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Mid-Year Investment Outlook 2019 | The Power of Influence

We are focused on generating consistent returns in a responsible way to help create a more sustainable future for you and generations to come.

10 min read

The first half of 2019 was good for investors. Equity and bond markets rose and returns were very positive. Even following the recent falls, returns remain positive for the year as a whole. 

But, as long-term investors we are continually considering what might come next.

Delivering sustainable investment returns is just one part of it. As investors, we are in a unique position to create and foster change.

How do you want to spend the future?

As investors, we have two responsibilities to our clients. The first is obvious – to help you secure a financial future by investing your capital in a way that will maintain its real value.  

The second is less self-evident – we also share a responsibility with the rest of the world to help create a future that’s worth living in.

Our mid-year outlook looks more closely at what both of these ideas mean to our investment approach. Investing in the future means more than just chasing returns. It means changing how we live our lives days to day. This includes changing the way that we invest.

CLIMATE ACTION MAKES ECONOMIC SENSE

Investors can influence the environmental impact of companies they invest in through voting and engagement with company management.

Investing for a low-carbon economy

A 2018 Report by the Principles for Responsible Investment (PRI) highlighted he following steps investors can take to invest for a low-carbon economy.

Diverse voices lead to better decisions

Reducing group think, listening to varied experiences and better reflecting a diverse customer base are some of the reasons why more diverse companies succeed.

POSITIVE STEPS TO INCREASE DIVERSITY

Voting on board membership allows us to encourage more diverse leadership in the companies we invest in.

Politics, economics and the wisdom of markets

mohammad-syed_author

MOHAMMAD KAMAL SYED

Head of Asset Management, Coutts

If the first quarter was characterised by relief for investors following a bumpy end to 2018, the second quarter was a reminder that short-term noise never completely fades away.  Politics has been largely responsible for market jitters, from Brexit to the China-US conflict over trade.

The driving forces behind market performance remained the same in the second quarter of the year as the first – central bank policy and trade negotiations against a background of slowing global growth. While central banks remained supportive and started the countdown for interest rate cuts, hopes of a resolution to the US/China trade dispute remain unrealised, and global growth remained under pressure.

But if things are never quite as good as some of the more exuberant commentators may suggest, it is equally true that things are never quite as bad as the naysayers would have you believe. The discipline to stick with your convictions when market sentiment goes in the opposite direction is the defining characteristic of a successful investor.

There are imminent risks in the months ahead on both the upside and the downside. Resolution of trade tensions and further economic expansion would be positive for markets, while further renewed slowdown in economic activity under the impact of renewed uncertainty would see some asset classes struggle.

As the year unfolds, we will continue to monitor markets with an eye to the longer term and navigate opportunities always with an eye on achieving sustainable returns in a responsible way.

“The discipline to stick with your convictions when market sentiment goes in the opposite direction is the defining characteristic of a successful investor.”

Achieving your goals

Whatever your goals and aspirations, the right financial plan is an invaluable tool for achieving them. Finding a wealth manager who you can trust to work towards your objectives is just one part of the decision.

Partnering with an adviser who really understands you is just as important. We know that the financial affairs of our clients can be complex.  When it comes to building a clear financial strategy, that takes account of both your long-term goals and day-to-day needs, our knowledgeable and experienced team can help you shape your future.

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  • The Environment

    weathering a changing climate

    The choices we make about our environment today have the potential not to just to affect investment returns but to severely limit the choices open to future generations. To help protect our freedoms, and to ensure the long-term future of our investments we have to think differently.

    Engagement and assessment are powerful tools for investors to reduce the negative effects of climate change in the companies they invest in. As we become more aware of what action can be taken to minimise the harm potentially caused by climate change, we can increasingly look to support these steps through our investments.

    What Are The Risks?

    Climate change presents several specific risks that investors need to address in their portfolios.

    Individuals and organisations are increasingly going to court seeking damages in relation to companies' action in relation to climate risk.

    One big successful challenge could pave the way for a large number of claims seeking reparations based on historical emissions and activity, leading to costly pay-outs

    National governments and international regulators are setting tough targets for reducing greenhouse gas emissions. The costs of meeting these targets will be met largely by companies. 

  • Diversity

    Diverse decisions are good decisions

    The benefit of diversification for investors is well understood – spreading your exposure across a range of asset classes means that you’re more likely to get the best out of investing, whichever way the economy turns. So, if we value diversity in our assets, why wouldn’t we feel the same about the decision-makers that have the power to drive the performance of the assets we hold on our clients’ behalf?

    Companies with a range of voices at the top make better decisions, while making the most of a deeper pool of talent. But not only does it have a material benefit, we believe it’s the right thing to do.

    We look for diversity in the decision-makers affecting our investments in two ways – on the boards of directors in the companies we own shares in and on the investment teams of the funds we invest in.

    Taking Action

    At Coutts, we're addressing diversity in two ways - engagement and assessment

    With support from Hermes EOS, we actively engage and vote to encourage companies we invest in directly to improve the diversity of their organisations and executive boards. This is not just a social issue but it is also good for governance and risk management. 

    For a number of years, Hermes EOS has been pressuring Anglo-Australian mining company Rio Tinto regarding the lack of diversity on its Board. They recommended voting against the appoinment of three male non-executive directors (NEDs) in early 2017 as this resulted in only two female directors out of 12. Following continued engagement, a new female NED was appointed in February 2019. The company has a target of 33% female representation by 2020 which it will fill once vacancies become available. These might feel like small steps but if we can help improve board diversity in an industry like mining, we can do it anywhere. 

    Environmental, Social and Governance ("ESG") considerations have already been part and parcel of our fund selection process for several years and deepened continuously.

    As the latest step, with a specific focus on diversity, we have now started to assess the diversity of the investment team of funds that we are analysing and investing. We will asess the male-female ratio of investment teams at the start of our analysis and then track changes to this ratio as part of our monitoring and review process. Our hope and expectation is that, by merely asking the questions, repeatedly and persistently (and conveying Coutts' views on the benefits of diversity), we will do our bit to trigger change in the fund management industry.

  • Sustainable Returns

    looking beyond the long term

    One of the most important measures we look at when investing is valuation. There is overwhelming evidence to suggest that over the longer term – five years or more – companies with a lower price/earnings ratio (P/E) will outperform higher-valued companies. In the shorter term, however, performance is more difficult to predict and so buying based on valuation alone can lead to volatile short-term performance.

    We have found that the economic environment has a significant effect on short-term performance.

    Economic fortunes drift up and down following a pattern that’s often referred to as the economic cycle. It can last from five to ten years, and include boom times at the peak and descend into recession at the trough.

    The drivers of economic cycles can be complex, and the peaks and troughs can vary. But careful analysis of economic data means we can usually have a good idea of which way the economy is heading.

    So, when we look for attractive investment opportunities we always pay attention to valuations,  but we also assess the economic environment and the impact it can have on returns.

    In the short term, the economic environment is key

    In the short term, waiting for the right environment before buying undervalued assets has, on average, improved overall outcomes.

    Each dot represents one-year performance of S&P 500 relative to price/earnings ratio at purchase. Past performance should not be taken as a guide to future performance. Source: Coutts & Co, Bloomberg.