One way investors can deal with market volatility is to diversify their holdings in various asset classes including alternative investments like digital assets and sustainable investing.
While the idea of investing in digital assets used to be conflated with cryptocurrency and token acquisition, today, it is no longer just about cryptocurrency, considering its vast potential in fintech.
“What we are seeing is the transition from early adopters to the next 100 million digital asset investors and this is important to asset managers today because these investors are going to comprise many clients that they already serve,” says Gerald Goh, co-founder and Singapore CEO of Sygnum, which describes itself as the world’s first digital asset bank.
Goh, speaking at the Schroders Singapore Investment Conference 2022 on May 26, has observed how the risk appetites of investors today are very much evolving from those of the past generation. “[Investors today] are far less likely to implement a direct booking level. They are far more interested in implementing passive exposure via ETFs (exchange-traded funds) or have broad and smart digital exposure, before layering on active satellite exposure where it makes sense.”
“Looking more at [the full range of] digital assets is an opportunity to commoditise one’s offerings and stay relevant to a client,” says Deepak Khanna, head of wealth and trading at Revolut. “This is also where fintech comes in to create new platforms and opportunities, rather than just looking at switching the behaviour of clients.”
However, the history of immense instability and unpredictable fluctuations in cryptocurrency markets continue to make some investors very wary of diversifying their portfolio towards digital assets, with the most recent example being Luna’s crash in May to zero from more than US$100 ($139).
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“The de-pegging of TerraUSD has demonstrated the necessity of regulation in the space, especially when it impacts millions of retail investors who might not have fully understood what they were investing in because it may be hard for them to distinguish between trusted tokens that have rigour behind its financial model, compared to those that are more experimental,” says Goh.
As such, sceptics continue to tread with caution in the investing arena, especially when it comes to deliberating whether cryptocurrency has a place in a multi-asset portfolio. “Multi-asset investing is about blending complementary return-seeking and risk-reducing assets to achieve investment objectives with a smoother path of return. Understanding asset classes’ risk, return and correlations are critical to achieving these goals,” says Blake Shefford, fund manager, multi-asset for Schroders.
“While the high volatility of cryptocurrencies is not so much an issue in itself, its volatility is far less stable than other traditional asset classes such as equities, bonds and commodities while its correlation with equities is rising, reducing the diversification benefits on offer,” says Shefford.
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“These unreliable factors pose problems for us when it comes to portfolio construction and appropriate position sizing in our portfolios. Its characteristics will no doubt become clearer over time but right now, we’re not ready to take the plunge,” he adds.
Yap Sze Sze and Claire Herbert from Schroders underscore the importance of ESG considerations in long-term investments
Take a longer-term view of ESG
While the popularity of digital assets with investors these days is a mixed bag, there is also currently an investing trend that is close to many investors’ values: Environmental, social and corporate governance (ESG).
“ESG and sustainable investing continue to gain traction and awareness across the board with regulators, policymakers, asset owners, asset managers as well as corporates,” says Yap Sze Sze, head of equities management, Asia ex-Japan equities at Schroders.
“Of late, we are seeing improving disclosures across companies in the Asian region, and an increasing number of companies are also committing to net-zero or climate targets as more companies embark on their ESG journey,” she adds.
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ESG is becoming more important to Schroders, especially since sustainable investments are increasingly viewed as integral to driving quality long-term growth for companies at large.
Moreover, the more recent global shift of awareness towards environmental issues has strengthened ESG as a viable investment consideration. As such, there has been increasingly more incentive for asset managers to build a community that incorporates sustainability into their portfolios and push for greater sustainability efforts at a corporate level.
Yap shares that at Schroders, a balance between active ownership and direct engagement with sustainability-related practices is a key theme in moving forward with ESG investments. “As bottom-up investors, we have integrated ESG in a way that enhances and strengthens our fundamental bottom-up approach to research and investing, leveraging on our proprietary analyst insights and perspectives,” says Yap.
Active ownership and engagement remain key to raising awareness on key and emerging issues, driving change and transition to more sustainable business models and practices, both through more direct engagements where our shareholdings are more substantive or collectively alongside other asset owners when it comes to large and multinational corporations,” she adds.
Yet, as one contemplates how to invest sustainably and how this will impact returns and alpha generation on one’s investments, Yap explains that it is important to consider the degree of focus and intended outcomes when defining sustainable investing as well as the investment horizon one is willing to commit to.
“For example, ongoing engagement with companies and efforts to influence change and impact a company and its stakeholders will take time, one needs to take a medium to longer-term view of three to five years on performance and alpha generation,” she says.
Claire Herbert, ESG manager at Schroders, reminds investors to take a longer-term view on this topic while keeping an eye on the fundamentals. “Over the last 10 years or so, we’ve seen things like carbon taxes, rising minimum wages and clampdowns on tax avoidance. These are all costs that companies originally didn’t have to bear the brunt of, but are now being pushed back onto their balance sheets. If we’re not looking at ESG factors, we are potentially missing some pretty big risks facing our portfolios,” says Herbert.
Inflationary pressures
Even as investors try and figure out ways to cope with market volatility and protect their portfolios, the elephant in the room for everyone is inflation. Coming off stronger than expected demand recovery from the pandemic, producers are making up for the lost time.
Part of the additional inflationary pressure was due to the recent Russia-Ukraine war. Both countries are major commodities exporters and the direct impact of supply disruptions is keeping inflation at higher levels than merely from supply disruptions from the pandemic and demand-driven ongoing recovery. Major developed economies including US and UK are coping with inflation at its highest levels in more than four decades.
However, Pang Kin Weng, Asian multi-asset fund manager at Schroders, believes that inflation may not necessarily be a completely bad thing. To him, it could be seen as a symptom of recovery as well from Covid-19.
However, Pang warns of hyperinflation being the real threat, which would adversely affect many assets if it occurs. “We continue to be in the cross-currents of pent-up demand meeting a disrupted supply due to Covid-19 and this will take time to normalise,” says Pang.
As it is, consumers and businesses across the world, including Singapore, are already feeling the effects of inflation. For instance, Singapore is currently seeing a shortage of fresh poultry imports, as the export of chicken feed from Ukraine has been causing distress in the production of poultry in Malaysia, Singapore’s main source of poultry. On June 1, Malaysia banned chicken exports, threatening the supply and price of Singapore’s de-facto national dish — chicken rice. Anecdotally, chicken rice stalls still open for business are now selling this staple food at a mark-up.
Besides eating away consumers’ spending power, another key danger of inflation is the impact on companies’ earnings, as whatever more they can collect in revenue gets nibbled away by bigger gains in costs. Such a situation was seen in Singapore back in the early 1970s, where the city-state witnessed headline inflation levels of 20% in 1973 and around 30% y-o-y in the first half of 1974, according to data from the Monetary Authority of Singapore (MAS).
“There is bound to be some volatility in the short-term but we just need to ensure that we’re invested in the companies that we believe are well placed to navigate this volatility and be successful over the long term,” says Stephen Kam, head of product management, Asia ex-Japan, at Schroders.
Photos: Schroders
