"Sustainability will be essential when deciding future investments"
What criteria should a trend have to draw our attention to it? Can every trend offer a good investment opportunity? What aspects should we take into account to identify them as such?
At BBVA Private Banking, we combine traditional management techniques with new trends in portfolio management. The goal is to obtain a different perspective, with greater portfolio diversification and decorrelation.
To achieve this, we rely on traditional portfolio management tools, which we use, along with diversification, to find combinations of assets with low correlations that reduce the total risk of portfolios. Additionally, we combine active and passive management, opting for the former in those markets and/or sectors where it is possible to consistently outperform the benchmark indices. In more efficient markets, we opt for the latter, which seeks to replicate the behavior of these benchmark indices. In turn, we have incorporated new risk factors or premiums as sources of profitability, relying on the Smart Beta or Factor Investing as a complement to traditional management.
Similarly, at BBVA Private Banking we have incorporated megatrends into our management models, which is yielding very high quality risk-adjusted returns. This is because we live in a constantly evolving world where technological progress, digitization and increasing access to big data have made these megatrends the new drivers of global growth. Thematic investing seeks to capture that growth by identifying the business models and companies that benefit from these trends. Investing based on them means sharing in their success; as a result, one of the main challenges is to identify these winning trends and the companies that will benefit. As a result, we think it is appropriate to diversify into several areas that overlap as little as possible while suitably complementing one another.
In short, we believe that the secret to good management is to generate value for customers, both from an asset allocation point of view and by selecting the best securities within each asset class. As for asset allocation, we must go beyond the traditional approach and include diversification between different management styles and trends, in order to additionally improve risk-adjusted returns. Within this scheme, in the asset selection part, it's essential to look for idiosyncratic returns, which we often find in companies that are pioneers in the aforementioned megatrends and that can yield returns well above those of the market as a whole.
Why will sustainability be so essential when deciding future investments? To what extent?
At BBVA, sustainability is a priority. Our goal is for all of our services and products to offer a sustainable solution. On the one hand, because we're certain that the 17 United Nations Sustainable Development Goals (SDGs) represent a transformation that is as important as digitalization, and where much more is at stake. In fact, companies and sectors that are not aligned with the SDGs will be more likely to suffer financial problems, payouts in litigation, fines and risk to their reputation, making them less appealing to investors. Also, because there are studies that show a positive correlation between sustainability practices and financial results in terms of risk-adjusted returns.
In short, sustainability could be the third area on which to base the analysis of any investment, and which would replace the traditional risk to reward ratio to include an impact variable and yield a three-pronged factor (risk-reward-sustainability).
How can individual investors take advantage of all these changes to make a good investment? And in this respect, what will be the great investment trends or opportunities in this newly-minted year of 2020? And in the medium term?
When we talk about trends, we can't be shortsighted, since their very nature demands having a medium-term outlook.
Above all, let's remember that thematic investing consists of investing in assets that involve exposure to some long-term trend, in order to obtain an appealing return that's higher than what would be achieved by investing using a traditional benchmark index. Thematic investments can also be considered as those that pursue objectives beyond economic profitability, such as having an impact in terms of ESG (environment, social and corporate governance).
What areas does BBVA Private Banking see as providing investment opportunities?
Sustainable (impact) investment. The social, political and financial pressure to fight climate change is intensifying. Some figures to consider include:
- To limit global warming to an additional 1.5 degrees, we must achieve a zero-emission society by 2050.
- According to a report by Cambridge University, the global GDP could drop by 7% in 2100 if additional measures on carbon emissions aren't taken to deal with climate change.
- According to the OECD article "Investing in climate, investing in growth," a package of public policies that are compatible with the climate can increase GDP in the long term to 2.8% (on average in all G20 countries) by 2050, continuing with current policies. But if the positive repercussions of avoiding climate change are also taken into account, the net effect on GDP by 2050 increases to almost 5% in the developed and emerging G20 economies.
We must keep in mind the growing social demand, which is calling for a definitive transformation of the economic model. In order to undertake it and reduce the deterioration that climate change is causing in our planet, vast amounts of financing and investment, both public and private, will be necessary. The winning companies in the long term will be those that integrate clean energies into their value chain.
All of this, together with the growing interest on the part of investors in aligning their financial interests with their personal convictions and values, make sustainability a clear investment opportunity.
Technological revolution in finance. Digital technology has already transformed the relationship and interaction between customers and financial institutions, changing the structure, operation, management, behavior and value proposition of the financial sector. The speed and disruption of technological changes in the traditional banking business is transforming the financial industry and providing interesting investment opportunities. Only those financial institutions with the capacity to absorb all the rapid changes that are taking place will come out on top.
It is necessary that they keep investing in technology in coming years so as to face the new competitors that will be entering the market, the evolution toward digital payment methods, the purchasing of all types of financial products online, storage protocols and the transmission of new and disruptive data such as Blockchain, digital financial advice (e.g. with robo advisors), etc. All this without ignoring the security and legal/regulatory requirements that the adaptation to these new technologies entails. All of this leads us to view the technological revolution in finance as a subject of enormous interest.
Technology applied to security. In an increasingly globalized and complex world, security is becoming more and more important. The focus of the security industry is to help protect the health, privacy and well-being of people throughout the world. This all stems from a growing concern, at the level of governments, companies and individuals, about everything related to this security.
On the one hand, new technologies open up new security needs involving computers, payment methods, data protection, advanced autonomous driving systems and more. On the other hand, demographic growth and global urbanization require enhancing physical security, food security and those services that keep people safe (public transport, infrastructure or popular events).
This trend has a significant growth potential, since feeling safe and secure is a basic human need. Furthermore, the law supports security measures in response to the threats of our modern, globalized world.
Because of this, we find investing in security very appealing.
Sustainable Consumption. The preferred definition for the term sustainable consumption is that proposed at the Oslo Symposium in 1994: "the use of goods and services that satisfy basic needs and provide a better quality of life, while minimizing the use of natural resources, toxic materials, waste and polluting emissions during their life cycle, in a way that does not risk the needs of future generations".
Many changes are taking place involving consumption, such as the changing consumption habits of new generations, greater awareness of the environmental impact and footprint of the producing companies, and changing consumer tastes.
But not only are consumers increasingly demanding responsible behavior from companies, they are also requiring suitable information through product labeling, characteristics and rules of use. Regulations are also becoming stricter, introducing taxes and imposing sanctions.
Those companies that are capable of anticipating these changes and leading the way will be the winners and leaders in their industries. The goal of sustainable consumption and production is to do more with less. Those companies that take the right approach to these issues will stand out from the competition in the eyes of both consumers and of their own employees.
For these reasons, we believe that sustainable consumption has a great growth potential.
Longevity. The life expectancy and maximum age of humans have continued to grow in the 20th century. Most children born in rich countries today can expect to live over 100 years. However, this trend has slowed in recent decades, significantly reducing the chances of living past the age of 100. According to a recent study by researchers at the Albert Einstein College of Medicine in New York, we have reached the longevity limit, which ends at age 115.
Despite everything, longevity is one of the greatest transformations of this century. There is an increasing awareness that a healthier lifestyle is essential: a balanced diet, regular exercise, taking care of the environment, etc. It is also very important to be optimistic.
In fact, a recent Boston University study (published in the journal Proceedings of the National Academy of Sciences) concluded that there is a positive correlation between being optimistic and living longer.
Companies are already starting to react to these imminent changes, investing in treatments, caring for the elderly, and providing for their well-being and leisure needs.
This means that investing in health, and more specifically in longevity, is another investment opportunity that we find very appealing.