A TOOL FOR MAKING BETTER INVESTMENT DECISIONS

Transcription

1 H E A L T H W E A L T H C A R E E R THE INVESTMENT PHILOSOPHY STATEMENT A TOOL FOR MAKING BETTER INVESTMENT DECISIONS 3 0 J U LY K a t e C a m H e a d o f I n v e s t m e n t G o v e r n a n c e, P a c i f i c MERCER

2 P H I L O S O P H I E S A S R E F E R E N C E P O I N T S MERCER

3 I N V E S T M E N T P H I L O S O P H Y S TAT E M E N T P R O V I D E S A N I N V E S T M E N T A D VA N TA G E MARKET ENVIRONMENT CONSISTENT INVESTMENT PHILOSOPHY STATEMENT DECISIVE I N V E S T M E N T S T R AT E G Y PRO-ACTIVE MERCER

4 W H O U S E S A N I N V E S T M E N T P H I L O S O P H Y S TAT E M E N T? I S N O T H AV I N G O N E W O R T H T H E R I S K? 2012 P&I/Oxford University Investment Beliefs survey 100% ASSET OWNERS 50% ASSET MANAGERS 68% CONSULTANTS 60% % of respondents that use a Statement of Investment Beliefs MERCER

5 I N V E S T M E N T P H I L O S O P H Y S TAT E M E N T R E F E R E N C E P O I N T S F O R I N V E S T M E N T A D VA N TA G E We believe markets are inefficient Implication We believe value investing is the most appropriate investment approach for our beneficiaries We believe listed companies with good corporate governance processes can increase their chance of achieving excess stock returns MERCER

6 REVERSE ENGINEERING THE INVESTMENT P H I L O S O P H Y S TAT E M E N T M A K I N G T H E I M P L I C I T E X P L I C I T I N V E S T M E N T P H I L O S O P H Y : A C T I V E V E R S U S P A S S I V E I N V E S T I N G P ORTFOLIO AS S E T AL LOCAT I ON $ M I L L I ONS Australian equities (active) 40 International equities (passive, unhedged) 10 Fixed interest 25 Cash 25 TOTAL 100 We believe we have the skills and resources available to us to identify and capture alpha in Australian equities but not in international equities MERCER

7 REVERSE ENGINEERING THE INVESTMENT P H I L O S O P H Y S TAT E M E N T M A K I N G T H E I M P L I C I T E X P L I C I T I N V E S T M E N T P H I L O S O P H Y : C U R R E N C Y E X P O S U R E P ORTFOLIO STRAT E GIC AS S E T AL L OCAT I ON $ M I L L I ONS Australian equities (active) 40 International equities (passive, unhedged) 10 Fixed interest 25 Cash 25 TOTAL 100 We believe currency exposure can add significant value to our portfolio We believe currency exposure can reduce portfolio risk MERCER

8 REVERSE ENGINEERING THE INVESTMENT P H I L O S O P H Y S TAT E M E N T M A K I N G T H E I M P L I C I T E X P L I C I T I N V E S T M E N T P H I L O S O P H Y : H O M E C O U N T R Y B I A S P ORTFOLIO AS S E T AL LOCAT I ON $ M I L L I ONS Australian equities (active) 40 International equities (passive, unhedged) 10 Fixed interest 25 Cash 25 TOTAL 100 We believe the expected risk and return characteristics of Australian equities are far superior to those of international equities MERCER

9 S U RV E Y I N G T H E B O A R D A N D I N V E S T M E N T T E A M M A K I N G T H E I M P L I C I T E X P L I C I T Q: In order to generate higher returns from a combination of investments, it is necessary to add riskier investments (please choose one) a. Strongly agree b. Mildly agree c. No opinion d. Mildly disagree e. Strongly disagree Number of respondents Board Exec Investment Division Total MERCER

10 S U RV E Y I N G T H E B O A R D A N D I N V E S T M E N T T E A M M A K I N G T H E I M P L I C I T E X P L I C I T Q: Currency trading is a suitable strategy for the fund (please choose one) a. Strongly agree b. Mildly agree c. No opinion d. Mildly disagree e. Strongly disagree Number of respondents Board Exec Investment Division Total MERCER

