INNOVATIVE The Nordea 1 – Balanced Income Fund takes a highly flexible approach to today’s low yield environment / 08
RELIABLE The combination of downside protection with equity-like returns makes global listed infrastructure an attractive choice / 12
FORWARD-LOOKING In the interview, Eric Pedersen, Head of Responsible Investments at NAM, speaks about what is coming next in his field / 16
Advertising material for professional investors only , investing for their own account – according to MiFID definition ISSUE 01.2020 nordic f iends
The managers of Nordea’s ESG STARS funds engage with companies around the globe to actively drive the transformation towards a more sustainable society – with success / 04 For a sustainable tomorrow
2 FUND TABLE
Selected Nordea funds at a glance Find out more about Nordea´s full product range at nordea.lu
NORDEA 1, SICAV
SHARE CLASS CURRENCY
LAUNCH IN THIS ISSUE
Equity Europe European Stars Equity Fund
Nordic Equity Fund
Nordic Stars Equity Fund
Emerging markets Asian Stars Equity Fund Emerging Stars Equity Fund
BP BP BP BP
USD USD USD EUR
28.04.2002 15.04.2011 05.07.2012
LU0602539602 LU0634510613 LU0309468808
Indian Equity Fund
Latin American Equity Fund
Global Global Stable Equity Fund - Euro Hedged
Global Stars Equity Fund
North America North American Small Cap Fund
North American Value Fund
North American Stars Equity Fund
Bond Core Norwegian Short-Term Bond Fund
Swedish Short-Term Bond Fund
Covered bonds Danish Covered Bond Fund
European Covered Bond Fund
European Covered Bond Opportunities Fund
Low Duration European Covered Bond Fund
Credit European Cross Credit Fund
European Financial Debt Fund
European High Yield Bond Fund
US Corporate Bond Fund
US High Yield Bond Fund
Emerging Market Bond Fund
Emerging Market Bond Opportunities Fund
Emerging Stars Bond Fund
Emerging Stars Local Bond Fund 1
Europe European Corporate Stars Bond Fund European High Yield Stars Bond Fund Unconstrained solutions Multi-asset solutions Balanced Income Fund
Flexible Fixed Income Fund
Stable Return Fund
Liquid alternatives Alpha 7 MA Fund
Alpha 10 MA Fund
Alpha 15 MA Fund
Fixed income Unconstrained Bond Fund - USD Hedged
US Total Return Bond Fund
Thematic Global Climate and Environment Fund
LU0348926287 LU1940854943 LU1939214778 LU1947902109
BP BP BP BP
EUR USD USD USD
13.03.2008 19.02.2019 21.02.2019 05.03.2019
Global Disruption Fund
Global Gender Diversity Fund
Global Listed Infrastructure Fund
1 With effect as of 5 May 2020 the sub-fund is renamed from Nordea 1 – Emerging Market Local Debt Fund Plus to Nordea 1 – Emerging Stars Local Bond Fund . Please note that not all sub-funds and share classes might be available in your country of jurisdiction.
EDITORIAL + CONTENTS
As we continue to face the challenge and impact of Covid-19, our thoughts are continuously with our clients across the world, from São Paulo to Milan to Singapore and beyond. While we hope for an end to the pandemic soon, we would like to extend our solidar-
In this edition
ity to you and your families. We are committed to supporting you during these unprecedented times; that’s why we have worked tirelessly to build bridges to our partners through various technologies and dedicated assistance. While these efforts – including our Stay alert microsite, which provides regular updates from our investment professionals, and our weekly Morning Espresso video webinars – have minimised the distance between us, we believe in the power of personal interac- tion and cannot wait to reunite with our clients face-to-face when the time is right. You can find details on our client engagement efforts in the lounge section. Our cover story shines a spotlight on the Nordea 1 – Global Stars Equity Fund . Portfolio manager Johan Swahn explains how more and more investors are embracing environmental, social and gov- ernance (ESG) considerations as they recognise the alpha genera- tion capabilities of sustainable corporate leaders. As they become “ESG savvy”, investors are demanding increased transparency from companies. To address this need, our ESG STARS funds disclose our engagement activities, as well as portfolio alignment to the UN’s Sustainable Development Goals. Additionally, we have teamed up with Nasdaq to provide an impact report that shows the sustain- ability footprint of portfolios. The Nordea 1 – Balanced Income Fund is our fund in focus. The strategy aims to combat the challenging low yield environment and seeks to offer protection while still enabling the fund to participate in up-markets. In our market view update, we hear from CBRE Clarion Securities’ Jeremy Anagnos, portfolio manager of the Nordea 1 – Global Listed Infrastructure Fund . The rapidly expanding listed infra- structure universe has historically delivered equity-like returns, but with lower volatility and superior downside protection. For our Q&A feature, we talk to Eric Pedersen, the head of our Responsible Investments (RI) team. He outlines the efforts we are undertaking to ensure we remain at the forefront of ESG investing. Finally, from all of us at Nordea, we would like to express our heartfelt gratitude for your continuing commitment and trust at this turbulent time. Please do not hesitate to reach out should you require further assistance from our team. Stay safe, and we look forward to reuniting soon.
