“Most market participants agree that the pandemic has accelerated changes that were already underway – perhaps most evident in the move to an online world across the globe,” she says. However, another important trend has also been accentuated: inequality linked to policy moves.
“Another area of increased intensity is the global debate on inequality,” she says. “Post-GFC, policy relied entirely on monetary tools leading to historically low interest rates and plentiful liquidity acting as a huge support to financial assets and, within that, particularly long duration assets. There was no commensurate increase in the valuation of real assets and, as Main Street is exposed to the latter whilst Wall Street represents the former, the sense of injustice in a political sense has been building steadily – Brexit, Trump, Salvini and Bolsonaro et al are symptoms not causes.”
“Of course, COVID-19 has forced the issue even more,” she says. “Now the question is how to protect jobs in the face of a threat that was unforeseeable and no-one’s ‘fault’ – an ‘event’ recession rather than a cyclical or structural recession.”
Reflecting on how governments are using fiscal policy in tandem with monetary tools as low interest rates fund government spending at levels that were inconceivable 12 months ago, she says: “We suspect politics are likely to remain a very real influence on financial markets moving forwards. The long-term ramifications of this are central to the debates we are having across investment teams. The crisis itself is undoubtedly deflationary, but the solution may well be inflationary. If so, how long will it take to manifest itself?” she asks.
Another area of accelerating change Butcher highlights is the profile of ESG within the investment process and the need for product innovation. “That ESG factors are important in analysing any business is obvious. There is a growing range of data available with various external ratings services offering their assessment of corporates’ progress in specific areas. The issue we have as investors is that the data itself is often backward-looking, slow to update and – by the nature of being data-centric – leans heavily towards the ‘E’ and the ‘G’ but struggles with the ‘S’. Our excellent ESG team have developed a proprietary ‘ESGIntel’ tool which allows us to access the best data available updated on a timely and iterative basis.”
However, a rating is only one part of the process of analysing corporates’ ESG integration, she says. “The real value-add we offer as long-term, active investors is our level of engagement with companies; we have access to Boards and senior management, and can use our votes and engagement to influence and leverage our views on a wide range of subjects including areas where the data struggles to make a judgement – how does one measure the impact of social media on mental health for example?”
“In our view, the optimum goal is to work with management teams to make companies better for all stakeholders – financial metrics will always be important but the requirement to achieve these in a way which makes those businesses sustainable in all senses of the word is vital, and as such shareholder and stakeholder values are fully aligned. This is central to the process within all of our funds.”
She notes that following the change of US President “hopes are high for a more cohesive global focus on environmental issues,” adding that Europe has some world-leading companies and is likely to export policy and technical expertise. “Cohesive action and engagement by other governments will continue to provide growth opportunities in this space.”
Reflections on Biden
A change of US President is always significant, says Butcher, but that change coming after one of the most divisive presidencies in history is of particular interest. “The issues that endeared Mr Trump to 70m voters will not go away and domestic and cultural factors will continue to dominate the US agenda,” she flags, adding that geopolitics (particularly with regard to China) are likely to remain complex.
“We remain committed to our philosophy of being active, engaged, long-term and valuation driven investors. The world is changing rapidly and requires us to continually challenge historic valuation assumptions but not, we strongly believe, to abandon the discipline of valuation altogether. Our key focus is to assess which assets present the best risk and reward combination for our clients. In an era of extreme policy making, the balance between risk and reward has never been more important.”