global equities - hsbc · fulfilment is to gain exposure to equity beta with cost-effective,...

February 2017

New approaches for investing in global equities

Global Equities

This publication is intended for Professional Clients

only and should not be distributed to or relied upon by

Retail Clients. The information contained in this

publication is not intended as investment advice or

recommendation. Non contractual document.

2

Contents

Introduction 3

Alpha-Beta divide 4

Global equity building blocks 5

Multi-Factor investing: core allocation 6

Active management opportunity 7

Active portfolio construction options 9

• Lower volatility 10

• Dividend / Income 11

• Smaller companies 12

• Real estate 13

• Thematic 14

Non-contractual document

3

Introduction

Our market outlook suggests that investors may

currently be thinking about increasing their

equity exposure. Our Global Investment

Strategy team assesses the long-term expected

returns of asset classes within our multi-asset

allocation models, to feed into our investment

strategy. These estimates are based on

dividend yield, earnings per share growth, and

market re-pricing. Our analysis suggests that

equities currently look more attractive than

developed market government bonds and cash

(Figure 1). In addition, global equities deliver an

attractive yield spread versus US 10-Year

Treasuries (Figure 2).

As investors have progressively been shifting

their equity allocations from domestic equities

towards both global equities and multi-asset

solutions, we have seen a renewed interest in

global equity strategies.

Global equity investing requires flexible

strategies that investors can tailor to their

investment objectives.

This paper reviews recent developments in

global equity investment approaches and offers

a brief description of the key asset allocation

building blocks available to investors.

Figure 1

Expected 10-year nominal returns

(annualised, USD unhedged, %)

Source: HSBC Global Asset Management as at 31 December 2016.

For illustrative purposes only and does not constitute any investment recommendation

in the above mentioned asset classes. Any forecast, projection or targets where

provided is indicative only and is not guaranteed in any way

0.0%0.0%

1.9%1.2%

2.3%

3.5%3.4%

4.2%8.2%

5.9%9.4%9.2%

4.5%5.3%5.2%5.7%

(5%) 0% 5% 10% 15%

Japan JGBGerman Bund

UK GiltsCanada 10yr Bond

US Government Bonds

US Corporate CreditEUR High Yield

US High YieldLocal EM Debt

Global listed real estateAsia ex Japan

Emerging marketsCanada

USDeveloped markets

Global

0

2

4

6

8

10

12

Oct-

95

Oct-

99

Oct-

03

Oct-

07

Oct-

11

Oct-

15

MSCI ACWI US 10-Year Treasuries

Figure 2

Yield spread

(Global equity earnings yield versus US 10-Year

Treasury yield)

Source: HSBC Global Asset Management, Bloomberg, as of 31

December 2016.

The level of yields is not guaranteed and may rise or fall in the

future. For illustrative purposes only. Any performance information

shown refers to the past and should not be seen as an indication of

future returns.

HSBC Global Asset Management, November 2016


4

Alpha-Beta divide

The objective for equity asset allocation

fulfilment is to gain exposure to equity beta with

cost-effective, efficient implementation. If one

believes equity markets are “efficient,” cap-

weighting is the optimal approach. The Efficient

Market Hypothesis suggested investors should

hold the market portfolio for equity exposure.

Cap-weighted indices became a proxy for the

market portfolio and low-cost passive

indexation became a reference for equity beta.

Equity markets, however, have exhibited

excess volatility, which can result in the

mispricing of risk. If equity markets are

“inefficient,” then active solutions and

alternative weighting schemes (smart beta

strategies) have the potential to add value.

The Alpha-Beta divide

The Alpha-Beta divide has evolved further

towards explicitly selecting and controlling

factor exposure (Figure 3). Taking a factor

perspective:

• Cap-weighted indices contain implicit factor

exposures

• The performance of traditional active

strategies could be explained as a

combination of factor exposure and “alpha”

Given that different factors outperform in

different regimes, there is a need to take explicit

control of these factors.

Alternative weighting schemes

Cap-weighted indices contain implicit factor

exposures and carry concentration risk, given

that index weights are linked to security prices.

Alternative weighting strategies are cost-

effective ways of gaining exposure to factors,

creating index weights without linkage to

security prices, yielding more stable index

weights.

Different weighting approaches exist:

• Factor weighting

• Fundamental weighting

• Equal-weighting

A systematic rebalancing mechanism to bring

index weights back to their target index weights

can capture pricing errors arising from excess

volatility, with the potential to add value over

traditional equity beta.

Figure 3

Alpha-Beta divide

Source: HSBC Global Asset Management

For illustrative purposes.

Please note that the products implementing the strategies described above may not be authorised/registered for sale in your country.