For a sustainable tomorrow NAM’s ESG STARS funds are at the forefront of sustainable investing, shaping a better tomorrow. Fund in Focus 8 More flexibility to reach your goals NAM’s Balanced Income strategy can adjust flexibly in order to keep the right balance in the portfolio. Market View 12 A bridge between two cycles Global listed infrastructure is an attractive investment destination – especially in a late-cycle environment. Macro Opinion 15 China re-emerging China is leading the global economic recovery. This opens up interesting investment opportunities. Inside Nordea 16 Absolutely committed Eric Pedersen, Head of Responsible Investments, speaks about NAM’s future role in ESG investing. ESG decrypted 19 The EU’s upcoming ESG regulation What will change with the introduction of the European Union’s new ESG regulation? Lounge 20 Stay alert with Morning Espresso Today’s STARS, tomorrow’s winners Nordic point of view: Simply charming
Christophe Girondel Global Head of Institutional and Wholesale Distribution
4 COVER STORY
Nordea’s ESG STARS funds stand at the forefront of sustainable investing. They create a lasting impact by investing exclusively in high-quality companies with strong environmental, social and governance (ESG) characteristics. For a sustainable tomorrow
COVER STORY 5
„ Engagement is a way to enhance long-term shareholder value, as well as create a positive impact for the broader society. Johan Swahn, portfolio manager at Nordea Asset Management
delivered on all three of its stated goals. In terms of performance, the fund has outperformed the broader global benchmark (MSCI ACWI Index) in each of the three full calendar years since inception, delivering a yearly alpha of 5.6%, which is almost twice its 3% gross of fee yearly target. 2,4 For the first nine months of 2020 and despite a challenging environment, the fund has continued to exhibit strong performance, outperforming the benchmark by 3.4%. 3,4 “Only a few years ago, there was a widely held view that people needed to sacrifice returns in order to invest responsibly,” Swahn says. “Pleasingly, this misconception has since been thoroughly dismissed.” Full ESG integration In running the Nordea 1 – Global Stars Equity Fund , Swahn is joined by co-portfolio manager Joakim Ahlberg as well as the 25-strong experi- enced and diverse Fundamental Equities Team. The initial step in the team’s investment process
Sustainability has long been deeply rooted within the culture, philosophy and business model of Nordea Asset Management (NAM), with the firm being one of the first signatories of the UN Principles for Responsible Investment back in 2007. Since the launch of its first ESG sector-screened fund more than three decades ago, NAM has firmly established itself at the forefront of the responsible and sustain- able investment movement. Since then, it has also built up its award-winning Responsible Investments (RI) team – which is, with 18 analysts, one of the largest in Europe in terms of pure ESG analysts. Drawing on this responsible investment edge, NAM unveiled its ESG STARS fund range almost a decade ago. All ESG STARS funds share three primary objectives: beat the benchmark, invest in companies displaying strong ESG standards and create a lasting impact. “The ESG STARS strategies seek to unearth the sustainable corporate leaders of tomorrow,” says Johan Swahn, portfolio manager of Nordea 1 – Global Stars Equity Fund .1
At a glance ` The Nordea 1 – Global Stars Equity Fund has a proven track record of delivering returns with responsibility ` Dedicated ESG analysts from one of the largest in-house responsible investment teams are working hand in hand with the portfolio managers ` The fund seeks to shape a more sustainable world by taking a unique engagement approach 1 There can be no warranty that an investment objective, targeted returns and results of an investment structure is achieved. 2 BI-USD net of fees annual excess returns in USD based on the 2017, 2018 and 2019 calendar years performance of the Nordea 1 – Global Stars Equity Fund compared with the MSCI All Country World Index. Inception date: 17.05.2016. 3 BI-USD net of fees in USD terms compared to the MSCI All Country World Index. 4 The performance represented is historical; past performance is not a reliable indica- tor of future results and investors may not recover the full amount invested. The value of shares can greatly fluctuate as a result of a sub-fund’s investment policy and cannot be ensured, you could lose some or all of your invested money.
