ESG approach finds Value in economic slowdown

22/10/2018

• Economic slowdown: does it present headwinds for value investing? • Targeting sustainable dividends is key to outperforming the market

As signs of a slowing economy emerge, conventional wisdom dictates that a value investing strategy - one that centres on picking stocks that are under-priced relative to a company’s assets - will come under the most pressure. From this viewpoint, value investing is thought to work best during expansionary phases, bolstered by strong corporate profits, and that investors should turn towards growth stocks to provide returns at a later point in the cycle. However, this is not necessarily the case, according to NN Investment Partners, whose value strategies continue to perform well against the market.

Nicolas Simar, Lead Portfolio Manager, European Equity Dividend Strategies, discusses how value strategies focused on sustainable dividends can outperform the market late in the cycle.

Economic climate

The end of the monetary cycle is approaching, with central banks easing their supportive policies and beginning to unwind quantitative easing programmes. Due to this tightening, the cycle will begin to turn as the economy enters a slowdown phase. This poses many potential risks to investors, who may be exposed to asset bubbles that have built up over years of supportive liquidity injections, putting particular pressure on a value investing style that traditionally sees the strongest relative performance during expansionary phases in the cycle.

Value investing

Value investing can also perform well in such a market environment, if it is tailored to the appropriate point in the cycle. Close attention must be paid to stock selection to allow investors to outperform the market despite value headwinds. By adjusting the selection criteria for stocks, a value investing approach can be tailored to suit any market environment.

During a slowdown phase, investors must focus on good quality, low risk stocks. This involves investing in companies that have good balance sheets and sustainable dividends The dividend sustainability angle will add a quality tilt to the stock selection process.

Sustainable dividend

A sustainable dividend can be viewed from both a financial and an ESG viewpoint. In the first instance and from a financial perspective, the company must be robust enough to support such dividends. An investor must ask: does the company generate enough profit and cash-flow to maintain and grow its dividend?

However, this dividend must also be analysed from an ESG perspective to assess its sustainability. By focusing on ESG risk (e.g. the likelihood of a carbon tax in the future), investors can reduce the risk that dividends will fall in the future. Focusing on ESG in this way has been proven to imply a lower risk profile, maximising risk-adjusted returns.

Sector balance

One important caveat to this approach is that while some sectors are naturally biased, both positively or negatively, by an ESG approach, it is important not to systematically penalise certain sectors in terms of allocation.

To allow for this ESG differential, ESG scores must be normalised by sector and size, selecting the best ESG players from each. .

Active convictions

Once appropriate stocks have been selected, a value investor must not be afraid to make significant active decisions to outperform the market. This can lead to portfolios with a very high active share that a passive fund can’t offer.

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Disclaimer

This communication is intended for press use only. This communication has been prepared solely for the purpose of information and does not constitute an offer, in particular a prospectus or any invitation to treat, buy or sell any security or to participate in any trading strategy or the provision of investment services. While particular attention has been paid to the contents of this communication, no guarantee, warranty or representation, express or implied, is given to the accuracy, correctness or completeness thereof. Any information given in this communication may be subject to change or update without notice. Neither NN Investment Partners B.V., NN Investment Partners Holdings N.V. nor any other company or unit belonging to the NN Group, nor any of its directors or employees can be held directly or indirectly liable or responsible with respect to this communication. Investment sustains risk. Please note that the value of any investment may rise or fall and that past performance is not indicative of future results and should in no event be deemed as such. This communication is not directed at and must not be acted upon by US Persons as defined in Rule 902 of Regulation S of the United States Securities Act of 1933, and is not intended and may not be used to solicit sales of investments or subscription of securities in countries where this is prohibited by the relevant authorities or legislation. Any claims arising out of or in connection with the terms and conditions of this disclaimer are governed by Dutch law.

About the author

Nicolas Simar

Nicolas Simar

Head of Equity Value and Senior Portfolio Manager Euro High Dividend

Experience since 1996

Business Experience

1999-to date Nicolas is Head of the Equity Value Boutique of NN Investment Partners. In this capacity he is responsible for all Value strategies. Next to that he is Senior Portfolio Manager Euro High Dividend

1996-1999 Portfolio Manager of Fixed Income  at Banque Bruxelles Lambert Asset Management (Now NN Investment Partners)

Qualifications

Degree in Civil Engineering from the Université Catholique de Louvain in 1994

Degree in Business Administration from the Institut Français du Pétrole, Paris in 1995

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