Top tips on

navigating the

market crash

FTfm asked investment chiefs

at some of the world’s leading

asset management companies

for their views on where to go

from here. JPMorgan, Amundi,

HSBC, LGIM and Invesco

provided insights on the

outlook for equities, bonds,

alternatives and helicopter

money. One clear message for

investors is that strong risk

management will be needed as

they confront a wave of big

earnings downgrades and

further weakness in bond

yields.

PAGE 6-

OW E N WA L K E R

Amundi has proposed suspending its

2019 dividend payment, becoming

the first big investment company to

take such a move, though analysts

predict others will follow suit.

Europe’s largest asset manager,

which is 70 per cent owned by French

bank Crédit Agricole, said it was

responding to calls by the European

Central Bank in March. The proposal

will be put to a shareholder vote at the

company’s annual meeting, which is

due to take place virtually on May 12.

Amundi’s share price is down more

than 32 per cent since hitting its all-

time high of €78 on February 19. The

group was formed by the merger of

the asset management arms of Crédit

Agricole and Société Générale a dec-

ade ago and listed in 2015.

The announcement came a day

after Britain’s five largest banks

agreed to withhold their 2019 divi-

dends following pressure from the

Bank of England’s Prudential Regula-

tion Authority.

Shareholders and regulators have

been calling on businesses to hold off

dividend payments as they wait for

the worst effects of the pandemic to

subside. Analysts speculated that

several household name fund manag-

ers — including Standard Life Aber-

deen and Jupiter — could pare back

their dividends by at least half.

Amundi stressed that it still had a

strong capital position, with a tier one

continued on page 2

Amundi to

suspend

dividends

after AGM

Peter Kraus

Why the fund

manager model is

broken

fm PAGE 4

THE AUTHORITY ON GLOBAL FUND MANAGEMENT |FINANCIAL TIMES| Monday April6 2020

P E T E R S M I T H— SY D N E Y

JPMorgan is to spend close to $1bn

buying out its minority partner in

China International Fund Manage-

ment, taking advantage of Chinese

reforms that came into force on

April 1 eliminating caps on foreign

companies taking full control of local

asset management operations.

China is the third-largest asset

management market in the world

behind the US and UK with assets

under management of $5.3tn,

according to an estimate from Mor-

gan Stanley, the investment bank,

and Oliver Wyman, a management

consultancy. It is forecast to grow to

$9tn by 2023, providing western

fund managers with their single big-

gest growth opportunity globally

over the next decade.

In recent months Beijing has

moved more quickly to allow greater

foreign participation in its financial

sector, partly in response to the trade

war with the US. Last year officials

brought forward the timeline for full

foreign ownership of securities,

futures and fund management com-

panies to 2020.

JPMorgan did not disclose finan-

cial terms for the minority stake in

CIFM it is buying from local partner

Shanghai International Trust, part of

Shanghai Pudong Development

Bank. However, it paid a more than

33 per cent premium to CIFM’s net

asset value when it spent $35m last

August lifting its stake from 49 to 51

per cent. Assuming a similar valua-

tion, the remaining 49 per cent stake

is worth close to $1bn.

Dan Watkins, JPMorgan Asset

Management’s Asia Pacific chief,

said moving to full ownership was a

milestone for the group and that

China’s removal of foreign owner-

ship restrictions was an important

change. The group had “strong ambi-

tions to strengthen our capabilities

in this market”, he added.

International managers expand-

i n g i n C h i n a h ave t y p i c a l ly

formed joint ventures with local

partners or more recently estab-

lished wholly foreign-owned enti-

ties, or both.

BlackRock, which owns a 16.5 per

cent stake in Bank of China Invest-

ment Management, part of Bank of

China, recently applied to set up a

mutual fund business in China.

continued on page 2

JPMorgan pays $1bn to take full

control of China fund venture

AT T R ACTA M O O N E Y

Schroders has warned UK

companies that executives

must “share the pain” of the

economic hit from the coro-

navirus pandemic as the UK’s

second-largest listed asset

manager called for boards to

review chief executive remu-

neration.

In a public letter to British

companies the £500bn asset

manager, which is a large

investor in UK plc, called on

groups to put employees, cus-

tomers and suppliers first as

they battle to survive with

measures aimed at containing

the outbreak decimating reve-

nues across many industries.

The letter, which is signed by

Jessica Ground, global head of

stewardship, and Sue Noffke,

head of UK equities at Schrod-

ers, said the group would sup-

port ailing companies that

sought to raise additional capi-

tal quickly, including signing

off businesses bypassing pre-

emption rules that give share-

holders first right of refusal on

new share issuances.

But in return, the asset man-

ager said: “Where companies

seek additional capital we

would expect their boards to

suspend dividends and to

reconsider management’s

remuneration.”