During the four years since its launch, the Nordea 1 – Global Stars Equity Fund has certainly
6 COVER STORY
eligible for investment under the ESG STARS con- cept. The coverage currently amounts to approxi- mately 600 internally scored companies. The power of engagement Engagement is a key component of the ESG STARS concept. “We believe engagement is in- credibly powerful. It is a way to enhance long-term shareholder value, as well as create a positive impact for the broader society,” Swahn explains. “What we are trying to do is create an engage- ment roadmap, which identifies the most relevant and material ESG topics for each company we engage with.” A good example of engagement can be seen in NAM’s dialogue with the world’s largest automotive safety supplier Autoliv – which has operations in 27 countries and sells to all the major car manufactur- ers. The team visited Autoliv’s China operations to learn how it is meeting the tightened emissions re- quirements driven by China’s war on pollution. The company has 14 plants in China and environmental compliance is highly material. Supply chain audits in China have strengthened Autoliv management’s focus on environmental compliance, such as permits and pollution caps. As a result, some of Autoliv’s suppliers have been removed. “We believe Autoliv is
is to undertake rigorous bottom-up fundamental analysis. “The first stage in our process is to seek out companies displaying compelling ‘expectation gaps’ – these are the differences between our expectations and the market valuation,” Ahlberg explains. “The next step is to make assessments of a company’s strategic positioning, focusing on businesses with sustainable competitive advan- tages – or so-called moats. When assessing a company’s moat, we consider the impact of var- ious ESG risk factors, which are quantified in the final valuation model.” ESG analysts from NAM’s Responsible Investments team are embedded in the portfolio management team and work along- side the managers, providing invaluable insights into possible risks and opportunities which are ultimately factored in the company valuation. Each company within the Nordea 1 – Global Stars Equity Fund , as well as every potential new hold- ing, is assessed on whether it conducts business responsibly in relation to its stakeholders – across employees, suppliers, customers, investors, the environment and society at large. The Responsible Investments team’s robust and proven proprietary scoring model assigns a forward-looking scoring to each company. Each company is given an A, B or C scoring where C-rated businesses are not
Nordea 1 – Global Stars Equity Fund Manager Fundamental Equities Team Base currency USD ISIN LU0985320562 (BP-USD) LU0985319804 (BI-USD) Launch date 17.05.2016 (BP-USD, BI-USD)
COVER STORY 7
„ Companies aligning their business models and practices with the SDGs are adjusting to global society’s future needs. Johan Swahn, portfolio manager at Nordea Asset Management
Nordea’s ESG STARS funds aim to create a positive long-term impact – for the benefit of future generations.
tion is most significant. NAM built these reports using an independent third-party source, the external data intelligence company ISS-ESG, a globally recognised expert across a full range of sustainability- and
at the forefront when it comes to environmental as- pects and, therefore, stricter regulation is not likely to impact the company. After the research trip, we had a follow-up meeting with the company focus- ing on how Autoliv could improve its current B+ scoring to A,” Ahlberg adds. “The team noted progress on supply chain audit developments and overall development of sustainability strategy, including ESG targets. Our team made recommen- dations to management, including reporting on climate risks, as well as requested higher trans- parency on supply chain risks and the results of supplier audits.” Aiming for a positive long-term impact The ESG STARS range at NAM focuses on creating a positive long-term impact. With the intention to be fully transparent to its clients, NAM launched a sustainability reporting suite last year, showing the contribution of each portfolio towards the United Nation’s Sustainable Development Goals (SDGs). “We believe that companies aligning their business models and practices with the SDGs are adjusting to global society’s future needs,” Swahn comments. The new reports highlight in which areas the port- folios create positive impact. A given portfolio will, of course, not contribute positively to all themes and the report helps to find out where the contribu-
40 % smaller CO 2 footprint
responsible investment-related topics. According to the latest data available in September 2020, the Nordea 1 – Global Stars Equity Fund exhib- ited a contribution towards the SDGs that was 1.5 times higher than the benchmark (MSCI All Country World index). In addition, the holdings in the fund’s portfolio had on average a carbon footprint 40% lower than companies in the benchmark.
Do you know the sustainability footprint of your investment?
In order to make it easier and more relatable for clients to see what difference they can make when choosing a sustainable alternative for their investments, Nordea Asset Management has introduced the new quarterly Impact Reports together with Nasdaq. The reports show the impact on selected environmental, social and governance metrics when investing EUR 100,000 in one of Nordea’s sustainable solutions, such as the Nordea 1 – Global Stars Equity Fund , in comparison to an investment of the same amount in the benchmark index.
8 FUND IN FOCUS
More flexibility to reach your goals
The team managing the Nordea 1 – Balanced Income Fund helps investors to find the right balance in their portfolios. This is Nordea’s response to the low yield environment.
Investors are being confronted with low or nega- tive returns in high quality bonds , after several years of strong positive fixed-income returns since the global financial crisis. Consequently, investors face the challenge of finding other sources of returns while containing a portfolio’s risk. For a conservative investor, emphasising riskier bonds is not an option due to increased volatility. This became evident in the turbulence of 2020 where risky assets were first beaten, followed by a rapid recovery. Nordea has long understood the need to offer inves- tors a balanced and unconstrained portfolio – one that is able to balance risks in the volatile markets, while still retaining the ability to generate attractive returns. This led to the launch of the Nordea 1 – Balanced Income Fund . The fund, unveiled in December 2016, builds on the approach that has become synonymous with Nordea’s renowned Multi Assets Team – which has now grown to oversee more than EUR 100bn of client assets. Taking a new approach Trade wars, global pandemics and geopolitical risks have all made forecasting a daunting chal- lenge. Staying in the safe haven of government
or high-quality investment-grade bonds bears the risk of negative returns in fixed-income portfolios. Increasing the risk level by switching to high yield or emerging market bonds in the portfolio will result in unpalatable risk levels for investors looking for capital preservation. In today’s low-yielding and fast-changing macro environment, accentuated by diverging monetary policies across the globe, it is understandable that many investors do not know where to turn. Can duration still protect the investor? When should they take more risk? Is liquidity a major issue? Perhaps most importantly – is all hope lost for someone seek- ing positive returns and preservation of capital? In a rapidly fluctuating investment landscape, these questions are difficult to answer and reinforce the ever increasing necessity for active management. The Nordea 1 – Balanced Income Fund was designed to address the challenges posed by the low yield environment. “Our approach is a conservative one, aiming at capital protection through a cautious and balanced portfolio with limited exposure to equities,” says Karsten Bierre, lead portfolio manager of the fund. “The idea is to balance risk-on and risk-off return drivers to reduce the risk of the portfolio while earning attractive returns.” 1
FUND IN FOCUS 9
„ We aim to balance assets that respond in recovery phases with those that perform in recessionary periods. Karsten Bierre, portfolio manager at Nordea Asset Management Balancing act: the red-eyed tree frog is a master in the art of balancing. It flexibly shifts its body weight to adjust to its surroundings. This allows the frog to live a life at dizzying heights, in the treetops of tropical forests.
