With GDP RPI inflation swaps implying a surge in inflation in 2022, Benbow says few will escape the squeeze on prices, with RPI-linked loan holders particularly exposed to much higher borrowing costs.
 
“You don’t need to look far to see inflation – commodity prices are rising rapidly, as are other input costs such as shipping,” he says. “And with the rising cost of living, it’s only a matter of time before employers realise that they will need to increase wages.
 
“That may sound like a good thing, but consider that index-linked bonds are implying that RPI will hit 7 per cent in 2022. If that comes to fruition, it will disrupt markets, households and students, who are painfully charged student loan interest on an RPI +3 per cent basis, meaning they will be paying interest of 10 per cent.”
 
Corporates will also feel the pain, says Benbow, who says the key question is to what extent they will seek to pass on rising costs to consumers.
 
“Third quarter earnings will tell us more but we likely to see quite a bit of margin compression,” he says. “The scary thing is that if you are a 10 per cent margin business which is 7x leveraged and your margin goes to 5 per cent – which is very easily done – you effectively double your leverage. Real yields simply aren’t high enough to compensate investors for this.”
 
He believes bond markets should reprice to a more appropriate level given the risks, particularly in the US, but he says central banks have found themselves in an uncomfortable position.
 
“Central banks are now in trouble if they reduce QE, which would see yields rise and destabilise asset prices, and in trouble if they don’t,” he says. “Ultimately, the low cost of capital is underpinning everything but how can you justify such a low cost of capital when real yields are so negative? As we know from 2018, even a small rise in the cost of capital is a very nasty thing for asset prices – and valuations today, in real yield terms, have never been so expensive.”
 
Given this backdrop, Benbow says the high yield team is seeking opportunities in names that are benefitting from rising prices and avoiding those impacted by disrupted supply chains.
 
“We like companies that make the commodities that are rising fast in price and are thus beneficiaries of inflation in areas like coffee, corn, cotton and metals – and we like shipping, which is doing very well,” he says. “We also like household names which aren’t affected by supply chain problems, like David Lloyd and PureGym, which still provide a yield of 5 per cent or more.”

The 40-year bull market in bonds is far from over despite predictions of its demise, according to Nick Hayes, manager of AXA IM’s Global Strategic Bond strategy. 

Hayes says that the current environment – with inflation high, economic growth strong and recoveries well underway – should be a significant headwind for fixed income markets. But he argues that, with more structural buyers than sellers, bonds are likely to continue to surpass expectations from a total return perspective, something he argues they have been doing for more than a decade. 
 
“On one hand, the macro picture should be massively negative for bonds, and we did see a fairly short-lived downturn earlier this year,” he says. “But the market rallied back over Q2 and Q3 because central banks have been tolerant of inflation, believing it to be transitory despite the ambiguous associated timeframe, and because there have been huge price insensitive buyers in the government bond market driving yields down.” 
 
Hayes says heavy government debt buying has come not only from central banks but also from insurance companies, pension funds and big banks, which have been investing large deposit bases in sovereign bonds for regulatory and balance sheet reasons. 
 
“This has created a dynamic where theoretically bond yields should be higher but, for positive technical reasons we believe will persist, they are not,” he says. “Everyone is talking about central bank tapering but we expect central banks to remain accommodative for as long as it takes to keep the recovery moving, even if that means gradual reductions in emergency asset purchasing programmes. Although market reaction is creating some spikes in volatility, yields remain low and still well below pre-pandemic levels. Hawkish, for us, is not tapering on its own, which we think is priced in. Rather, the Fed has been at pains to emphasise a distinction between tapering and interest rate rises, which we do not see happening in a sustained manner for some time to come yet.” 
 
With yields likely to remain low, Hayes says the team still sees a place for duration in the strategic bond portfolio, focused in US treasuries – the highest nominal yielding high quality sovereign debt – although exposure was recently trimmed from four years to two years to deal with short-term volatility. 
 
