FPI SURVEY

THERE’S an oft-quoted saying attributed to investment guru Warren Buffett: “Only when the tide goes out do you discover who’s been swimming naked.”

The Covid-19 pandemic has proved an extreme low tide for the business world. Shaky companies have been left dangerously exposed, and many will not survive the next six months. There will be casualties among solid, wellrun companies too, but the death rate will be lower.

In fact, it’s similar to how the disease is playing out in humans. The unhealthier you are, and the greater your level of co-morbidity – to use the current soulless medical term – the greater your chances of succumbing to the virus.

So what constitutes a healthy company? Traditionally, a company was judged solely on the state of its balance sheet. But in the past decade or so, there has been a growing trend for companies to be assessed in more holistic terms, particularly by a younger generation of investors.

The pandemic has hastened this sea-change. The old-style profit-driven approach to business, built on mantras such as “business and sentiment don’t mix” and “greed is good”, just doesn’t cut it during times of hardship.

Companies that have tried to

THE COVID-19 crisis is reshaping the world of financial advice. The crisis has jolted advisers out of their comfort zone, forcing them to reassess their relationships with clients and to embrace technology in adapting to what will likely become the “new normal”. And it appears that most are rising to the challenge and, importantly, that consumers are not being compromised.

Two local surveys conducted over the past two months – one of advisers across several countries, and one among members of the Financial Planning Institute (FPI) – have highlighted the difficulties, but also the opportunities, facing advisers during these times.

An obvious challenge was working from home and not being able to meet clients in person. Linktank, a Cape Townbased consultancy that provides technology solutions to the financial services industry, recently sent out a survey to financial advisers asking how they had adjusted to a remote working environment.

Of the 352 responses, about 70% were from South Africa, but also from Namibia, Australia, the US, Canada, the UK, the Netherlands and Malaysia.

The survey found that half of the respondents (50.7%) were operating as normal, despite the restrictions of the lockdowns, and 18.2% reported exploit supply-demand imbalances at the expense of the consumer – such as selling face masks at outrageous prices – risk coming out of this period with their reputations battered. Those that are putting aside their drive for profits in order to help their communities (I salute the many that are doing amazing work) are the ones likely to be better supported in the future.

Not only are socially responsible, sustainable companies likely to come out stronger on the other side of this pandemic; they appear to have been more resilient going into it.

BlackRock is the world’s largest asset manager – it manages an astounding $7.4 trillion (R123trln) of investors’ money. In a recent article, “Sustainable investing: resilience that not only were they operating normally, but business had increased. The remaining 31.2% were operating on a limited scale. None had closed shop entirely.

On how they had found the transition to a remote working environment, 26.3% said it had been “really easy” and 43.4% “not too difficult”. A quarter of respondents said the transition had been difficult but they were managing, and just more than 5% said it had been “impossible”.

Most advice practices had the technology in place to enable remote working, including virtual consultations through videoconferencing.

About four-fifths (81.6%) of respondents said they already had the technology and processes in place, with two-thirds of this group reporting that they had to make some adjustments.

The remaining fifth (18.4%) said they had to “find and implement new technology in a hurry”.

Clients, on the whole, were not disrupted unduly through virtual consultations. Only 12.8% of advisers reported that the switch had generally not been well received by clients. More than half (56.4%) said clients had mostly been happy with the change, and 14.1% said there had been no disruption because they had already implemented video conferencing as a means of communicating with clients.

On whether these changes were amid uncertainty”, Brian Deese, the global head of sustainable investing at BlackRock, makes a case for the resilience of companies that score highly on environmental, social and governance (ESG) factors.

Deese says BlackRock’s view is that companies with strong ESG profiles have the potential to outperform those with poor profiles. The pandemicinduced downturn was a key test of this view. In the first quarter of 2020, financial data provider Morningstar reported that 51 out of 57 of its sustainable-investment indices outperformed indices that measure the broader market, as did 15 out of 17 of index-provider MSCI’s sustainable indices.

“While this short time period is not determinative, it aligns with the resilience we have seen in sustainable strategies during downturns in 20152016 and 2018. Furthermore, these results are consistent with the research BlackRock has been publishing since mid-2018, demonstrating that sustainable strategies do not require a return trade-off and have important resilient properties,” Deese says.

WHAT EXPLAINS THE RESILIENCE?

Deese says research by BlackRock has established a correlation between sustainability and traditional factors likely to be permanent, only 8.75% of respondents said they would go back to working as before.

At the other end of the spectrum, only a small percentage (2.5%) said they would go fully virtual. Most advisers (68%) said they would probably have more virtual meetings with clients in future, and 20.5% said they and their staff would work more from home in future.