Control risk at all times Instead of trying to anticipate central banks’ deci- sions or macroeconomic turns, which proves to be a delicate exercise in the long run, often leading to inconsistent returns and higher risk, Bierre and his team focus on two distinctive concepts – valuation and diversification. These characteristics form the basis of the team’s unique philosophy of ‘risk balanc- ing’, which helps to generate consistent returns over time. “Our investment process has one primary aim: to control risk at all times – not target the highest
At a glance
` The Nordea 1 – Balanced Income Fund is NAM’s response to the low yield environment ` It is a flexible investment solution, dynamically changing exposures (duration/credit/equity) ` The fund aims at capital preservation and consistent returns. 1 Thus; risk management is a top priority for the management team
1 There can be no warranty that an investment objective, targeted returns and results of an investment structure is achieved. The value of your investment can go up and down, and you could lose some or all of your invested money.
10 FUND IN FOCUS
Eyes on the goal: during the turbulences in the first quarter of 2020, Karsten Bierre and his team could prove once again the resilience of their risk-balancing approach – it can bring investors closer to their goals.
strategies, to strengthen the balance of risks. These strategies can offer protection when needed and still enable the fund to participate in up-markets. What about the short-term tactical asset allocation overlay? This is only used to reduce the risk level of the portfolio. The team never uses tactical views to increase the portfolio risk. The gist is to maintain the fund’s capital preservation features. Should risks build up in markets, the tactical overlay can be used to actively reduce duration, credit or equity risk in the portfolio. “The key is to find the right balance between assets that could protect the portfolio if a downturn were to occur and investments that can drive the portfolio and its returns when markets are going up,“ Bierre explains. Strong track record As a result of this unique approach, the strategy has met its objectives and developed a strong track record since launch. “Indeed – due to its diversi- fied exposure and flexible approach – the fund has been able to generate interesting returns in different market environments, delivering on its objectives and consistently outperforming its main peers,” Bierre points out. 3, 5 Recently, there has been no shortage of opportunities for the Nordea 1 – Balanced Income
return,” Bierre explains. 2 Risk is managed at two levels: long-term strategic and short-term tactical. While these terms can sometimes be tough to un- derstand, the reality is quite straightforward. From a strategic asset allocation viewpoint, the Multi Assets Team combines fixed-income assets with a moderate equity allocation in order to preserve capital, as well as deliver long-term consistent returns. The target return is cash +3% (gross of fees) over the invest- ment cycle, with a volatility of 3-6%. 2 How does the team do this? Instead of allocating to specific assets in response to a short-term macro view, the portfolio managers follow their ‘risk bal- ancing’ philosophy and exploit opportunities across markets and risk premia to combine risky compo- nents (credit spreads, equity beta) with defensive components (duration, currencies). By doing this, the strategy benefits from several sources of returns while avoiding geographical, sector and style risks. In addition, it deploys alternative risk-mitigating
2 There can be no warranty that an investment objective, targeted returns and results of an investment structure is achieved. The value of your investment can go up and down, and you could lose some or all of your invested money.
FUND IN FOCUS 11
„ Due to its flexible approach, the fund has been able to deliver in its objectives, outperforming its main peers. Karsten Bierre, portfolio manager at Nordea Asset Management
even more sought-after in today’s low to negative yield environment.