“There are so many investors underweight bonds and duration that it provides a positive contrary tailwind,” says Hayes. “We know duration is expensive but as investors you just can’t rule out government bonds. People think they’re incredibly dull, that they have no yield and you can’t make any money out of them – that is not true. There are hugely positive reasons to own government bonds, including attractive liquidity and diversification characteristics, and we like to use them as an engine and performance driver in the fund.” 
 
In terms of credit, Hayes says valuations remain expensive after a long rally but considers pockets of the US High Yield and UK and European credit markets to be attractive. “We have a preference for lower quality investment grade credit over higher quality, and we see value in select subordinated financials with more attractive spreads and where we have a strong fundamental opinion.” 
 
In US High Yield, the team is finding short-dated, high carry opportunities further down the rating spectrum, although they are underweight energy. “Vanilla passive funds must have a large exposure to energy as it such as big part of the US High Yield market, but as an ESG integrated strategy we prefer to be underweight that sector and instead do a lot of fundamental credit work to find attractive alternatives in the single B and CCC space, where average yields are 4-6 per cent. That, for us, is another good way to make money out of an asset class some people seem to think has run out of return-seeking options.” 

In July, we announced a venture with CIIC to provide services to HNWI’s in China and Hong Kong, and I am reflecting here on some of the differences in wealth transfer approach from clients in Asia and their Western counterparts.

The Asia Pacific region is one of the fastest growing wealth centres in the world. According to Capgemini, the region has seen the highest percentage growth and the largest population of HNWI’s in the world for five of the past six years.

Wealthy families in the region are dealing with many of the same issues as their counterparts in the West in transferring wealth from one generation to the next and ensuring the needs are met across multiple stakeholders with different motivations. 

As a global multi-family office firm we now have the luxury of looking at how our clients from different regions and cultures may be able to benefit one another.

What follows are some key learnings across cultures and motivations that we share with clients considering how to best transfer wealth from one generation to the next.

Have candid conversations about succession with family

One stark difference between Asian and Western cultures is the comfort with which families have conversations about planning for the passing on of elder family members. Discussing death is considered taboo in many Asian countries, which unfortunately means important conversations about wishes and motivations often do not happen before it is too late.

We advise our clients to begin these conversations early with their younger beneficiaries, discussing everything from the particulars of passing on a business to investment goals to personal passions. Depending on comfort levels, they may want to involve advisors in these conversations, which can help bridge gaps and differences of opinions between generations with practical guidance on how to address seemingly divergent concerns and preferences.

Be transparent and creative about philanthropic and sustainable investment interests

HNWI’s in the West have been much more progressive about putting their assets towards philanthropic and sustainable investment interests than their peers in Asia. However, we are starting to see a shift with the younger generations of our Asian clients, which mirrors what we have seen for several years with our Western clients.

Beneficiaries of family wealth are more frequently looking to give money away to charitable pursuits that match their passions or looking at impact investing to make a difference as well as a profit. For years, we have been advising Western clients on how to achieve these aims whilst still honouring the wishes of the older generations.

Whether through creative investment vehicles or understanding tax regimes, we have been successful in guiding clients through the transfer of wealth and differing opinions on how to deploy it. Through these lessons learned, we can better advise clients on meeting multiple goals that allow, for example, the older generations to preserve and pass on their wealth and legacy whilst the younger generations can make their own mark that aligns with their values as well.

Look East for progress on inclusiveness

Our Asian clients have been very progressive in terms of fostering an environment for high-achieving women to thrive. Indeed, more female entrepreneurs on the world’s list of billionaires are from Hong Kong and China than anywhere else globally.

One of the significant differences we see in Asia vs the West is how often women and younger generations are included and valued in traditionally older financial structures usually dominated by men. These groups are reshaping family businesses, relationships, and investments in Asia, and pushing innovation on how we think about dual financial and social legacy.

Whilst there is certainly more work to be done on a societal level in the West to bring more openness and resources to help women start business and generate their own wealth, wealthy families and individuals should not lean on tradition by only involving male beneficiaries. They could be compromising the potential of their business, assets, or legacies by ignoring their female beneficiaries’ ideas and values.

