The second area that I would point out is Japan – this is a country that has underperformed significantly, not just the US but also the rest of the market especially from a US dollar perspective. However, there are many companies with strong, increasing earnings, and there has been an improvement in corporate governance, shareholders’ returns, more efficient balance sheets, and an increase in M&As, which are unlocking synergies. This is not the case for all companies in Japan, though, hence the need to also be selective in this case.
Jim Leaviss: For multi-asset, how do you manage the balancing act between asset classes, where previously they were negatively correlated, now that is no longer so much the case?
Maria Municchi: Observing assets’ correlations is something we do on a day-to-day basis, and it’s very much central to how we construct portfolios. The current environment is still supportive for ‘risk-on’ assets, from both a macroeconomic and a valuation standpoint. The macro environment is still conducive to growth and expansion, particularly in certain sectors through sectoral and structural trends, or due to the transition to a lower carbon economy. From a valuation standpoint, both equities and fixed income currently present some difficulties. This calls very much for selectivity within multi asset portfolios, but more importantly, for tactical asset allocation – the ability to take advantage of shorter-term market moves to grasp the opportunity that the market provides. I believe that inflation will certainly remain a key topic in the year ahead. However, it’s important to think about other potential surprises to markets. In terms of our response, it’s important to maintain portfolios that are well-diversified, and the way we do that is to hold a portion of the fund in cash, as well as maintaining exposure to the longer end of developed market government bonds, including 30-year US Treasuries.
Sustainability – what lies ahead post COP26?
Jim Leaviss: Several weeks have now passed since COP26 in Glasgow. Some of the headlines that came out of the climate summit were very encouraging, but overall, people were perhaps slightly disappointed by the outcome. Having said that, there is some impetus in the asset management industry, and in the UK government. In the fixed income team, we participated in the first green gilts issued this year; we’re going to see far more green bonds and sustainable linked bonds over the course of 2022 and that will be a great opportunity for our funds to start buying some of those assets. So, were you disappointed, or is this a step in the right direction?
Fabiana Fedeli: I would say the latter. I sympathise with those who believe that COP26 didn’t do everything it could have done, but it has undeniably been a huge step forward. Even when you think about the controversy relating to coal being phased out or phased down, it’s the first time that we actually have such a targeted hydrocarbon pledge on such a wide scale. So, the outcome is not perfect, but definitely a big step in the right direction. And these pledges need to be executed, and public opinion will demand delivery from both governments and companies.
Maria Municchi: I agree. After two weeks of intense negotiations, the Glasgow Climate Pact really puts down on paper the key areas that we need to focus on for aiming towards the maximum 1.5 degree increase in temperature. And all these different areas, including ending deforestation, financing emerging markets and phasing down coal, are areas where almost 200 countries found agreement, which is really incredible. This is only the beginning – there is a lot of work that needs to accelerate from here. But I think a very positive outcome is that countries are starting to have a common language and ambition towards climate change, that they can start to integrate it into their own national policies. And countries have a strong ability to introduce push and pull factors to facilitate the transition towards a lower carbon economy, possibly faster and to a more significant extent than market players believe today. If that proves to be the case, some companies are better-positioned to respond than others.