Interesting returns without hindering liquidity Finally, the challenging low yield environment in recent years has led many investors to increase li- quidity risk. Essentially, this is the risk that an investor cannot sell an asset quickly. While liquidity risk has frequently made the investment headlines in recent months, it has always been of paramount importance to Nordea’s Multi Assets Team. “Our team looks to al- locate to highly liquid physical instruments – such as high-quality government bonds from developed mar- kets or European covered bonds,” says Bierre. “In ad- dition, we employ commonly used derivatives, such as US treasury bond futures, credit default swaps and US equity futures.” The dynamic approach allows the fund to adjust its equity weight continu- ously. Again, the tactical asset allocation can only be used to reduce the risk level. “The resulting portfolio displays a high level of liquidity, which allows it to successfully withstand any market conditions,” Bierre sums up. Thus, the Nordea 1 – Balanced Income Fund aims to offer a new, liquid, balanced and flexi- ble way for investors to reach their goals. 4
Fund to show its resilient qualities. “In the volatile first quarter of 2020, flexibility and risk manage- ment allowed us to keep the fund’s volatility in check even when market volatility spiked drastically, offering to our investors superior capital protection,” says the portfolio manager. While the preservation of capital is a major feature of the fund, the generation of returns is also a vital element. “In our portfolio, at all times, we aim to balance assets that respond in recovery phases with those that perform in recessionary periods,” Bierre explains. “This allows the fund to deliver consistent returns whichever phase of the cycle we are in.” 4 So far this year, the strategy has proved its qualities, protecting during the sell-off, benefitting from the market rebound and quickly reaching a positive year-to-date performance. 5 This ability to capture positive markets and protect through such equity sell-offs is a very desirable feature that becomes
Nordea 1 – Balanced Income Fund Manager Karsten Bierre Base currency EUR ISIN LU0634509953 (BP-EUR) LU0637308585 (BI-EUR) Launch date 22.02.2012 (BP-EUR, BI-EUR)
3 Source: © 2020 Morningstar, Inc. All Rights Reserved as at: 28.10.2020. European Open End Funds database, Morningstar EAA Fund EUR Cautious Allocation - Global category. Performance in EUR. Period under consideration: 16.12.2016 – 30.09.2020. Comparison with other financial products or benchmarks is only meant for indicative purposes. 4 There can be no warranty that an investment objective, targeted returns and results of an investment structure is achieved. The value of your investment can go up and down, and you could lose some or all of your invested money. 5 The performance represented is historical; past performance is not a reliable indicator of future results and investors may not recover the full amount invested. The value of shares can greatly fluctuate as a result of the sub-fund’s investment policy and cannot be ensured, you could lose some or all of your invested money.
12 MARKET VIEW
Listed infrastructure assets offer investors robust and consistent returns independent of the ups and downs of economic cycles. That makes the asset class an attractive late-cycle alternative to broader equities. A bridge between two cycles
Late-cycle investment destination Listed infrastructure – which consists of four pri- mary sectors: communications, midstream energy, utilities and transportation – has been one of the most desirable asset classes in recent years. Listed infrastructure assets typically display high barri- ers to entry, consistent demand, defined revenue streams and predictable growth – all of which is inflation-protected. Furthermore, listed infrastruc- ture has historically delivered equity-like returns, but with lower volatility and superior downside protection relative to broader equity markets. Over the past two decades, global listed infrastructure has captured just 60% of the global equity market downside. “It’s this combination of predictable
At the beginning of this decade, the investment outlook for global equity and bond markets appears increasingly unpredictable. In addition to the fact that the current economic cycle is ex- tremely lengthy by historical standards, investors are also confronted with the near-term challeng- es of the US presidential election, trade-related Brexit turbulence and rising geopolitical risks in many parts of the world. Then there is the coronavirus pandemic. Investors are undoubtedly facing difficult allocation decisions and are likely to seek out areas of the market offering a higher level of certainty and predictability. One space increasingly likely to be in the spotlight is global listed infrastructure.
MARKET VIEW 13
more than 30 years of experience in managing list- ed real asset portfolios. Jeremy Anagnos expects the asset class to continue displaying long-term growth and stability due to three primary drivers. Firstly, the expert sees consistent organic growth potential, driven by the ongoing need for compa- nies to invest in existing infrastructure assets. This investment is uncorrelated to the broader mac- roeconomic outlook as the companies are invest- ing for safety, reliability and efficiency purposes.
growth, reliable cash flows and downside protec- tion that makes listed infrastructure a reputable and attractive late-cycle destination,” says Jeremy Anagnos, CIO of listed infrastructure at CBRE Clarion Securities LLC. These characteristics are extremely appealing, considering the US economic cycle is at a record length.
„ Predictable growth, reliable cash flows and downside protection make listed infrastructure an attractive late-cycle destination. Jeremy Anagnos , CIO at CBRE Clarion Securities LLC However, the asset class is more than just a destination for cautious investors, as it has also
Secondly, the asset class will also be boosted by increased demand for new renewable energy infrastructure to support global decarbonisation initiatives. Finally, accelerating data requirements will result in expanding communications infra- structure. “Global listed infrastructure companies in developed markets own an estimated USD 6trn of assets. We estimate these companies will need to spend USD 200bn annually upgrading, replac- ing and expanding existing assets. On the current asset base, this results in an annual growth rate of approximately 3%. This growth rate is organic and repeating,” Anagnos explains. “This investment is being made under a regulatory structure providing companies with a high level of certainty as to the rate of return – adding to stability and visibility of infrastructure cash flows.” The race to reduce carbon Anagnos also notes a tailwind from the intense global scrutiny on tackling climate change, with political pressure to de-carbonise mounting in most industrialised countries. “Decarbonisation goals can be helped by shutting coal power plants down and replacing the output with renewable and natural gas-fired generation. Global listed infrastructure companies are making significant investments to effect this change, with earnings and dividends supported by the activity,” Anagnos says.