In an increasingly global world, we must look outside of our native regions for ideas and opportunities. It is an area in which multi-family offices have an obligation and a unique opportunity to advocate for their clients and apply best practices from elsewhere. With Asia and the West growing their wealth at a blistering pace, we must continue to look across borders and hemispheres for best practices on preserving and growing wealth and legacies.

Max Eppel is CEO of McFaddens and Co, an international multi-family office providing a suite of investment and wealth management services, with offices and experts located in the Middle East, Europe and APAC.

Eleanor Price, Senior Credit Analyst at AAM, says that while many oil companies are in better health from a credit perspective than they have been in recent years, having seen their balance sheets bolstered by strengthening oil prices in 2021, they are finding it increasingly difficult to raise financing as the pool of willing investors shrinks and banks bow to pressure to decarbonise their lending operations.
 
“Tullow Oil issued a bumper USD1.8 billion deal in April that was well received by the market due to its double-digit coupon and the concurrent simplification of its capital structure,” she says. “But last month’s deal from Delek-owned Ithaca has been a different story. The deal priced at the wides of its marketed price talk and is still trading slightly below issue level, despite a juicy 9% coupon, well-invested low-cost asset base and significant cash generation.
 
“Yes, there are differences between these issuers in terms of geographic focus and asset base and Ithaca offered a lower coupon, but the differing market reception of these issues also signals waning interest in hydro-carbon investment and the limited funds willing and able to invest therein.”
 
Price says that with most new client mandates requiring an increasingly stringent ESG focus, it is unsurprising that investors are shying away from such an environmentally unfriendly sector. However, she believes it is significant that this shift is happening so quickly at a time when oil companies offer solid credit fundamentals and attractive coupons. 
 
“In a market hungry for yield, it’s a brave investor who would completely eschew all hydro-carbon investment, but for the issuers it must feel like an ongoing game of musical chairs as their available investor bases continue to shrink,” she says. “This is not just a High Yield phenomenon – the pool of available lending banks is also shrinking as institutions come under increasing pressure to decarbonise their lending operations.”

Price points out that, paradoxically, many oil companies are actively responding to energy transition trends by shifting their operations to managing mid and end of life assets. But while the oil majors seek to diversify away from production assets, she argues this is not a luxury as easily available to smaller HY companies.
 
“Despite the world’s ongoing need for significant supplies of oil for several decades, the sector is left scratching its head about how to finance its operations,” she says. “If this trend of investor aversion continues, you have to ask – how will some of these bonds eventually be refinanced? For the HY investor it is an increasing consideration as we try to price in this added dimension of risk.”
 
Aegon Asset Management has holdings in both companies mentioned above.
 

Regulatory changes allowing certain German funds to invest up to 20 per cent of their assets in cryptocurrencies could increase demand for cryptocurrencies. However, there are significant risks – notably liquidity risk – for the funds that invest in such assets, says Fitch Ratings.

The new regulations, which came into force on 2 August, apply only to Spezialfonds, which are reserved for institutional investors. Insurance companies and pension funds dominate the investor base for Spezialfonds. The changes bring cryptocurrencies into the traditional, and more regulated, financial system and could result in increased, albeit intermediated, exposure to crypto-assets for retail investors whose assets, retirement benefits or insurance policies are managed by such institutions.

Open-ended Spezialfonds had assets under management (AUM) of EUR2 trillion at end-March 2021, or around EUR1.8 trillion net of property funds, funds of funds and feeder funds. This could imply maximum crypto-asset investments of up to EUR360 billion – which compares with bitcoin’s current market capitalisation of around USD860 billion (around EUR730 billion). However, we do not believe that allocations to crypto-assets will reach close to the 20% threshold, considering the traditionally risk-averse asset allocation patterns of the main institutional investors in Spezialfonds, as well as other regulatory restrictions on their asset allocation.

