The bar for sustainability criteria is rapidly being raised. Article 8 under the new SFDR legislation will become the lower limit for a sustainable product, and the stricter Article 9 will become the standard for truly “green” products and investment funds. And do not underestimate the impact of Principal Adverse Impact reporting.
This is evident from an exclusive conversation that Investment Officer Belgium, this publication’s sister title, had with Levi Sarens (photo), head of asset management Funds at Nagelmackers. He is in charge of fund management and external fund selection, which is used to upholster the portfolios of private banking clients and to put together funds of funds.
“For retail clients, in addition to our house funds, we have ten to fifteen external funds available. However, the complete selection of external funds is a multiple of that. Within private banking mandates, where the lower limit is half a million in investable assets, we have more niche thematic strategies, both actively managed funds and ETFs. For example, for retail clients we offer a broader thematic fund of Allianz that invests in six to seven trends simultaneously. In private banking we take care of the timing between the different trends ourselves,” explained Sarens.
Sustainability
In Sarens’ team they also see a strong advance in making investment products and services more sustainable.
There is a strong rush going on to “scale up” funds towards Article 8 or 9 labelled products (within the framework of the SFDR legislation), where the exact reason for this was much less clear six months ago. Many parties are therefore now catching up with Article 8, which will become the lower limit for being able to speak of a sustainable product.
“Gradually, the bar will be set higher and higher, and only from Article 9 onwards will it be possible to speak of a truly sustainable product. Within the MiFID story, in time, Article 8 in itself will become insufficient to be able to speak of a sustainable product. A kind of Article 8 ‘plus’ will be required, probably to be linked to the Principal Adverse Impact (PAI) reports on which data must be recorded and subsequently reported from 2022 onwards.”
Explicitly sustainable
Sarens argued that you will have to demonstrate an explicitly sustainable activity. According to him, the Article 9 funds will evolve more towards purely thematic funds that, for example, focus on gender equality, water funds, and so on. “Principal Adverse Impact reporting is in full development, and data suppliers such as MSCI and Sustainalytics are currently busy collecting the necessary data.”
“As a company, you will have to include this in your annual report in the future, but today the data providers still make their own estimates. Consequently, as a fund manager, it is not yet so obvious to include this information in your investment process. It is also only from 30/06/22 that you as a financial entity are actually required to collect this data - whereas ESMA had initially set the deadline at 31/12/2021.”
Low-interest environment
Sarens also stated that the lower interest rate environment is a challenge to fill in the “concrete” part of the portfolio that used to be filled with bonds. “The CPI - reference for inflation in the US - is around 5 per cent at the moment. Then, when tapering starts, interest rates will normally pick up and that safe part will come under pressure.”
Therefore, in times of rising interest rates, Nagelmackers has said it foresees short duration solutions, which are thus less sensitive to interest rates, in those segments that by nature have a longer duration, such as inflation-linked bonds and government bonds.
Sarens confirmed that alternative investments have also been part of diversified portfolios for some time. “We can go up to 10 to 15 per cent here. We invest, for example, in CTAs, which are having a harder time this year but offer nice decorrelation when the markets go down, as they did last year during the Covid breakout. We also invest in convertible arbitrage, which is more suited to private banking clients than retail.”
“Finally, long short (both equity and credit) and merger arbitrage are also performing well. The latter class is particularly strong at the end of the cycle, when M&A is picking up. These funds can generate good returns with limited leverage by, for example, exploiting the spreads in takeover deals.”
Open architecture
Sarens added that Nagelmackers is positioning itself as an open architecture player, in addition to its self-managed range of funds. “Nagelmackers’ own fund range mainly focuses on asset classes that we know well, such as European bonds and equities, small- and mid-caps, and listed real estate. For example, we will not manage a Japan fund in-house, but we will call on external expertise. By the way, ten to fifteen years ago we were one of the pioneers in the field of open architecture.”
Performance
According to Sarens, this results in favourable performance. “Depending on the range, the balanced portfolios were 8.5 to 10 percent positive as of 31 August. There are three ranges: value, sustainable and private banking management. This places us in the better half of our peer group for each range. All in all, we manage around 4 billion euro for our clients.”
Read also the interview with Yves Van Laecke (In French or Dutch).