Jen McKay, a founding director of Linktank, says the prevailing view in the industry has been that both client relationships and staff relationships should be managed face-to-face, but the survey shows that “a new realisation may be dawning about the feasibility of virtual workplaces”, and they are likely to become a permanent feature of the “new normal”.

She says it came as a positive surprise that the transition to a virtual environment had largely been welcomed by clients. such as quality and low volatility.

But there’s more to it than that.

“Our research indicates that, in the current crisis, with its transformative and devastating impact on daily life, companies with a record of good customer relations or robust corporate culture are demonstrating resilient financial performance … We believe this has been driven by a range of sustainability characteristics, including job satisfaction of employees, the strength of customer relations, or the effectiveness of the company’s board,” he says.

Another key piece of the story has been investors’ preference for sustainable assets during the crisis, Deese says. “As investors have sought to rebalance their portfolios during market turmoil, they are increasingly preferring sustainable funds over more traditional ones. In the first quarter of 2020, global sustainable funds brought in $40.5bn in new assets, a 41% increase year over year,” he says.

Jon Duncan, the head of responsible investing at Old Mutual, and Elize Botha, the managing director of Old Mutual Unit Trusts, explain that companies with higher ESG scores “are businesses that actively manage their environmental impact, treat their stakeholders well, and govern themselves in an ethical fashion ...

On advisory practices that had found making the changes difficult or “impossible”, McKay says there is a likely correlation with those that had not kept pace with technology and were still over-reliant on paperbased systems.

“The bottom line,” McKay says, “is that clients have not been compromised during the lockdowns.”

The survey among Certified Financial Planner (CFP) members of the FPI showed that clients’ demands on advisers had increased during the crisis, with 79% of 761 respondents saying their clients had high or very high stress levels, and 37% reporting they had had an increase in queries from prospective clients.

The top five concerns among clients (320 respondents answered this question) were: unemployment or reduced income (79%), protecting

They enjoy a stronger social licence to operate, lower staff turnover, better resource efficiency, lower cost of capital, better innovation and stronger access to markets, which are proven to result in better performance.”

Duncan and Botha believe that the pandemic will define the new “quality companies” of the 21st century.

“In a post-Covid-19 world, one thing seems clear: asset managers with assets (51%), managing investment volatility (38%), managing debt (36%), and liquidity (30%).

On the challenges they faced during the lockdown, the respondents listed establishing relationships with new clients

(25%), planning in anticipation of a possible economic recession (21%), conducting client meetings by phone or video conference and not in person (16%), balancing the needs of clients with personal/family needs (11%), and dealing with the emotional needs of clients (11%). Only 8% saw working remotely from home as a challenge.

Lelané Bezuidenhout, the chief executive of the FPI, says: “This is a tough time for all, but CFP professionals around the country are not shying away from the challenge of improving the financial wellbeing of all South Africans and their families, even during turbulent times like this.”

IN A BREAKTHROUGH for the South African investment industry, Old Mutual has launched the first retail unit trust fund to invest in JSE-listed companies that score highly on environmental, social and governance (ESG) factors. The actively managed Old Mutual ESG Equity Fund will complement the company’s two passive global ESG funds, the Old Mutual MSCI World ESG Index Feeder Fund and the Old Mutual MSCI Emerging Markets ESG Index Feeder Fund. The fund, which launched on May 31, is managed by Fawaz Fakier and is aimed at investors with an investment horizon of five years or more. It is also available in Old Mutual’s suite of tax-free investments. Its total annual investment charge, of 1.18% for retail investors, is relatively low for an actively managed equity fund.

Elize Botha, managing director of Old Mutual Unit Trusts, says the fund invests in companies that have strong balance sheets, are well priced and score highly on criteria developed by global index provider MSCI for its ESG indices. The portfolio currently consists of about 85 companies, of which the top 10 holdings are: Naspers, Prosus, FirstRand, Standard Bank, Richemont, Old Mutual, MTN, Clicks, Kumba Iron Ore and Anglo Gold. “Investors with a longer-term horizon, who are primarily seeking exposure to a South African general equity fund with a high ESG focus, will find this solution particularly attractive, as it targets a significantly lower carbon footprint and a higher ESG profile relative to the benchmark (the FTSE/JSE Capped Shareholder Weighted All Share Index),” Botha says.

| a commitment to ESG will be at a distinct advantage over their peers, as will investors who see the long-term value of ESG investing,” says Duncan.

He says that not only are ESGbased investments expected to deliver superior returns in the long term, but they will help shift the global economy in a direction that is more environmentally friendly and socially inclusive.