The volatile nature of crypto markets will present particular challenges to fund managers that include cryptocurrencies in Spezialfonds. The price volatility among cryptocurrencies suggests that pricing and redemption terms will be important for investors in cryptocurrency-exposed Spezialfonds. We believe that managing the liquidity risk of mutual funds invested in such highly volatile assets would be an important consideration for fund managers.

If price volatility triggers trading breaks for exchange-traded cryptocurrency assets, this could make it more difficult for managers of cryptocurrency-exposed Spezialfonds to meet investors’ redemption requests or other obligations. However, this would also depend on various factors, such as the extent of cryptocurrency exposure, the duration and materiality of market interruption, the availability of other liquid assets within the fund and the degree of liquidity offered to investors.

Liquidity risks could increase if Spezialfonds’ crypto investments become material in the asset class, increasing the difficulty of managing positions without exacerbating market stress during periods of volatility. Under such circumstances, the risk of mutually reinforcing sell-offs in cryptocurrencies and the funds exposed to them could add to volatility in crypto markets.

If these factors caused a temporary suspension of fund redemptions (known as ‘gating’), or fund failure, this could result in reputational damage to the relevant fund managers, particularly if gating was perceived to be damaging to retail investors’ savings, for example. In turn this may affect their ability to launch new funds and attract or retain assets in existing funds, and potentially heighten regulatory scrutiny.

Liquidity risks are not limited to crypto-asset funds – several European funds investing in traditional assets gated in March 2020, for example. The primary unifying feature in these funds’ suspension was their temporary inability to value their assets due to material price movements.

Fitch Ratings is not expecting large volumes in cryptocurrency-exposed funds in the next one to two years, but if other regulators follow Germany’s lead in allowing institutional – and potentially direct retail – access to cryptocurrency funds, AUM could eventually reach levels sufficient to pose greater financial stability risks. If AUM in cryptocurrency-exposed funds rose significantly above EUR100 billion, for example, contagion risks posed to the broader system by fund gatings in the crypto-asset sector would be more substantial. Banks or other lenders might also be affected if those affected funds used these institutions for leverage or liquidity facilities.
 

While the flights caused dismay among the sustainable community, McPartlin says investors should not lose sight of the fact that the technological developments in the space industry over the last decade could have a positive impact on society and the planet in the years to come.
 
“It’s fair to say recent news on the ‘new space’ race didn’t exactly exude sustainability,” he says. “Watching some of the world’s best-known billionaires flying to outer space was greeted with a negative reaction in sustainable circles. Shouldn’t they be doing something more worthwhile with their vast resources? How much carbon did those flights burn? These are very fair points.”
 
However, McPartlin points out that amid the ‘egoism’ of this space race is a raft of positive developments that could help drive efforts to make the world a greener place.
 
“There have been significant advances in space-tech over the last 10 years which in time have the potential to make a strong contribution to the world’s sustainable drive,” he says.
 
“At the heart of space-tech advances has been a significant reduction in the cost of sending payload into space; it has fallen by around 100x over the last decade. The concept of reusable rockets pioneered by SpaceX, combined with the continued miniaturisation of technology, has seen private capital investment transform the economics of space. We expect to see this paradigm shift in the cost of space-tech to lead to a wave of disruptive products and services in the coming decade.”
 
McPartlin says the recent launch of a dedicated space-focused investment trust has shone a spotlight on the early-stage businesses being enabled by this technological development. He points out that the sustainability benefits being sought include bringing satellite-based connectivity to the 3-4 billion people who currently lack it – something that could “make a massive difference to education, trade and economic prosperity in the developing world” – energy efficiency, and, by providing a more powerful global view of climate data and environmental science, more effective climate action and better ESG reporting.
 
“We expect these kinds of technologies to enable companies to continue making a positive impact on society and our planet,” he says. “So, the next time we see a billionaire fly past in their latest space toy we can take comfort we have achieved something more worthwhile with space than the lunacy of space tourism.”

