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How crucial is sustainability when investing?

Volatility is normal for the end of a cycle, says Gyongyi King from Alexander Forbes.

NOMPU SIZIBA: Alexander Forbes held its investment indaba today [Wednesday], covering issues like prescribed assets, impact investing and sustainable investment – among other issues. One of the speakers at the indaba was Gyongyi King, a chief investment officer at Alexander Forbes, and she joins me in the studio. Thanks very much for joining us.

GYONGYI KING: Thank you for having me.

NOMPU SIZIBA: Very topical themes were discussed at the indaba today. What were some of the observations you’ve made around how asset managers, among others, can invest in a sustainable manner, especially with so much uncertainty in global markets?

GYONGYI KING: I think sustainability is gaining in importance in everything that we do from an investment perspective. The actual force of long-term investing is about it being sustainable. You are not going to be able to get long-term investment horizons and a good investment outcome without it being sustainable, because it is contradictory. If you think about climate change, you can’t possibly invest for the long term and not worry about that. So, a lot of the things that were being discussed – how we make an impact, get good investment returns for clients, make sure that that’s all sustainable – I think that’s the most important  conversation we can have at the moment.

NOMPU SIZIBA: Sustainability. There is a lot of risk aversion these days, what with trade tensions, local economy woes and just generally negative headlines here at home and abroad. Equities markets aren’t going to die their death any time soon, so how do you diversify across all the available assets, and what needs to inform the investment decision? You’ve already talked about sustainability.

GYONGYI KING: The one thing that mustn’t inform investment decisions is the kind of feelings and emotional reactions to the way we are feeling at the moment. We often make bad investment decisions at the wrong time. There are trade tensions, there are certainly issues globally. If you look at just global equities versus what global bonds are telling you, they tell you completely contradictory things. One is saying everything is fine, and the other is saying, with negative yields in global bonds, that there is risk aversion. So, we are in a  kind of contradictory area of investments, and it’s because we are at the end of a cycle. You can’t really predict when the cycle is going to end, but we know that there are end-of-cycle dynamics, and this is what you see.

What you need to do is make sure you are diversified. You stick to your long-term goals. It’s the most important  thing you can do in investments – make sure that whatever investment decision you had at the beginning remains intact, and that you don’t make decisions based on the information that’s perhaps partial information, or imperfect information.

NOMPU SIZIBA: One of the issues that was being discussed was impact investment. And there is a conversation as well around prescribed assets, and we know that asset managers are kind of anti prescribed assets because they feel like government is telling them a way to invest. So, what is the difference between prescribed assets and impact investing?

GYONGYI KING: You’ve actually put it in a nutshell. Prescribed assets means that you are told where to invest, in whatever shape or form, even if it’s an asset class. Impact investing means it’s impactful – there will be an impact, whatever it is – social, economic. There will be an impact from that investment. But the asset owner, the person who is making the investment, is making it from an investment decision. They are making it from a perspective of an investment goal and getting a return.

The difference also in the impact space is that whoever if trying to get back capital is doing it for good reasons, too. They are actually try to generate a return; there are good economic reasons and fundamentals behind that investment. There you are bringing together both the capital owners, which are the asset owners – we speak on behalf of retirement funds; the capital owners are the members of those funds – and the people who are trying to raise investments for good projects that can really be impactful in society, be they infrastructure investment or whatever the case may be.

NOMPU SIZIBA: That’s what I was going to ask you now. What sort of investments are being made to make an impact where – which sectors, and so on?

GYONGYI KING: In South Africa it’s been quite successful – impact investment. There’s been quite a lot done in renewables, for instance. The renewable energy market has been funded by private capital, largely, and so there are impact investments already going on, perhaps not visible to everybody in the market. But what we do need is a lot of infrastructure investment. We need lots of investment in lots of different areas in South Africa. There are certain pockets of education, and infrastructure that’s being invested in healthcare – that kind of thing.

