Director of Business Development at MAPFRE AM
Without a shadow of a doubt, 2020 is going to go down in history. A number of factors and events have come together that will eventually become an object of study. The pandemic is driving a series of changes to industry that will end up becoming structural in nature, both in terms of supply and demand.
It’s too early to draw conclusions that can be used as a basis for future decision-making. We are still going through a process of change that will lead to a new investment environment, with new factors coming into play and objectives that are different and even new from both a financial and social perspective.
The dreaded black swans that evoke a sense of fear and uncertainty are no longer the only cause for concern. Now there is another type of swan that is beginning to affect investment decisions. The so-called green swans. I don’t want to appropriate this new term, and I’d recommend reading John Elkington’s Green Swans: The Coming Boom in Regenerative Capitalism. The author successfully sets out a new way of understanding sustainable capitalism. He describes it as swans that provide traditional companies with opportunities within the reinvention process, and others that offer opportunities for new players that have found a new world to explore in sustainable investment, providing solutions to the social and environmental demands that this pandemic has brought to the fore.
Investor behavior will change, with lower profitability thresholds as the foundation, but in turn with a demand for other types of returns that are yet to be defined and consolidated.
All of this is coupled with a low interest rate environment that will last a number of years, with looser inflation controls and a market defined by excess liquidity caused by expansionary policies from central banks. This liquidity will be invested in assets with a higher risk profile that we are used to.
All of this sounds exciting and equally worrying, given that in one way or another we are starting from square one. What comes next will be the combined results of all those involved over the next few years.
What are we starting with? A series of theories that will form part of the final equation. ESG criteria, low interest rates, alternative asset investments, and the search for recurring returns. All of this comes hand in hand with a sharp drop in global GDP and increasing deficits caused by the pandemic, with many sectors now in a critical situation. Companies, which were previously considered to be resilient, could disappear, and government bailouts may be required for systemically important companies. The ultimate consequence of all this is a fall in employment and, therefore, a drop in consumption.
Now that we have put all of these variables on the table, we must make tactical and strategic investment decisions and provide the market with solutions that investors are calling for. It’s not going to be easy, in fact it is a real challenge. In order to overcome this challenge, the fund industry must demonstrate flexibility, dynamism, originality—as opposed to creativity—and above all, proximity.
In regard to the Spanish market, the challenge is even greater, as we are typically dealing with conservative investors, with little experience in alternative assets at the private investment level. ESG criteria are making headway in this sector, and the education process is in full swing.
It is our responsibility to ensure that this re-education process is conducted in an orderly manner, with set criteria, so that we can provide investors with the confidence to face these novel, but necessary, changes to their new investment policies.
In terms of supply, we are in the midst of a revolution. We are responsible for providing investment solutions based on strict risk controls both to institutional customers and private customers that are able to compete as equals with large international houses, with lower volumes of investment and attractive returns.
New items that have squarely entered our proposals include liquid and illiquid funds with ESG criteria, and alternative funds for investment in infrastructure, renewable energy, private debt, circular economies, etc. The market is sovereign and will favor those assets and managers that are successful and able to take root in the long-term.
Still, I dare not say that there are no more surprises in store, as 2020 is proving to be a complicated and demanding year. However, let’s see the glass as half full. We have laid the foundations for an open-minded attitude that will serve us well in future situations.