It’s Spring and we feel more than ever motivated to contribute to initiatives aimed at aligning private wealth and financial markets to our society’s sustainable development goals! On top of what we can contribute through our consulting work, we therefore engage in collaborative initiatives and fora aimed at innovating, growing and mainstreaming sustainable approaches. New engagements include the active role of Ivo Knoepfel in the Advisory Board of the Center for Sustainable Finance and Private Wealth at the University of Zürich and his role as speaker and moderator at this year’s pymwymic Impact Days, a gathering of leading European wealthholders engaged in investing for positive impact. Ivo Knoepfel has also recently become a trustee of the PeaceNexus Foundation , whose aim it is to strengthen organisations committed to preventing conflict and building peace, and continues to act as an advisor to WWF Switzerland in relation to their benchmarking of Swiss pension funds’ responsible investment commitments.
Investing in sectors and companies with a high impact on the global climate is “dangerous for your portfolio’s health”, if we express it in similar terms as health warnings on cigarette packs. It is not only governments’ policies aimed at maintaining global warming within the 2°C mark, but also the rise of the shared economy, on-demand transportation and the new price competitiveness of renewable energies that will lead to tectonic shifts in the power, automobile, oil and other sectors. onValues helps clients align their wealth to the challenges ahead by focusing on investments that are part of the solution and not part of the climate change problem. We believe that it is not enough to avoid high-risk companies and to lower the portfolio’s carbon footprint (current emissions of portfolio companies). The main focus should be on investing in winning companies providing break-through products and services needed for a low-carbon future. Long-term investors will be able to generate superior financial returns and contribute to a better world.
On behalf of our clients, onValues has recently assessed the role of gold as part of a long-term investment strategy. Results of our analysis using price data for the last 20 years indicate that gold (measured in US-Dollars) did not outperform other ‘safe haven’ assets such as high quality government bonds in periods of pronounced stock market volatility. For non-US investors a volatile and generally weakening US-Dollar introduced exchange rate risks, frequently wiping out the occasional gains of gold holdings. We therefore cannot validate the common belief that gold is a good portfolio insurance based on recent history – especially for European investors. Moreover, the environmental and social impact of the gold industry needs to be taken into account. In extreme crisis situations, such as a global war or the collapse of global financial systems, gold could play a role as a store of value. For clients attaching a high likelihood to such events it could make sense to hold significant amounts of gold, but this would require a well thought through implementation plan, factoring in choices like physical denomination (coins, bars, jewellery), storage location (bank, external storage, at home) and security aspects when accessing and using the gold during crisis times.
Toniic Institute, the global action community for impact investors, has recently released “T100: Insights from the Frontier of Impact Investing”, a study showing aggregated data from 51 high net worth individuals, foundations, and family offices (including onValues clients). The data analyzed reveals that 100% values alignment can be achieved today in the portfolios of different types of investors, including those seeking market-rate returns. As part of the T100 project, Toniic also announced the launch of the Toniic Diirectory, a publicly accessible, peer-sourced catalogue of more than 1’000 impact investments made by its members, upon which the T100 findings are based. The directory is searchable by impact categories, impact themes, asset classes, management structure, liquidity profile, and impact geography.
Toniic also recently launched “T100: Insights from Impact Advisors and Consultants 2017” which shows the global landscape of dedicated impact investment consultants and advisors. 37 organisations from 12 countries, who work for 38 of Toniic’s members, open the door to their impact practices to demystify, inspire and activate both investors and the financial services industry. “What we see is a dedicated, articulate, optimistic, innovative, and definitely persistent group of entrepreneurial founders as well as large company intrapreneurs,” said Lisa Kleissner, co-founder of Toniic and its 100% Impact Network. “Beyond fulfilling their clients’ impact needs, they are building new impact products and services, and volunteering their time to strengthen and grow the impact ecosystem. All of them, while cognizant of the challenges, are optimistic there are solutions and a bright future for impact.”