But it needs to come from the right place. It needs to be based on good fundamentals, because then you’ve got a good business model, good, successful. I hate to use, again, the words “sustainable investments” – ones generating good returns, because they are actually fulfilling a need as required, plus they are also generating a return for capital owners. And that’s the happy marriage of those. It’s a win-win.

NOMPU SIZIBA:  So, when it comes to offshore vis-à-vis South Africa, what’s the best way for investors to get the balance right? Especially, like you say, because there is a cycle that’s coming to an end, even though we cant put a time on it.

GYONGYI KING: It’s always difficult. That balance is difficult. It depends on your investment horizon. The rand may seen very volatile offshore. We often think about the rand always depreciating, so it’s better to be offshore. But that’s not always the case. It just depends. It really depends on your own investment outcomes, on what you are trying to achieve. From a Regulation 28 perspective, there are obviously restrictions on how much you can go offshore, and you are obviously limited by how much local and offshore you can actually invest in.

But what you also need to be thinking about is what you are doing when you go offshore. What asset classes are you investing in? For instance, at the moment we talk a lot about negative yield in debt – that’s a lot of jargon, and I apologise. It effectively means that in a place like Germany you lend money to the government and you have to pay them to do that. You get absolutely no return on that. That is not a sustainable investment scenario. You wouldn’t even argue that it’s an investment.

So, the reality is that, when you do the offshores, it’s also about thinking about what you are investing in. Do you want to be in certain asset types? In our world of retirement funds, we are as Alexander Forbes diversified. You need to spread your risk in cross-asset classes and try and ensure that you are not too exposed to one risk or another. Yes, you talked earlier about global trade tensions. There is a lot going on in the world, lots of isolationist policies going on which are changing the dynamics, and one of the things we are seeing at the end of the cycle where we are at the moment is investments that worked for the past 10 years are not necessarily the ones that are going to work for the next 10 years.

NOMPU SIZIBA: Given the buzz word “sustainability”, what factors do you need to focus on when looking at a potential company that you want to invest in?

GYONGYI KING: That’s another great question, because it’s so broad. Sustainability means many different things to people. Effectively, what you are trying to say is that there is something inherent that can continue. And there are certain aspects that are changing – for instance, how we use energy. We know that there is a lot of focus on carbon, and there is a lot of focus on changing our energy usage.

So, if you were looking at investments, you’d have to consider: do I want to go into an x, y, z investment that is very heavy in carbon when we know that carbon taxes, for instance, came in in South Africa? This is a very big focus for global government. You need to think about that investment type. Sustainability really is all about you needing to invest now for something that is long term, and I’ll give another example.

If a company doesn’t have good governance, how sustainable is that business model – because, at some stage, particularly in an environment where things are a little tougher, growth is a bit harder to get to? If your business model and your governance isn’t good you are not going to be able to extract value for shareholders.

NOMPU SIZIBA: That’s right. And we have seen the wheels come off a number of companies because of dodgy governance.

And lastly, the question that I wanted to ask you at the end, is: for the long-term investor, are South African valuations, and equity valuations, looking sufficiently attractive for people to pick up for the long term?

GYONGYI KING: Selectively, we believe in quite a bit of active management at the moment. I think that we are at a prudent cycle, where you could argue that there is some value, there are pockets of value. It’s very difficult without growth to see very quick trajectories on releasing that value. From a  perspective of asset classes, for instance, there is a lot of value at the moment. Looking across the range we get good yields in bonds at the moment. Government bonds are providing quite good yields for investors.

So, to call equities or bonds or cash is quite difficult at the moment. Which of these to be in is quite diversified. I think we are certainly in a risk-off environment. You can see it from all the volatility. At the end of the cycle you always get a lot of volatility, and that’s what we are experiencing at the moment in South Africa. This is perfectly normal. It’s not comfortable – which is normal for the end of the cycle. You just want to be spread out in terms of your risk in diversified.

NOMPU SIZIBA: Gyongyi King, thank you very much for your time.

GYONGYI KING: Thank you for having me.

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