At a glance ` Listed infrastructure assets typically display high barriers to entry, consistent demand, defined revenue streams and predictable growth – all of which has inflation protection ` Over the past two decades, global listed infrastructure has captured 80% of the global equity market upside, but just 60% of downside ` Government policy is actively promoting more investment in reducing carbon emissions, and infrastructure companies are taking a leading role in this investment activity experienced robust upside capture versus global equities of more than 80% over the long term. Performance in 2019 reinforced the ability of glob- al listed infrastructure to participate in a strongly rising market, with the asset class delivering strong returns of 25%, just slightly lower than the 28% for broader global equities. Robust expected growth rates Investors can access the compelling long-term characteristics of the asset class through the Nordea 1 – Global Listed Infrastructure Fund . The strategy is managed by listed real assets specialist CBRE Clarion Securities LLC, which has
Regarded as the cleanest of the fossil fuels, global natural gas is estimated to see a consumption
14 MARKET VIEW
Going up: since infrastructure assets provide essential services to society, cash flows into the asset class are quite independent of macro developments and market cycles. These are sought after characteristics in a late-cycle environment.
near-zero interest rates for an extended period to avoid a recession. Infrastructure assets are well positioned for such an environment. “Infrastructure assets are less sensitive to macro and economic forces as they provide essential services to society,” says Anagnos. Near-zero interest rates can even be a tailwind for these assets. “Infrastructure compa- nies operate with 35-40% leverage, so cost of debt is important to their financial returns,” says Anag- nos. “We continue to see companies refinancing expiring debt at lower rates, which supports future earnings. Thus, we expect the low cost of finance to bolster asset valuations and lead to lower required returns (i.e. higher multiples) for assets.” Listed infrastructure stocks have traded at nearly the same range of EV/EBITDA multiples for five years, despite lower interest rates. “In our opinion, higher multiples should prevail, particularly as the assets in the listed market trade over 20% below private market multiples,” Anagnos explains. “We believe that long-term investors will be rewarded for investing in listed infrastructure today. Secular themes that drive the long-term growth of the as- sets remain in place and demand from institutional investors for the assets has been confirmed.”
increase of 43% by 2040. This demand will primar- ily come from non-OECD countries, with gas- generation flexibility complementing intermittent renewable energy. Liquefied natural gas (LNG) is projected to dominate US natural gas exports by the early-2020s, with US companies developing the infrastructure to service this development for many years. Government policy initiatives recently approved in Europe (EU Green Deal) and proposed by US pres- ident-elect Joe Biden would further the investment growth in renewables. Utilities in each region are leaders in the development of sustainable energy infrastructure, including renewable generation as- sets, transmission assets and battery storage. A top holding in the fund that is a clear example of this opportunity is Enel. Enel is an Italian company operating a well-run utility business in Italy and is also one of the largest developers of renewable generation assets, not only in Italy but around the world for other utilities and corporate customers. This is a non-regulated activity that complements the stable utility business and generates higher returns and growth. “Enel has a 102-GW renewable generation pipeline, which is equivalent to all 546 coal fire power plants – the amount of coal plants retired in the US between 2010 and Q1 2019,” Anagnos points out. Low interest rates support the asset class The COVID-19 pandemic has led to unprecedented levels of monetary and fiscal support. Economies are beginning to heal and the support from central banks and governments is visible in forward-looking indicators. Despite these initial signs of improve- ment, it is likely that markets will continue to see
Nordea 1 – Global Listed Infrastructure Fund
CBRE Clarion Securities LLC
LU1947902109 (BP-USD) LU1927026317 (BI-USD) 05.03.2019 (BP-USD) 17.05.2016 (BI-USD)
MARKET VIEW 15
MACRO OPIN ON
Sébastien Galy , Senior Macro Strategist at Nordea Asset Management:
The gradual recovery of China from the Covid-19 crisis should steadily expand to other economies in the Asian-Pacific region, opening up multiple opportunities.
After having severely stumbled initially, the economic recovery in China started earlier than in other countries thanks to rapid and orderly crisis management. The Chinese government and central bank were able to force liquidity injections into parts of the economy that were badly affect- ed by the economic shutdown. Sectors with lower profit margins, such as tourism and the hotel industry, laid off worker but were able to survive. The government fostered the issuance of bonds for a variety of projects and the low interest rate environment helped many sectors, including real estate. The outcome of this is a sharp increase in lending known as total social financing. In contrast, the government’s fiscal stance has been very prudent in the face of a mountain of na- tional debt, particularly so on the part of private households and local government. As a result, the economic recovery has been somewhat slower than hoped for. The economy is still confronted with weak global demand and the effects of the Covid-19 shock. Over time, we expect demand to steadily firm up - a development well anticipat- ed by local equity and credit markets with large foreign portfolio investments. This should help growth in the Asian-Pacific region, where we like a rising middle class and the IT sector. The elec- tion of Joe Biden injects a feeling of calmer, albeit tense relations between the two countries. The cyclical recovery that we are currently seeing, though a powerful force, should abate next year in the context of a structural slowdown. Amongst other factors, the latter is linked to an aging population, less efficient services, debt supporting zombie companies and an extremely expensive real estate market – all of which are not sup- portive of growth. However, such concerns are well understood by Chinese authorities and the country continues to be an anchor of stability in Asia Pacific with an attractive fixed-income and equity market.