Source: HSBC Global Asset Management – December 2016.


5

Global equity building blocks

Smart Beta / Alternative Weighting Schemes

Passive

Cap-Weighted

Indexation

Active

Fundamental

Stock

Selection

Fundamental

weighting

Lower

VolatilityMulti-FactorSingle Factor

Equity fulfilment options

New approaches to investing

Investors looking to access global equity beta

or alpha-seeking strategies within global

markets now have a number of compelling

investment options to consider, spanning the

risk spectrum, for strategic asset allocation.

By highlighting the specific investment

objective, the respective investment processes

may be tailored to capture the essence of the

investment opportunity.

Subsequent pages highlight and discuss select

new developments in global equity investing.

Passive cap-weighted indexation

Low cost, efficient indexation solutions capture

equity beta across reference cap-weighted

indices

Single Factor/ Multi Factor

Our strategy ensures the selected factors are

designed to carry purified target premia with

most reliable data sources, minimal unintended

risk and least duplication among themselves.

Multi Factor strategy is a bespoke solution to

construct diversified portfolio that are exposed

to a multiple factors. It mitigates the cyclicality

of individual factors as well as the need for

factor timing.

Our Multi-Factor Equity process can be applied

to a wide range of markets and is capable of

incorporating client specific guidelines such as

tracking error, country and sector risk exposure

or ESG requirements (e.g. low carbons)

Fundamental weighting

Alternative weighting schemes, or Smart Beta,

seek to deliver excess returns over market

capitalisation-weighted indexation, by taking

advantage of excess volatility in markets.

Fundamentally-weighted strategies may be

well-positioned as a fulfilment option for a core

equity allocation.

Lower volatility

Volatility comes with investing in equities. A

lower volatility strategy aims to deliver better

risk-adjusted returns and aims to help investors

accommodate this volatility.

Active Fundamental Stock Selection

Typical stock selection strategies aim to identify

significant mispricing within the market. We

also see increasing integration of Environment,

Social, Goveranace (ESG analysis into active

investment decisions as well as a consideration

of carbon exposure and carbon intensity.

A number of portfolio construction options exist,

including

• Core

• Dividend/income

• Small cap

• Real estate

• Thematic


1 “Current topics in global equity investing”

HSBC Global Asset Management, November 2016


6

Smart Beta: Global Multi-Factor / core allocation

We believe that it is possible to outperform

capitalisation-weighted indices. However, the

concepts, economic models and tools used to

describe how markets work were designed for

efficient, rational markets. In our view this

dependence on efficient market theories is a

serious brake on designing and implementing

effective investment strategies. This makes it

critical that we apply rigorous thought to the

implementation of any investment process. A

number of concepts drawn from the academic

literature form the cornerstone of our investment

process.

HSBC’s investment approach/philosophy to

factor investing is based on the observation that

stocks, with certain characteristics, have been

shown to outperform the broader market on a

risk adjusted basis (Figure 3) . This work

leverages the broad academic literature during

the last forty years and highlights the

persistence of certain equity risk premia.

Our strategy aims to profit from these

inefficiencies by adopting a robust quantitative

approach based on financial and economic

theory. The key elements of our factor

investment process are quantitative stock

selection, robust portfolio construction and

consistent implementation with integrated risk

management.

HSBC Global Multi-Factor Equity

HSBC Global Multi Factor Equity, established in

2004 in segregated portfolios for institutional

clients, is a multi-factor equity strategy which

aims to deliver consistent outperformance

against a market capitalisation weighted index

with targeted tracking error. The strategy is

designed to provide investors with exposure to

multiple factor premiums, such as value, quality,

low risk, size and momentum. (Figures 3), and

the solution has exhibited exposures consistent

with its design parameters (Figure 4). . One of

the keys in delivering consistent

outperformance is to maintain a suitably

diversified set of small active weights against

the specified index.

Figure 3

Factor risk premia

Figure 4

Factor exposures over time

Source: HSBC Global Asset Management. For illustrative purposes.

Source: HSBC Global Asset Management, Bloomberg, Thompson Reuters, Worldscope.

September 2016.

0%

20%

40%

60%

80%

100%

Nov-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

Nov-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

Nov-1

5

Feb-1

6

Ma

y-1

6

Au

g-1

6

Value Quality Size Low risk Momentum


7

Smart Beta: Fundamental weighting

A fundamentally-weighted strategy can provide

investors with broad equity exposure with the

potential for outperformance.

As an example, the HSBC Economic Scale

Index (ESI) strategy weights companies based

on their economic footprint, that is, their

contribution to the global economy, as

measured by Gross National Product (GNP), or

‘Value Added’.

