Third in the series of RI's C-suite Leaders interviews.
Fiona Frick became CEO of Unigestion, the Geneva-based investment manager, in 2011. As the firm’s Head of Equities, back in 1995 she pioneered Unigestion’s rules-based core approach centred on the minimum variance anomaly, or the observed phenomena that long-term stock market returns are correlated with the amount of risk avoided rather than the additional risk taken on.
Unigestion touts an approach to equity investing it says is borne out by research: risk-efficient strategies outperform benchmarks over a market cycle.
The manager aims to construct portfolios with low downside risk and optimal diversification.
Considering the firm’s sensitivity to risk, the integration of ESG factors into investment seems like a logical step, although Frick admits the firm wasn’t an early adopter.
“We discovered ESG in 2004 when a Nordic client requested a bespoke version of a fund with ESG factors integrated. In the end, the performance of the standard strategy and the bespoke mandate was similar and we intuited that ESG products have better risk protection and included it in our analysis. Knowing that ESG as a factor was not necessarily priced in the market historically, but is going to be more forward looking, it made sense on a risk adjusted performance basis”.
She is frank, however, about the quality of ESG data.
Unigestion calculates in-house ESG performance ratios for all stocks within its investable universe based on scoring by four to five external providers. But the firm has found that the reliability and granularity of data for mid-cap companies, a Unigestion focus, can compare unfavourably with that of larger companies.
To address this, the firm directly engages with companies to verify third-party data and provide feedback where there is a discrepancy to the database provider.
Yet despite the shortcomings of ESG data, Frick is critical about those who cite it as an obstacle to integration: “Any third-party data will have to be cleaned and sorted. Around 80% of our total workforce is devoted to developing our systematic strategies, which include making sure that all data inputs are robust. Obviously ESG data will get better with time, but you have to start somewhere. It’s an easy argument not to do anything. It's convenient.”
The manager has two exclusions in place across its strategies: coal and tobacco.
It also doesn’t invest in stocks considered worst-performers on ESG, although any which show improving trends will be considered candidates for direct engagement. Unigestion has 50 such engagements planned for 2019.
Frick broadens the conversation out to the ‘sustainability’ of current markets and of the wider retirement systems in which asset managers operate.
She describes the past decade or so of economic growth as “artificial”, driven by massive central bank asset purchasing programmes that have flooded markets with cheap capital. As a result, she says, investors have been able to pick almost any security and make gains: “This is unhealthy, markets should be reacting to news and economic data for them to function efficiently.”
But she doesn’t foresee this period lasting forever. Central bank stimuli have started showing diminishing returns and there is no room to drop rock-bottom interest rates: “Even if central banks maintain their stimulus, it won’t achieve the effect it has in the past. The performance in the future will be more constructed on alpha than on beta and investors will realise that they cannot just take the last 10 years and project that forward”.
Frick is concerned about the impacts of the prolonged ultra-loose monetary policy on retirement savings.
Government bonds play a foundation role for pension funds as a source of safe, long-term returns which pairs well with their liabilities. With negative-interest bearing bonds in much of the eurozone, and low rates in other developed markets, many schemes are finding themselves questioning their ability to make future pension payouts to beneficiaries.
Frick says: “The current low yield is a very bad deal for future retirees. It’s even more the case in Europe, where workers don’t invest in addition to their pensions, than it is in the US. Previously, pensions guaranteed social security and a certain standard of life in retirement. With interest rates so low, that promise is starting to disappear.”
She points to the long-term trend toward defined contribution (DC) pension arrangements as further evidence that the social contract between employers and society is fraying: “With the end of DB schemes, retirees now have to take on the responsibility of self-funding a bigger portion of their retirement which I think can be risky because of the lack of expertise and behavioural biases. I think DB schemes were positive arrangements as savings are managed by a professional entity which ensures coherence.”
Although Frick frames the unwinding of expansionary central bank policies as imperative to return markets to efficiency, she also makes the case for it being positive for active management: “Deceleration of growth creates a hunt for yield and sophisticated investment solutions. Institutional investors will realise that they won't get the return they need to meet their liabilities from traditional strategies. We like it when there is volatility in the market because it enables us to show that there is a need for active risk management.”