Carving a thematic path in portfolios

Investors have been quick to seize opportunities stemming from the structural shifts entrenched due to Covid-19.

“There is no shortage of emerging themes for investors to capitalise on when investing in Asian equities. However, finding winners today is no longer as clear-cut as at the outset of the pandemic, when e-commerce and healthcare were more obvious winners,” said Stephen Kam, head of product management, Asia ex Japan equities, at Schroders.

Instead, the past six months or so have witnessed recovery plays leading the market. With the broad re-opening of the global economy largely intact, one of the prominent themes to date in 2021 has been technology stocks – more specifically the semiconductor and tech hardware sectors.

“Demand has picked up as economies have re-opened, but the supply situation remains very tight,” explained Kam.

It has led to growing order books for big tech in Asia, and demand across the semiconductor space in particular should remain high given rising data and 5G related needs. “We see a backdrop where structural demand for technology will continue to be strong,” he added.

By geography, meanwhile, China’s commitment to carbon neutrality over the coming decades makes the country a strong advocate of sustainable development that is creating numerous new investment opportunities.

“With the environment a priority for the government, this is supportive for certain Chinese companies and industries,” explained Kam.

Electric vehicles (EVs) are a clear reflection of structural changes underway that are redefining consumer behaviour. “This offers a possibility to invest across the entire EV supply chain, which we believe has a multi-year growth runway,” he added.

Kam said the key is to identify companies that have a strong and sustainable return profile.

“What this means is we evaluate whether or not a company has a genuine competitive advantage in its industry. That might be evident from its technology, supply chain management, intellectual property, the R&D investment it has made, or its overall execution track record,” explained Kam, “and these qualities typically enable companies to defend their profitability well.”

Sustainability is a theme and a choice

Amid the acceleration of trends already underway before 2020 – such as digitalisation and climate awareness – sustainability is front-of-mind in many portfolio allocation decisions.

Among the latest research to reinforce this, Schroders’ 2021 Institutional Investor Study of 750 global institutional investors found that almost half (48%) of asset owners in Asia Pacific view the role of sustainable investing within their organisation as significantly more and more important due to the pandemic.

The recent Schroders study also revealed that over three-quarters (78%) of asset owners in Asia Pacific find investing in sustainable investments challenging. Among the issues that respondents highlighted were greenwashing (57%), difficulty in measuring and managing risk (54%), and lack of transparency and reported data (52%).

“Investors are now demanding greater transparency and visibility over how companies address and tackle these issues,” said Kam.

As a result, formal processes are essential to assess each of the environmental, social and governance (ESG) considerations, along with the risks.

Stakeholder analysis provides insights into managing change

One key to a successful sustainable investing approach is ensuring the company manages its stakeholder relationships well. “This is a lens through which we look at a company’s ability to manage ESG factors and mitigate risks,” added Kam.

Developed as an analytical framework by Schroders’ Sustainability team, Schroders CONTEXT has become a component of how the firm turns stakeholder analysis into insights about how a company will fare going forward.

So, if it is not managing its relationships well with its customers, employees, suppliers, regulators, or the broader community, the sustainability of the business in terms of its viability will be in doubt.


Schroders ‘CONTEXT’ framework


Getting more engaged in ESG

Although ESG considerations are already fully integrated as part of the Asian equity investment process at Schroders, they are now becoming mainstream among asset owners.

According to Kam, this proves the increasing desire to invest in companies that make a positive impact. “We are seeing greater ESG-related discounts on businesses that have a negative impact, especially on the environment.”

This feeds into engagement; as owners, investors can get “a seat at the table” to push for greater change.

Kam said Schroders does this on an ongoing basis via its team of 40 analysts in Asia, using their access to management teams to assess them in detail and provide direct feedback to the company.

Investing with eyes wide open

Given this relatively early stage of development of ESG engagement and reporting in Asia, investors need to be realistic with their expectations of effecting change.

Rather than a misperception that results can be achieved within a matter of months, the impact might not happen for between two and five years in some cases, especially where companies are still building up their governance processes around ESG. More important is that the efforts of engagement catalyse change that is meaningful and long-lasting.

“We want to be investing into companies that are making a positive impact on our world and are well managed businesses. This is the sweet spot that can generate positive returns for investors,” explained Kam.

This comes back to the context of the investment – in terms of backing companies that manage ESG risks and relationships well as a way to run good businesses over the long term.

“For investors who want to use the growing opportunity-set in sustainable Asian equities to make an impact with their investments, they should look to invest with managers that are active and have a well-trodden, structured approach to ESG,” added Kam.

Click here to learn more about how Schroders views sustainability and makes concrete impact through sustainable investing.


About the Schroders Institutional Investor Study

The Study analyses the investment perspectives of 750 global institutional investors on the investment landscape, private assets and sustainability.

The respondents represent a spectrum of institutions, including corporate and public pension plans, insurance companies, official institutions, private banks, endowments and foundations, collectively responsible for $26.8 trillion in assets. The research was carried out via an extensive global survey during February and March 2021.


IMPORTANT INFORMATION

Investment involves risks. This material is issued by Schroder Investment Management (Hong Kong) Limited and has not been reviewed by the SFC.