Speaking to the Financial

Times, Ms Noffke said that for

some companies such pay cuts

might be retrospective while at

others it could be for the cur-

rent year. “We would expect

management to share in some

of the pain,” she said. “If com-

panies need capital, they

should have an expectation

that their compensation

should also bear some cuts.”

Peter Harrison, Schroders

chief executive, took his

£5.68m bonus for 2019,

according to the company's

annual report, which was pub-

lished two weeks ago. The

asset manager said employee

bonuses had been paid out ear-

lier this year, before the situa-

tion with Covid-19 deterio-

rated significantly.

“Our board and manage-

ment team is focused on

doing the right thing for our

clients, our people and wider

society and we will continue to

monitor the situation care-

fully. We will consider 2020

performance and pay out-

comes in due course later in

the year,” the asset manager

said.

Ms Noffke said investment

groups had a key role to play in

supporting businesses through

this difficult period, alongside

governments, banks and other

institutions.

“This is unprecedented in

terms of everything coming to

a halt at the same time. It has

huge implications for the man-

agement of cash and capital.

We think companies should be

focused on maintaining the

business rather than main-

taining shareholder relations,”

she added.

Schroders demands executives take pay cuts and ‘share the pain’

O P I N I O N

from a Bermuda partnership to a

Canadian corporation. BIP says these

forms will be “economically” equiva-

lent. BIP, now BIPC, does not have

any employees of its own, depending

on BAM to be its “service provider”.

In the past, Brookfield compared BIP

to US Master Limited Partnerships,

which pass through dividend income

from energy-related assets such as

pipelines and gas processing plants.

MLPs have gone out of favour as a

group, since under the Trump tax

reforms there are fewer advantages to

investors from the pass through

structure. Also, the perceived value of

energy assets has declined with oil

and gas prices. But MLPs and Reits,

their pass-through cousins in the

property and data centre trades, pay

dividends to investors that are less

than the cash flows they receive from

operations. For example, Magellan

Midstream, an energy MLP, last year

paid out about 71 per cent of its cash

flows as dividends. Digital Realty, a

data centre Reit, paid out about 73

per cent of its cash flow in dividends.

BIP, in contrast, appears to be pay-

ing out more in management fees to

BAM, dividends to its unit holders,

and “incentive distributions” to BAM

and its senior management, than it

receives as dollars paid in to BIP’s

holding company as dividends from

its operating subsidiaries.

The difference between cash divi-

dends from operating subsidiaries

coming in and fees, incentive pay-

ments, and dividends going out

appears to be covered by capital mar-

kets activity at the holding company

level, ie BIP’s net issuance of equity,

debt and preferred shares. A person

close to Brookfield stated this analy-

sis was untrue. I refer readers to the

“Consolidated Statement Of Cash

Flows” in Brookfield’s 2019 annual

report, page F-13, if they would like to

draw their own conclusions.

In the near future it may be even

more difficult to raise or maintain the

flow of cash dividends from BIP sub-

sidiaries, such as rail and pipelines in

the US or toll roads in Brazil to the BIP

holding company, BAM and their out-

side partners. BIP’s holdings are not

reported by country, but Brazilian

assets seem to comprise more than a

quarter and as much as a third of its

total. Since May the Brazilian real has

declined by about a third against the

US dollar in which BIP reports. There

would be similar currency value and

forex transfer issues with BIP’s sub-

stantial assets in India.

What foresight do BIP shareholders

receive for the hundreds of millions

of management fees and incentive

distributions? Well, on February 10,

Mr Pollock said on an investor call

that “from a BIP perspective, we do

not anticipate any material financial

impact from the coronavirus situa-

tion and remain optimistic regarding

the business outlook for the regions

we operate in”. That comment can be

“recycled”.

In recent weeks the public has

accepted state and central bank sup-

port for banks and corporate finance.

There is a revulsion, though, at allow-

ing the bailed-out groups to pay divi-

dends, high executive compensation

or management bonuses. This is a

threat to the existence of asset shuf-

fling leveraged holding companies.

For several years I have examined

the Brookfield group, in particular

Brookfield Infrastructure Partners

(BIP) and its parent Brookfield Asset

Management (BAM).

BIP had more than $56bn in assets

at the end of 2019 and, according to

chief executive Sam Pollock, “$20bn

of capital”. On March 31, BIP’s man-

agement changed its corporate form

A

s we gradually emerge

from the shutdowns,

quarantines and mourn-

ing, we will need to deal

as quickly as possible

with a financial system that will not

be capable of delivering the income

streams it has promised or, in its

present form, efficiently allocating

capital across the global economy.

The public shock will turn to anger at

failed promises of wealth, or even

functionality.