Consumer demand from the rising middle class continues to be a driver of long-term growth in the Asian- Pacific region. Following the slack at the beginning of the year, it is now picking up again.
China: structural downturn, cyclical recovery Development of Chinese construction and mining industry, in %
95 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
China, Business Surveys, National Bureau of Statistics of China, Business Climate Index, Industry, Construction & Mining, General (Industrial), Index
Source: Nordea Investment Management AB and Macrobond Date: 11.10.2020
ISSUE 01.2019 20
16 INSIDE NORDEA
Eric Christian Pedersen, Head of Responsible Investments (RI) at Nordea Asset Management (NAM), discusses NAM’s long-term commitment to ESG investing and how the group plans to remain a leader in this burgeoning space.
nordic friends: NAM has one of the industry’s longest track records in ESG. How does the group ensure that it remains at the forefront? Eric Pedersen: ESG and sustainability have been an integral part of NAM’s business model for a very long time, and we are fortunate to have strong ESG processes and products to build on. Creating such an integrated ESG capability from scratch would be incredibly difficult – not to say impossible. This foundation is invaluable, as the focus of clients and regulators on ESG and sus- tainability continues to increase. For our ESG STARS fund range, ESG analysts from our RI team are working side-by-side with the portfolio managers, providing invaluable insights on each current position, as well as potential in- vestments. This integration has intensified over the past decade and I believe that, as far as the ESG STARS funds go, there is nothing more advanced in the industry. And yet, this is a journey that never ends. We will continue to evolve – both in terms of depth of integration as well as breadth of concept as we look to offer our clients additional ESG-enhanced strategies. Correspondingly, we expanded our ESG STARS range into fixed income last year, as ESG issues can clearly present a mate- rial risk in respect to both sovereign and corporate debt as well, not just equities.
and aim to maintain our leading position in this sphere – which means we will undertake even more proprietary research, develop even better models and further increase company engage- ments. These efforts will provide strong support to our clients as the spotlight on sustainability and ESG risk intensifies. nordic friends: NAM’s RI team is now divided into four clusters. Can you describe the new structure? Eric Pedersen: We have one cluster responsi- ble for active ownership and engagement, one focusing primarily on company research and product development, and a third cluster contin- uing to develop our in-house ESG data platform
At a glance ` Although NAM already has one of the industry’s leading RI teams, it plans to undertake even more proprietary research, develop even better models and further increase company engagements ` The integration between portfolio managers and ESG analysts has reached an industry-leading level over the past decade and will continue to progress in the coming years ` Despite the challenges of Covid-19, NAM has continued its ESG activities through video calls, data analytics and collaborative investor initiatives
We have long had one of the largest ESG/RI teams in the industry, relative to the size of the firm
INSIDE NORDEA 17
Eric Christian Pedersen joined Nordea in 1996 and has been here ever since, aside from a short gap in 2008-09. Before Nordea – or Unibank, as it was called at the time – he was in international development. Pedersen’s first professional role was as a consultant to the Danish Ministry of Foreign Affairs and then the United Nations Development Programme in West Africa. While doing an internship with Tata Iron & Steel in Mumbai, he wrote his Masters thesis on the early 1990s economic reform drive in India. Pedersen trained as a macroeconomist at the University of Copenhagen. He is Danish and was born in Austria.
and models. Climate is a separate focus area, as the risk picture here is perhaps the most clear and present both on portfolio and macro level. The fourth cluster is our ESG private equity team, which handles our cooperation with Trill Impact, the new venture launched by Jan Ståhlberg, part of the initial team at EQT Partners and industry veteran. While the four clusters focus on different areas, there is cooperation and knowledge shar- ing among the team members, both on a daily basis and in the weekly formal all-team meetings. nordic friends: NAM is also able to leverage the expertise of the Nordea Group’s Sustain- able Finance Team. Can you tell us more? Eric Pedersen: Yes, there is a sizeable sustaina- bility team also at the Nordea Group level, which focuses on issues related to ESG risk on the bank balance sheet, the advice process towards bank customers and so on, as well as Nordea’s obligations as co-founder of the UN Principles for Responsible Banking. Although we are fully sep- arate teams, we do cooperate closely on various
projects. Incidentally, the Nordea Bank is one of the first major banks to integrate sustainability preferences into its client-facing suitability testing process – well ahead of when this becomes re- quired under new MiFID rules. nordic friends: How does the cooperation work between the fund managers and the RI team? Is it always a smooth process? Eric Pedersen: All companies considered for investment in the ESG STARS and Climate funds are analysed by our dedicated ESG professionals in the RI team, in tandem with the financial analysts from the relevant investment boutique. The objective is to identify companies able to deliver sustainable long- term shareholder value – in other words: to beat the benchmark with a high ESG profile. In order to find tomorrow’s winners, we incorporate the findings of
18 INSIDE NORDEA
Eric Pedersen in discussion at a meeting of NAM’s Responsible Investments Committee (left). Pedersen and colleagues from the RI team meet the mayor of Brumadinho, Brazil, during a field trip to assess a quarantine case (below).
