In the latest in our regular series, Portfolio Adviser hears from Jamie Hayes, director of UK wholesale distribution at Nordea Asset Management (pictured below):
Which particular asset classes and strategies do you anticipate your intermediary clients focusing on for the remainder of 2024 and beyond?
In the UK wealth market, cost and diversification remain front and centre in investors’ minds, and rightly so. The pressure to squeeze down price throughout the advice chain has been a dominant theme for a decade and there is no going back. Equally, many investors have taken major style bets in the pursuit of returns and have been caught out when markets and rate cycles have turned.
As a response to these pressures, investors are increasingly exploring enhanced index solutions – which offer equity beta diversified across risk premia within a controlled risk budget, delivered at low cost – and employing them at the core of portfolios. This allows the active risk and fee budgets to be used in more esoteric and inefficient areas of the market, with the diversified core complemented by a satellite of high-conviction ideas and thematic equity strategies.
As a result, we have had a substantial uptick in interest in our enhanced equity index range, alongside our climate equity solutions – an area we have been long well-recognised by the market.
Finally, private markets. Still a bit of chicken-egg about solution allocation, but with industry and client knowledge increasing in this asset class, it seems like only a matter of time before this becomes a key part of any investment offering.
Should end-investors – and, by association, asset managers – be thinking beyond equity or bond investments? Towards what?
Due to high interest rates after years in negative territory, and inflation likely to remain above target, the investment landscape and bond/equity dynamics have changed. On one hand, this means products that had lost their relevance several years ago are now back in play – such as target maturity funds or structured debt products. This has a second derivative effect for product creators, as these strategies are more efficient for banking groups to create internally and distribute, as opposed to selecting a product from a third-party entity.
The industry must prepare its range of strategies to adapt to the new environment of higher interest rates. If yields are 3%, you need to offer a fund with a return target of 7-8%. However, asset managers need to act with caution when trying to deliver that extra return.
Without wishing to dive too deep into the question of equity-bond correlations and forecasting what that will look like going forward, markets are unpredictable and there are many different strategies and asset classes at investors’ disposal to offer them a ‘free lunch’ of diversification – which rightly has given rise to conversations about absolute risk premia and private market solutions.
Nordea has a broad solution and is constantly innovating, but one thing is certain, we are not going to change our DNA – responsible investment remains at the heart of what we do.
To what extent do private assets and markets fit into your thinking? What are the current pros and cons for investors?
Institutional investors have long been exposed to private assets, but recently we have seen a growing appetite for private assets from the wealth management segment.
At Nordea, we are focused on the primary challenges we think will support the adoption of private markets within the wealth space. The first is education. Private assets are very different from public with limited information, a wide dispersion of strategies and niches, and unique terminology. This requires upskilling, so investors feel more comfortable with this asset class. The second is access. Unlike public markets, private markets are more relationship-driven, with the best funds often difficult to access for new investors. It is not only about having capital to deploy but also about getting access to the top allocators. Third is ‘trade-ability’. It is not uncommon for wealth investors to have a similar investment horizon as some institutional investors, but the more dynamic nature of a wealth portfolio makes it harder to include private assets, given the illiquidity.
Without a doubt, private markets have an important role to play in a client portfolio, but investors need first to accept and understand the associated illiquidity. One of the primary ways around this is to build a private assets portfolio combining different private equity and private debt funds. To this effect, we have built very successful solutions for our internal channel, offering a structured approach to private markets that we are now proposing to intermediaries.
Given client and regulatory pressure on charges, how is your business delivering value for money to intermediaries and end-clients?
‘Value for money’ has two subcomponents – what you are delivering to investors and what they are paying in return. Simplistically, the delivery of our product comes in two forms: investment outcome and client experience. We are an outcome- and alpha-orientated investment manager, so resourcing – both from a human and technological perspective – and structuring our investment teams to deliver on their investment objective is first and foremost on our minds. The second is in delivering a strong investor experience. To me, this means regular, detailed and timely reporting on our portfolios and providing access to relevant professionals.
With regard to the ‘price’ component, we constantly review our pricing strategy to ensure it remains in line with the market and is appropriate. At the end of the day, core to our business practice and mindset is the idea that our fiduciary duty is to deliver returns with responsibility. Without fulfilling our core duty to a full set of stakeholders – clients, the environment, and society – we have no social licence to operate.
How much of your distribution is currently oriented towards climate change, net zero, and other segments of sustainable investing? How do you see this approach to investing evolving?
Nordea Asset Management was a pioneer in ESG investing and for more than three decades, we have been developing solutions designed to deliver attractive long-term returns alongside a positive impact. After the success of Global Climate & Environment strategy, which has grown to the largest Article 9 fund in Europe, we continue to enhance our range to provide strong solutions spanning three different approaches to portfolio decarbonisation.
First, we have our Beta Plus enhanced index approach, which employs a corporate exclusion list and divests from high-emitting sectors and companies. Next, are our ESG STARS solutions, which are a set of core building block portfolios investing in ‘relatively low emitters’ in advanced transition phases. These companies have a higher potential for emission reduction versus the sector-adjusted benchmark, resulting in better real emission reductions over time. We offer 23 ESG STARS funds – with the majority currently displaying a GHG intensity lower than the benchmark, and we anticipate portfolio fossil fuel emissions falling faster than the benchmark.
Finally, we further developed our climate equity range to include ‘relatively high emitters’ early transition phases. Our Climate Engagement approach supports real-world decarbonisation through engagement with select heavy-emitting and environment-polluting companies in order to drive real change. Excluding these companies from portfolios may look good on paper, but it will have a limited impact in the real world. We believe a significant factor in unlocking value in these businesses is convincing the wider market of their improving sustainability, as well as their ability to generate positive returns in the future green economy.
Helping our clients to decarbonise portfolios is increasingly relevant, as many investors have pledged to decarbonise and now need to deliver on those promises. We are currently supporting many entities that are seeking to implement decarbonisation strategies by offering a wide array of bespoke customisable solutions.
Looking a little further ahead, in what ways do you see the asset management sector evolving over the next few years?
The asset management industry is experiencing an investment paradigm shift, as government bond yields on both sides of the Atlantic have reached levels not seen since before the 2008/09 global financial crisis. Clients preferring lower risk are returning to more traditional ways of allocating money – such as cash, government bonds and/or structured products.
In the midst of uncertainty, we seek to offer solutions able to respond to current challenges. Our liquid alternative solutions offer a level of decorrelated return profiles, for example, while our climate strategies address the paradigm shift taking place in the energy sector.
We also believe responsible investment will return to its trajectory of moving centre-stage in client portfolios. It is increasingly clear sustainability factors such as climate change can have long-term financial impacts, and we expect strong growth in this investment field for the years to come – particularly as regulations are clarified. Sustainable investment has been a core value for us for many years and we will continue to further develop our team and processes to ensure we remain a market leader in this space.
What do you do outside of work?
I play a reasonable amount of tennis, but unfortunately, I seem to exist to disprove Malcolm Gladwell’s 10,000-hour rules – that 10,000 hours of intensive practice is enough to master any complex skill. When I am not on the tennis court, I am found 20 metres away at the club bar.
What is the most extraordinary thing you have seen?
Before joining Nordea Asset Management, I spent a couple of weeks in Kenya. This coincided with the great migration in the Masai Mara – with millions of wildebeest searching for greener pastures. While there, I was fortunate enough to see a river crossing, as the wildebeest and zebras vied to cross the Mara River to the safety of the other bank, avoiding the crocodiles lying in wait. Curiously, little seems to be known about what drives wildebeest migration patterns. Perhaps a fitting allegory for investing…