Defining and managing a global portfolio’s currency allocation is a key factor in driving long-term risks and returns. In our consulting practice we often find that our clients (and the banks and asset managers that advise them) do not pay enough attention to currency exposures or, alternatively, focus too much on short-term considerations and market timing of exchange rates. onValues does not believe in short-term market timing and supports clients in defining a global currency allocation that is in line with their risk/return profile and is part of a truly long-term investment strategy. As an input, we use different approaches based on long-term scenarios and macro-economic indicators. We are critical of commonly used approaches based on currency allocations of global benchmarks such as MSCI’s World or All Country World indices, given the fact that many global corporations generate more revenues abroad than in their home country. In addition, onValues provides an ongoing monitoring of currency markets informing clients of likely major market dislocations. This, in turn, is an input for revising the client’s long-term currency strategy or for measures aimed at reducing downside risk.
In the past months onValues has increased its research activities focusing on investments in sustainable agriculture and food systems, also based on the interest that its clients are showing for this sector. From a financial point of view, investments in agriculture are interesting because of their real assets and yield generating character. From a social and environmental point of view, investments that take positive impact and ESG into account can contribute to food security and healthy nutrition, and reduce risks related to the use of pesticides and GMOs, to water availability, biodiversity loss and climate change. In identifying and assessing investments in the space, onValues can rely on its 15-year track-record and on a network of independent specialists. In the past, onValues has facilitated investor initiatives (see the Geneva conference in 2011 and the Principles for Responsible Investment in Farmland) and published proprietary research on the subject.
Peter Wüthrich was invited to speak at Prestel & Partner’s Family Office Forum to share onValues’ experience in advising clients interested in frontier market investments. Focusing on microfinance investments, he noted that - in spite of recent challenges - they can contribute to better diversification and alignment to family values in the context of family office portfolios. After giving an overview of the market and of the main market players, many of the family office managers in the audience were surprised to learn that some of the pioneers of microfinance investments are Swiss-based and offer a wide range of public and private investment funds with substantial assets under management.
Peter stressed the fact that investing into microfinance requires a long-term investment horizon and that past performance should not be the driving selection criteria for choosing a fund manager. A thorough evaluation of aspects like geographic focus, diversification, currency exposure and the fund’s investment process should be an integral part of the investment decision.
The past months have seen an increasing number of private wealth-holders going public with their engagement for integrating social and environmental aspects in their investments. An article by the Financial Times portrays Justin Rockefeller and other young members of historic dynasties that are taking their family offices into a new era of investing in line with their values. Annie Chen, a long-time onValues client, was portrayed in an August article in Barron’s and a Huffington Post blog in September. Ben Thornley, the author of the blog, notes how passion drives this new generation of investors and that “..institutional investors looking to high net worth individuals to shoulder the early-stage risk of impact fund managers, and for advisors to high net worth clients, understanding why and how the wealthy make impact investments is essential”.
During the past 30 years, financial markets repeatedly went through boom and bust cycles both in developed and emerging markets. Despite the asset price declines during bear markets, long-term investors who held on to their investments in equities and bonds still earned total returns that were well above long-term averages. Many investors have become used to the high returns of their investment portfolios and assume that future performance will be similar to what they observed in the past.
Several years ago already, onValues has started working with clients to derive more realistic expectations for future portfolio returns. Our analysis shows that the drivers leading to the exceptional returns of the past years are weakening and that asset returns will probably be below historical averages during the next decade. A recent McKinsey Global Institute report gives a good overview of the challenges ahead by taking a closer look at the driving forces of asset returns. The study concludes that in the recent past, asset returns were lifted by a unique but now fading combination of economic and business factors. Using a multi-factor approach with real economy and corporate fundamental factors, McKinsey argues that investment returns in the US and Europe over the next 20 years could be substantially lower – even in very favourable economic scenarios. These findings are consistent with those based on several other approaches seeking to forecast asset returns. onValues, for example, uses deviations from long-term asset valuation levels as one of the major determinants of future returns (see this previous news). Based on these signals we review our clients’ investment strategies, adjust expected asset class and portfolio returns, and are able to point to particularly attractive or unattractive investment areas.