11 T H E I N V E S T M E N T P H I L O S O P H Y S TAT E M E N T A C T U A L E X A M P L E S TAT E M E N T Fund strategies should be related to risk Diversification should be achieved by seeking an appropriate balance of risk factors. These are not always fully described by simple asset class groupings I M P L I C AT I O N short to medium term volatility should be reduced and large negative returns over short periods (adverse volatility) should be minimised Equities, bonds and other asset classes should not be routinely classified as growth or defensive assets but in most cases can be transformed or selectively constructed to perform both roles The challenge is to estimate the presence of risk factors in assets Source: QSuper s Investment Principles MERCER

12 ESG PHILOSOPHIES MERCER

13 R E P U TAT I O N R I S K Source: James Ennis, Flickr MERCER

14 R E P U TAT I O N R I S K The Church of England has DIVESTED FROM COAL AND TAR SANDS! Source: MERCER

15 E N V I R O N M E N TA L, S O C I A L A N D G O V E R N A N C E ( E S G ) F A C T O R S ENVIRONMENTAL CLIMATE CHANGE ENERGY EFFICIENCY POLLUTION WATER AVAILABILITY RESOURCE SCARCITY SOCIAL HEALTH & SAFETY POPULATION & CONSUMPTION STAKEHOLDER RELATIONS & REPUTATION SUPPLY CHAINS WORKING CONDITIONS A broader perspective on risk and opportunity GOVERNANCE ACCOUNTING & AUDIT QUALITY BOARD STRUCTURE REMUNERATION SHAREOWNER RIGHTS TRANSPARENCY MERCER

16 C O M M O N C O N C E R N S W H E N D E V E L O P I N G A N D I M P L E M E N T I N G A N E S G I N V E S T M E N T P H I L O S O P H Y How far down the investment chain do I dig? Will engagement or exclusion be most effective? Shouldn t we just focus on investment returns and let other NFPs focus on Responsible Investment issues? Will the cost of Responsible Investment outweigh the benefit? This sounds too hard given our delegated investment model What about companies with a diversified business? MERCER

17 S T R E S S T E S T I N G T H E ESG P H I L O S O P H I E S S E N S I T I V E I N V E S T M E N T T O P I C A N A LY S E R MERCER

18 I M P L E M E N T I N G ESG P H I L O S O P H I E S Screening Integration Corporate engagement Collaborative engagement Divestment Carbon footprinting Portfolio emission reduction Impact investing Source: UNPRI Report on Progress 2014 MERCER

19 S U S TA I N A B I L I T Y T R E N D S I N E N D O W M E N T S A N D F O U N D AT I O N S 51% are formally integrating ESG issues into the investment decisionmaking process But 68% DO NOT have a policy on climate change 42% are considering impact investing (investing with the intention to generate a positive social or environmental impact 34% want further education on impact investing opportunities before making a decision MERCER

20 S U S TA I N A B I L I T Y A C O R E I N V E S T M E N T B E L I E F AT M E R C E R 1. ESG risks and opportunities can have a material impact on long-term risk and return outcomes 2. Taking a sustainable investment view is more likely to create and preserve long-term investment capital 3. Active ownership helps the realisation of long-term shareholder value 4. Accessing long-term streams of returns and long-term themes, rather than focusing on short-term price movements, can add value MERCER

21 EMBEDDING PHILOSOPHIES MERCER

22 K E E P I N G T H E D R E A M A L I V E Refer investment decisions back to the relevant philosophy Align your other Investment Governance documents (Risk Appetite Statement, Risk Management Statement and Investment Policy Statement) with your Investment Philosophy Statement Consider creating a diagram as a visual reinforcement of the reference points that guide your firms investment strategy Revisit and refresh your beliefs every 2 to 3 years - particularly if you have new board members, new experience or new information MERCER

23 I N V E S T M E N T P H I L O S O P H Y S TAT E M E N T H O W Y O U C R E AT E VA L U E F O R Y O U R B E N E F I C I A R I E S MERCER

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