dialogue, like meat and poultry plants which have emerged as Covid-19 hotspots. Finally, along with 300 other asset managers, we are a signatory of the Investor Statement on Corona Response, which calls for paid leave, continuous employment and other worker protections. We have also taken part in an investor statement targeting the pharmaceutical
the ESG analysis throughout the investment process, from idea generation and valuation to portfolio con- struction and risk management. While it is a closely integrated process, there is often spirited debate – which is exactly what you want to occur. This allows us to stress test our assumptions and ensure that we are not missing any angles.
„ It is vital to put boots on the ground and go beyond reading broker reports and financial statements. Eric Pedersen, Head of Responsible Investments at Nordea Asset Management
nordic friends: The RI team has more than 165 company interactions a year. Why are the on-the- ground insights so valuable? Eric Pedersen: We have always said that in order to truly determine ESG-related risks and opportu- nities in a company, it is vital to put boots on the ground and go beyond reading broker reports and financial statements. Field visits allow us to expand our understanding of the companies we invest in, while also greatly improving our ability to be a positive influence. Although we are currently unable to meet our investee companies face-to-face, the quality of our engagement activities has not been impacted by the travel restrictions. Our investee companies are making ample time to interact with us via video calls and we have still been able to ask pointed questions. We also rely on data to determine the corporate response to the pandemic. We have, for example, discovered areas in need of investor
sector. Overall, we see COVID-19 as an opportunity to demonstrate good corporate citizenship.
nordic friends: Finally, what does the future hold for the RI field?
Eric Pedersen: We have expected for many years that responsible investment would inevitably become part of the mainstream – which is what we are seeing right now. But we also know that we need to continue investing in and building out our operational infrastructure, team and specialist ESG solutions. The active stance of the European Commission, the UN, NGOs and national govern- ments with regard to sustainable finance is a strong tailwind – but I am afraid that not all in the industry will be able to meet the requirements. My job is to ensure that NAM not only lives up to our clients’ expectations within ESG – but continues to exceed them.
INSIDE NORDEA 5 decrypted ESG
The EU’s upcoming ESG regulation The European Union (EU) is working on new regulation that will make sustainability considerations mandatory for all industry players. What does this mean for fund distributors and financial advisors?
Following the EU’s 2018 Action Plan on Sustain- able Finance, a new legislative package is currently underway. Key regulations include: Sustainability (or ESG) disclosures : greater disclosure to enhance transparency on how finan- cial market participants consider sustainability. Incorporating sustainability into the advisory and risk management process : amendments to MiFID II, IDD, UCITS and AIFMD will ensure that sustainability preferences of end investors are taken into account. The development of an EU taxonomy : a classification system for environmentally sustainable economic activities which will support both disclosure and the development of a (non-mandatory) EU eco-label for funds. Other regulations are also planned, but these are the ones that should impact asset managers, financial advisors and distributors the most. The regulation is still in its early stages and a lot of clarification and alignment is yet to come. The disclosure regulation will require asset managers to disclose how they integrate ESG factors into their investment processes and how their products con- sider key potential negative impacts on sustainability, also referred to as the principle adverse impacts. In addition, managers will need to provide sustain- ability-related product information to end investors. Distributors and advisors, too, will need to be more transparent to end clients. Products marketed as ESG will need additional disclosures, which should con-
tribute to preventing greenwashing. The regulation distinguishes between products with ESG character- istics (article 8 products) and those with sustainable objectives (article 9 products). MiFID II is also being updated to align with the ESG regulation. However, draft updates published in June 2020 revealed some misalignments with the disclo- sure regulation, raising challenges to achieving prod- uct classification. A key change is the requirement to assess sustainability preferences alongside the usual aspects of financial suitability when providing invest- ment advice or discretionary portfolio management. This means that distributors and advisors will need to evaluate to what extent a client should be steered towards an ESG-focused product or not. The taxonomy regulation aims to establish an EU- wide classification system for environmentally sus- tainable economic activities; in short, what is green and what is not. The idea is to see how far a fund is aligned with green activities, from 0% to 100%, informing the product classification. A key challenge is the current lack of corporate environmental data to support this. While much media attention focuses on the new taxonomy, we believe that the disclosure requirements and changes to MiFID II will have far greater impact on the fund distribution value chain. With its multiple strands, the upcoming regulation is not yet easy to decipher. However, the direction of travel is clear: those who wish to participate in the ESG market will have to disclose in far greater detail the position of both their organisation and its prod- ucts regarding sustainability. And within each organi- sation, more training and knowledge about sustaina- bility and sustainable products will be required.
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