The restructurings that are coming

will have to cut away wasteful and

self-serving corporate forms, point-

less “activity” and opaque “disclo-

sure”. Among the financial structures

we do not need any more are highly

leveraged holding companies that

depend on continuous capital mar-

kets access to shuffle debt and inter-

ests in operating companies.

The most questionable groups are

those which have explicitly or implic-

itly promised public investors steady

streams of dividends from “operat-

ing” earnings that appear to come

from the revaluation and releverag-

ing of their asset base. The holding

companies of these groups collect

very high management fees for this

asset shuffling.

Brookfield’s leveraged complexity is not needed

‘Recycled’ comment: BIP chief Sam Pollock played down the financial impact of coronavirus— Vanessa Carvalho/Zuma

LAST WORD

John

Dizard

Are ESG and sustainability the new alpha mantra?

W

hen fund managers

start to think again

about alpha-seeking

strategies, my bet is

that more than a few

will tell investors that sustainability,

and environmental, social and gov-

ernance-based screening will top

their list.

Put simply, ESG and sustainability

is the new alpha mantra that I hear all

too frequently. Denis Panel, head of

MAQS, part of BNP Paribas Asset

Management, is not untypical when

he says: “A better understanding of

the impacts of the energy transition,

environmental constraints, and

social inequality allows us to better

manage risk, and in the long term we

believe more sustainable perform-

ance will follow from it.” This focus on

ESG as a source of alpha is more ambi-

tious than traditional arguments that

have tended to revolve around more

humble claims, such as incorporating

sustainability analyses.

The next logical step was to say ESG

screens could help avoid the worst

performers, that is risk reduction.

This hasn’t declined in importance

for many fund managers.

Mr Panel points to an analysis of

stranded assets, which posits that

renewables will produce six to seven

times more useful energy than oil

with gasoline-powered vehicles. This

implies a long-term break-even oil

price of about $10 per barrel for gaso-

line to remain a competitive source,

which is likely to lead to a high risk of

stranded assets in the oil sector.

This risk mitigation perspective is

echoed by others. Robin Braun at

DWS said ESG indices showed the

same returns as traditional bench-

marks with often lower volatility and

drawdown even though they were

less diversified. Ian Simm, chief of

Impax AM, said sustainable strate-

gies were a “radar sweep of potential

fattail risks affecting individual com-

panies, for example, consumer boy-

cotts, new regulations, local commu-

nity action, and fraud/corruption, as

well as systemic risks such as cyber

security, pandemics, internet resil-

ience and climate change.”

But the claims now being made go

further than risk reduction. They

insist on the potential for alpha, usu-

ally built around better corporate

governance, active engagement and

smarter stock screens.

The lodestar for active governance

enhancing returns is a 2015 paper by

Elroy Dimson, Oguzhan Karakas and

Xi Li, which looked at a huge range of

engagement sequences with 613 pub-

lic companies between 1999 and

2009. It found companies were more
      likely to be engaged if they were
      “large, mature and performing
      poorly”. The success rate was 18 per
      cent after two or three engagements
      over one or two years. Over the year

ing. It’s hard not to conclude that

there isn’t any compelling evidence

ESG strategies can outperform.

That said, long-termstudies also

conclude there is no evidence of

underperformance either, but that is

hardly a promising basis on which to

promise alpha outperformance.

My hunch is that the flip side of the

alpha performance argument, risk

mitigation, might, by contrast, have

stronger foundations but even here

there’s a challenge. The authors of the

Credit Suisse yearbook cite the exam-

ple of stranded assets, which could

wreck many portfolios, yet they

observed that “there is no evidence

that climate experts have superior

ability to appraise market values”.

Butone challenge is obvious. One

might build better data tools to help

investors pick more sustainable busi-

nesses and stocks, but what guaran-

teeis there that fund managers will

pick the right stocks? Just because

they have access to more accurate

data has not been any guarantee of

alpha outperformance.

VIEWPOINT

David

Stevenson

following initial engagement the

companies experienced an average

return of 2.3 per cent uplift in value.

But there’s a snag, outlined in the

Credit Suisse global investment

returns yearbook 2020, edited by

Prof Dimson, among others. It said

these gains from active governance

“are likely to be shortlived thanks to

competition from other investors and

by peers catching up”. The first mover

pockets all the alpha.

The crux of the alpha argument

rests on better stock screens, which

will, in turn, direct managers to

smarter picks. Mr Simm said since

2015, Impax has been screening all

sectors of the economy for their

attractiveness over a five- to 10-year

horizon. He said an index comprising

companies in those sectors that score

well has outperformed relevant

benchmarks by about 1 per cent a

year. But many long-term studies on

return offer scant evidence for the

assertion, especially if it is an analysis

of past returns. In fact, quite the

opposite, with sin stocks outperform-