Alasdair Mayes, Chair of the Conversion sub-group responsible for preparing the Guidance, says: “GMP equalisation is a major undertaking. The Conversion Guidance addresses another significant step, enabling trustees and their advisors to better navigate their equalisation journey. GMP conversion is a valuable tool which can be used to equalise benefits for GMPs and avoid the additional complexity associated with the year-on-year equalisation methods.  Lots of schemes are keen to use GMP conversion but are aware they need to consider the impact on members and address pensions tax and procedural issues from current legislation. This Guidance and the examples provided will help them achieve this.”
 
David Fairs, Executive Director for Regulatory Policy, Analysis and Advice at The Pensions Regulator, adds: “GMP equalisation is a hugely complex area, and this is a valuable addition to the portfolio of guidance provided by the industry working group. This guidance will help trustees understand which approaches are being taken in industry to deliver conversion, and the factors they need to consider.”
 
Anthony Arter, Pensions Ombudsman, says: “The Pensions Ombudsman welcomes the GMP Equalisation Working Group Guidance on GMP Conversion. It will be useful for us to refer to in our investigations and will be beneficial for the pensions industry working on these types of cases.”
 

By Neil Jamieson, head of UK and Ireland Sales at NTree International, a firm specialising in distribution and investor education.

The growth of interest in clean energy investing has been dramatic over the past few years. The number of reports coming out of bodies such as the International Energy Agency provides clear evidence that major economies have embarked on a path away from fossil fuel use to increased use of renewable energy.

In the equity space, there have been some clear winners and losers in terms of investor money flows.  Companies focused on renewable energy have attracted significant interest.  On the other hand, those in the fossil fuel camp have seen some major investors pull out while in some cases also facing pressure from remaining shareholders to reduce carbon emissions and make a meaningful shift towards renewables.  

The challenge for investors looking to make an allocation to energy transition stocks is to identify winners and losers in this unfolding journey, as in the case of Betamax versus VHS the best technologies may not necessarily win.  Reducing stock specific risk by investing in Exchange Traded Funds (ETFs) is a potential option and there is plenty of choice from clean energy through to battery technology and hydrogen ETFs.  It pays to check the index constituents to check to what extent their activities match the name on the bonnet.

An alternative approach for investors to consider is diversification or reduction of equity exposure to the energy transition theme by investing directly in the commodities that are key to delivering clean energy.  Whether a wind power company is a winner or loser, it will need to buy copper, similarly, in the race to win market share in the EV space, the manufacturers of battery packs will need to access nickel and other key materials.

The International Energy Agency in its May 2021 report, The Role of Critical Minerals in Clean Energy Transitions, projects significant growth in minerals demand in 2040 relative to 2020 levels.  In a clean energy technology scenario where the Paris Agreement goals to limit global warming to well below 2 degrees Celsius, are met, their share of total demand rises to over 40 per cent for copper and 60-70 per cent for nickel and cobalt.  In aggregate, it would imply a quadrupling of mineral requirements for clean energy technologies by 2040.  EVs and battery storage would account for about half of the mineral demand growth from the clean energy sector.  By weight, mineral demand in 2040 would be dominated by graphite, copper and nickel.  

A supply side response will be required in order to meet the projected increase in demand for copper and nickel.  This will be far from straightforward, as highlighted in the IEA report.  In the case of copper, the quality of ore bodies is declining, which puts pressure on costs, emissions and waste production.  In addition, mines in South America and Australia are subject to climate and water stress, which further complicate mining operations.  Nickel requires battery-grade Class 1 supply, which is seen by analysts as largely dependent on the success of high-pressure acid leach (HPAL) projects.  These projects are capital intensive and face emissions and tailings challenges, which is also the case for alternative Class 1 supply options such as the conversion of nickel pig iron to nickel matte.  The high level of emissions was one of the principal concerns raised after China’s Tsingshan announced it was using this process.

