CEIBS forum highlights environmental, social concerns in volatile global markets
Leading experts, economists and financial leaders gathered on Saturday to share views on investment management at the 10th CEIBS Private Wealth Investment Forum.
The forum, sponsored by CEIBS Alumni Finance & Investment Club and the CEIBS Centre for Wealth Management, and co-sponsored by Darden School of Business at the University of Virginia, explored a private wealth investment strategy under the banner of “The cold winter has passed, can spring be far behind?”
Experts agreed that despite statistics showing a relatively stable Chinese economy, the global capital markets last year were highly volatile and posed several challenges to private wealth management and assets deployment.
In the afternoon Darden Panel, on “Innovative Investment Solutions in China and Overseas Markets,” four panelists aired views on wealth management from the perspectives of social responsibility, organizational innovation, unique conditions of the Chinese markets and big data.
Pedro Matos, academic director of the Richard A. Mayo Center for Asset Management, Darden School of Business at the University of Virginia, explained the logic of environment, social responsibility and corporate governance (ESG).
While sometimes defined as the consideration of environmental, social and governance factors alongside financial factors in the investment decision-making process, ESG can mean more in different contexts. In the US, it can mean gender-diversity investing, green finance, impact investing, mission-related investing, purpose-drive capital, responsible investing, socially responsible investing, sustainable investing, triple bottom line, or values-based investing — not unlike the “Wild West” of the finance.
There arises, according to Matos, the question of whether you are trying to achieve social goals or financial returns.
The practice of ESG investing began in the 1960s as socially responsible investing, with investors excluding stocks or entire industries from their portfolios based on business activities. Today, ethical considerations and alignment with values remain common motivations of many ESG investors but the field is rapidly growing and evolving, as many investors look to incorporate ESG factors into the investment process alongside traditional financial analysis.
According to Matos, in terms of the proportion of sustainable, responsible and impact investing relative to total managed assets, Europe is the largest market, accounting for 53 percent in 2016, at US$12 trillion, while in the US, it was 22 percent, at US$8.7 trillion.
In Asia it is less than one percent, though Matos believes it is going to be important, citing growing awareness of social and environmental concerns, particularly in China.
Similar trends can be also observed demographically. Findings suggest that compared with the general population, millennials, people born 1981-1996, are more and more interested in sustainable investing, which is the practice of making investments or funds which aim to achieve market-rate financial returns while pursuing social and/or environmental impact.
Rating ESG in specific companies can be more complex than it appears. For instance, is BMW a more environment-friendly company than Tesla? Tesla manufactures electric vehicles. But there might be a difference of opinion, especially when you consider the full-life-cycle energy costs of a battery-powered Tesla, compared with a regular combustion engine car. The assessment can be subject to the indicators and technology used in evaluation and this explains why ESG can mean different things to different people. Similarly, today there are no standardized criteria and framework regarding ESG disclosures.
There are observable facts as well as questions regarding ESG: It’s inclusive of many different assets, investment vehicles and investors; percentage of US assets has grown but still lags behind many regions except Asia; it is a movement with momentum, but is it sustainable?
Andrew Xia, chief research officer at Noah Holdings, believes ESG is much nearer us than it is generally assumed. He revealed he was recently approached by a headhunter representing a European insurance company looking for someone to look after its investment in China’s A-share market. There were explicit instructions to target companies focused on ESG. Xia said organizational innovation is key and drove home its importance by citing the case of Haidilao, a hotpot chain.
“People might assume that in the case of hotpot, there might not be much innovation to speak of, which is not the case,” Xia said. The Haidilao hotpot is self-stewed at a table by customers who select ingredients à la Carte. It is nothing you wouldn’t expect from the myriads of other hotpot stores in Chongqing. But, the swift, sure shepherding by staff, complimentary manicures and other management genres suggest something innovatively organizational. Through elaborate discussion, elucidations and comparisons, Xia concluded that the kind of organizational innovation that has taken place in Haidilao could, if properly emulated, be pressed into service and lead to important changes in investment platforms.
The investment platform innovation Xia mentioned could provide talented local fund managers a new organizational platform to put to practice their investment skills.
Fan Chen, managing director and head of Portfolio Management at Rayliant Global Advisors, approached investment from a down-to-earth manner, by focusing on the earning issue.
How to achieve Alpha in China market? Alpha refers to the excess return of an investment relative to the return of a benchmark index. Chen said there is nothing mysterious about Alpha. It’s a zero-sum game and easily understandable in light of a simple principle that when there are winners, there are losers. “The important thing is to remember that as a long-term winner in the market, you must give serious consideration to who you are trading with, or who is losing money to you,” Chen observed.
After comparing the Chinese market with the overseas market, it is found that as far as the proportion of retail investors is concerned, China still roughly corresponds to the US market in the 1950s. Chinese retail investors are similar to American retail investors in behavior, and a study of this behavior can be part of a profitable trading strategy when retail investors become contributors to your Alpha. Studies reveal that retail investors, whether American or Chinese, prefer to buy growth stocks, small-cap stocks, lottery, and stocks with high volatility.
If retail investors trading still accounts for 80 percent in the China market, in the US it might be as low as 10 percent, suggesting significant potential for achieving profitability in the Chinese market. Chen’s long-term Alpha is about two percent in the US market while in China it could be as high as 10 percent.
China’s stock markets do not yet correspond with its economic power, and as overseas fund managers try to diversify their portfolios, they find that Chinese markets are unique in that they don’t correlate highly with overseas counterparts. This provides for the potential for reducing systemic risks. “In the next 5 to 10 years, the flow of overseas institutional investment into China’s A-share markets would only grow, and fast,” Chen concluded.
Yuanjun Sheng, director of Intelligent Investment and Research at Datayes, highlighted the use of big data in investment.
Sheng cited three challenges confronting the financial sector in the big data age.
The first is that we are in the age of big data, and this is no longer a remote concept, but very much part of our reality, as machines could be used to handle data and information with greater efficiency. The second is that simple business models need significant upgrades, as a lot of simple and repetitive work is being taken over by machines. Third, in wealth management, AI could be used to match clients with financial products that suit them most in terms of clients’ age, psychology, and their risk appetite, on the strength of algorithms.