commitment based on these ESG criteria. In this sense, where do you see the greatest opportunities?
– This is very good news because 4 or 5 years ago international fund managers spoke with many of our institutional clients and when we asked them about investor appetite, only a few asked about sustainable investment funds or sustainability in general. Many investors have historically considered that everything related to sustainable investment was linked to very limited invertible universes where it was difficult to add value, philanthropy issues … in short, it was something that cost more and gave less profitability and this is not the case.
The recent crisis has opened the eyes of many investors. What we see now is that investing with extra financial criteria has not only worked recently in 2020 but in the short, medium and long term it is not a drag on profitability, but rather offers many opportunities and a better control of risks in many cases .
In terms of growth, it is being exponential with data at the end of the first quarter of 2021 that reveals that 51% of net flows in Europe have been towards sustainable investment funds in sustainable Europe according to the latest data from Morningstar.
Regarding the greatest opportunities, one of the most tangible is the one linked to climatic or environmental aspects and, in particular, the ESG theme most related to the subcategory of the energy transition that we see with a very strong boom in Europe. If we look at the ten sustainable funds with the highest inflows so far this year, six of them are directly linked to ecology and specifically to the energy transition. It is a category that is having a profitability close to 10%.
We have a fund linked to the climate and the environment that even have a profitability higher than 11% and we are very aligned with it, but we believe that there are more issues of impact on equities that can have a role as a complement to portfolios in a structural way for investors arriving at productivity, infrastructure, connectivity and financial inclusion that we think have a place for long-term investors and in a company selection approach that is detached from indices where value can be added.
– How do you approach impact investing in the manager? What products does NN Investment Partners offer to obtain the maximum profitability in this segment?
– YES, before we talked about the energy transition, which is a sub-theme that is interesting to investors this year in Europe. We think it is interesting to look at it, but, with a broader approach, not closed to subsectors or funds linked only to a topic, a focus or a specific niche but rather to an approach oriented to value chains, for example, our Clim fund and Environment or climate and environment does not only look at the issue of the energy transition, but also invests in companies related to the circular economy, food management, water, waste, etc.
In addition, in equities, we manage other funds. A fund that is the NN Smart Connectivity where we include companies that have an impact that, for us, has to be material, intentional and transformational in the companies. All this in the field of technology, innovation, process automation, sustainable and efficient buildings, names linked to fraud prevention and this report it since in the end they are monthly impact funds if possible and transparent, that is, the impact real you have. Anecdotally, we estimate that in 2020 the companies in our Smart Connectivity fund avoided about 32.7 million euros in losses related to different types of fraud and this is something that the end investor sees and, in addition to having a financial return, it has an extra financial impact.
Another variable income issue would be that linked to the health sector, but again in an expanded way. Our NNG Dual Beam impacts on 6 different sustainable development objectives and not only related to health, which is half of the portfolio, but companies such as HDFC, which is a financial services company in India that grants mortgages and, therefore , facilitate access to housing for middle and lower class families and favor the financial inclusion of a very important part of the population. This impacts on the basic SDG that has to do with ending poverty. Ultimately, these are equity ideas that we think are worth keeping on the radar.
– Taking into account the situation they act around inflation, do they bet on fixed or variable income?
– We do not close ourselves to clearly overweight an asset, that is, fixed or variable income. Let’s say that in equities tactically in this environment we are moderately overweighting the eurozone since mid-June. We expect reasonable growth in 2021 due to the cyclical nature of the market and after it has a global exposure since about 40% of the income generated in a euro area comes from global trade and we believe, ultimately, that we can see positive foreign flows in the euro zone.
In equities, we are currently underweighting somewhat more emerging markets in recent weeks on the basis of a strong dollar, a Fed a little more how keys and weaker data in China and, in fixed income, we do not have a very strong conviction But, yes, we are overweight European high yield and also in the United States. In this complicated environment, these two fishing grounds seem interesting to us since you do not assume a very ambitious duration, which is something that must be taken into account in this environment of rates and you have a decent return if a good selection of bonds is made.
Our debt portfolio below investment grade or high yield From the United States that we manage from New York, is having a maturity yield of more than 5% and finding many opportunities in the ‘fallen angels’ or fallen angels what are these companies that they have been downgraded from investment grade to the high yield universe.
Finally, in the face of a scenario of gradual and growing sustained inflation that we think we can live, we believe that maintaining a structural position of complementing the portfolio, credit and North American investment grade may make sense relative to another asset such as the European one in investment grade.
– Regarding green bonds, what is your approach? What prospects do you have for the second half of the year?
– Many times when we talk about sustainable investment we focus on equities and especially on very visual issues, of impact such as health, climate, etc. But it must not be forgotten that, in Spain, the average investor tends to have a greater weight in fixed income compared to equities, making it a defensive mixed investor.
In this segment, the best way to move towards a sustainable investment and generate impact continues to be, by far, the one linked to green bonds. Currently, between mandates and funds in green bonds we are approaching 4,000 million euros and we consider that an active management looking for those issuers and issues that are really dark green add value and offer a real impact. We measure this transparently in our reporting each month for each of these funds.
In terms of prospects, we have had a very good two years for green bonds. We believe that the invertible universe allowed a niche for investors’ portfolio to be kissed already in 2019 and the first half of 2021 we continue to see this good moment and good attraction with a very strong number of missions. We have seen practically twice the number of new issues in the middle of the year compared to what we saw in 2020, which was the best year to date for this type of asset. Most of the issues are still in European governments and companies, we must not forget that about 70% of the universe of green bonds at a global level is in euros and although 2019 2020 we saw two record years with total issues close to 200,000 million euros per year in green bonds, we believe that this year we are in a very good position to easily overcome the 300,000 million barrier.
In short, the average investor in green bonds this year may be suffering a little more for duration reasons, since we mentioned earlier that it is usually greater due to the type of projects and bonds that green bond funds have in our portfolio than green bond funds. Traditional fixed income, but in the manager we have a corporate version of green bonds that has a shorter duration than an aggregate portfolio of short duration, specifically, of two years, such as the NN Green Bond short duration and these funds are holding up much better than the average fund of green bonds in the year and we think that, it makes a lot of sense for the investor who is watching a lot that interest rates do to get short income.
Here we have these two options in which both corporate fixed income from green bonds and aggregated green government or corporate bonds with a short duration of two years, we are seeing inflows. Therefore, we are very positive in all these bonds and that more and more we see that they are making a more natural hole in traditional fixed income portfolios.