The question remains as to how fast the supply response will be.  Most likely, there will be a lag in the response given the lead time to identify and develop mines as well as the inevitable delays in completing projects.  CRU, for example, is looking at 5.9 million tonne long-term copper supply gap opening up from the mid-2020s, which could grow larger by 2030.  With the scope for shortages, industrial consumers are moving to secure supplies. In the case of metals needed for electric vehicles, for example, Thomas Schmall, Volkswagen’s board member in charge of technology, told Reuters in June 2021, “We’re all in a race. It’s about making the most affordable cells and you need scale to do that.  Apart from cell manufacturing, which is a new area of business for us, we need to move into vertical integration more strongly, procuring and securing raw materials.”

This may sound exciting, but from an investment point of view, a key question to consider is whether the inclusion of copper and nickel in a diversified portfolio can potentially add value? To provide an answer, the research team at NTree International, using a portfolio optimiser tool, looked at a multi-asset portfolio and then added individually Copper and Nickel to the mix.  The benchmarks used in the simulation include  

Using a 5-year time frame, which reflects the time period over which interest in clean energy and electrification has started to build, exposure to the metals was found to be accretive in terms of improving risk-adjusted returns and positioning a multi-asset portfolio on the efficient frontier.

In the context of the benchmarks used, the commodities index S&P GSCI was found not to add value in terms of risk-adjusted returns.  This should be seen in the context of the 5-year timeframe, a period during which, with the exception of the last 12 months, the prices of many commodities were relatively weak.

From an investor perspective, the portfolio optimiser analysis is helpful because it highlights the potential for nickel and copper to be part of a diversified portfolio.  As with any potential investment and asset allocation decision, each investor needs to understand the potential risks involved and how an investment could serve to enhance overall portfolio performance.  

An investment in commodities can provide portfolio diversification as it is a distinct asset class with a different risk profile to equities and fixed income.  But with commodities, it can pay to be selective. The particular attraction of copper and nickel lies in the fact that they play a critical role in the transition to a clean energy economy, which implies significant incremental demand for these metals in the coming decade.  This has not gone unnoticed by investors.  Recent research from the Global Palladium Fund polling 150 European pension funds found that 49 per cent were looking to overweight copper in the next 12 months.
 

Richard Butcher, MD at PTL, says: “As a population we are getting older at a rapid rate. Over the next 20 years our population will grow by 9 per cent, a significant increase. But that’s not the whole story; the under-45 population will stay around the same, increasing by just 2 per cent over the same period, whereas the over 75s will increase significantly, by over 50 per cent. We’re all living longer which is a good thing, but this means people need more retirement savings and are therefore working longer, pushing the retirement age steadily year on year.
 
“So what, you might say? Once you add in the long-term effects of Freedom and Choice, introduced in 2015, and the issue of cognitive decline and increasing susceptibility to scams, we end up with an ageing workforce with too little savings, who risk running out of money, or being scammed, and who are less and less able to make the complex decisions they need to as they get older. The prospects are scary.

“We need to build pathways through to better retirement outcomes, to stop encashment becoming the de facto option because of lack of understanding, or a scammer’s greater cunning. We need to build far more robust processes with a greater capacity to deal with vulnerable members, meeting with them as they age and leading them to a good outcome.”
 
 

In responding to the EBA, the WFE is seeking to promote market-based finance globally, by advocating for proportionate and predictable capital treatment for equity-market risk. 

The WFE proposes that the favourable designation of ‘advanced-economy’ equity market in the draft EBA Regulatory Technical Standards be linked to objective criteria that are relevant to positions in the ‘trading book’. For example, it may be desirable to use a metric comparing the liquidity and volatility of a particular country to a global index. This is important for all firms not using internal models, as the standardised approach should avoid introducing distortions through arbitrary bucketing of countries.

Adding more countries to the advanced economy list, subject to their meeting appropriate criteria, would mean that brokers with operations in any given country will better be able to serve the needs of investors outside that country, allowing those investors to benefit from its economic growth and to diversify portfolios.

Nandini Sukumar, Chief Executive Officer of the WFE, says: “The list of countries included in the Basel approach does not appear to have a clear, risk-based methodology behind it. We hope the EBA will take this opportunity to implement the bank capital regime in the EU in such a way that all countries can understand the yardstick against which they are being judged for these purposes.”