Weighting companies in proportion to their

economic footprint, rather than price, helps to

avoid the performance drag associated with

systematically overweighting overpriced shares

and underweighting under-priced shares

(Figure 5).

Rebalancing

Rebalancing can also be a key driver of

performance in Smart Beta strategies.

To demonstrate the value of rebalancing,

portfolio returns can be decomposed into the

sensitivity to the styles/factors identified by

Fama and French. The ‘alpha’ not attributed to

these styles/factors can be associated with

rebalancing.

Rebalancing can make a significant contribution

to the excess performance, with relatively little

exposure or sensitivity to small cap and value

factors (Figure 6). This potential for excess

return from rebalancing increases with the

volatility or ‘noise’ of the underlying market.

Return

p.a.

Excess

Return

p.a.

Volatility

p.a.

Sharpe

Ratio

HSBC

ESI

World

7.19% 1.49% 16.4% 0.34

MSCI

World5.70% 15.4% 0.26

FTSE

RAFI

Developed

1000

6.85% 1.15% 16.9% 0.31

Source: Euromoney Indices, Bloomberg, Datastream, MSCI Barra. Simulated data

calculated by the Euromoney Index Team based on weekly total returns in USD for

the period 30 June 2006 to 31 December 2016.

Based on performance back tests that assume no trading costs or fees. HSBC

Economic Scale Index data prior to 15 June 2012 is back tested (simulated) data

calculated by the independent calculation agent, Euromoney. Data subsequent to the

Index launch date has been calculated daily by Euromoney. Past performance and

back tested (simulated) data are not a reliable indication of future returns. Back

tested performance results have many inherent limitations and were achieved with

the benefit of hindsight by means of a retrospective application of the HSBC

Economic Scale Index rules based methodology to determine the appropriate

weightings. The results do not represent the results of actual trading using client

assets and as such do not include any dealing costs that may be incurred by funds

tracking an Index. No representation is being made that the Index will or is likely to

achieve results similar to those shown. In fact, there are frequently sharp differences

between back tested performance results and actual results subsequently achieved.

Index data prior to 15 June 2012 is back-tested (simulated) data calculated by the independent calculation agent, Euromoney Indices. Data

subsequent to the Index launch date has been calculated daily by Euromoney Indices. Past performance and back-tested (simulated) data are

not a reliable indication of future returns. Back-tested performance results have many inherent limitations and were achieved with the benefit of

hindsight by means of a retrospective application of the HSBC Economic Scale Index rules-based methodology to determine the appropriate

weightings. The results do not represent the results of actual trading using client assets and as such do not include any dealing costs that may

be incurred by funds tracking an index. No representation is being made that the Index will or is likely to achieve results similar to those shown.

In fact, there are frequently sharp differences between back tested performance results and actual results subsequently achieved. Source:

Datastream, data (using weekly total returns in GBP with gross dividends re-invested) from 11 July 2001 to 30 September 2016.

Value of RebalancingOverall

excess return

Potential

rebalancing

‘Alpha'

Market

beta

Small-

cap

beta

Value

beta

Tracking

error

HSBC ESI Emerging Markets 3.57% 3.45% 0.98 0.04 0.33 3.71%

HSBC ESI Worldwide 1.81% 1.21% 1.00 0.25 0.29 2.81%

HSBC ESI World 1.41% 0.91% 1.00 0.22 0.27 2.75%

Figure 5

Performance of fundamentally-weighted

strategies

Figure 6

Value of rebalancing

50

100

150

200

250

300

Jun

-01

Jun

-03

Jun

-05

Jun

-07

Jun

-09

Jun

-11

Jun

-13

Jun

-15

HSBC ESI World

MSCI World

FTSE RAFI Developed 1000


8

Lower volatility strategies aim to deliver

improved risk-adjusted returns relative to the

reference cap-weighted benchmark.

Lower volatility strategies typically offer a

smoother performance pattern and lower

drawdowns. This can lend investors confidence

in funding obligations and provide the capacity

to stay invested with less likelihood of triggering

a de-risking decision. From an asset allocation

perspective, lower volatility aims to soften the

impact of equity on overall portfolio risk and can

allow or balance a tactical allocation to more

aggressive, higher volatility strategies.

At the end of June 2016, the MSCI ACWI

Minimum Volatility Index appeared expensive

relative to the profitability delivered, given the

construction of the index does not consider

stock valuation and low volatility stocks appear

expensive (Figure 7), but premium valuation

corrected dramatically in the second half of

2016. The index is also skewed towards

defensive sectors (i.e. consumer staples, health

care, telecommunications and utilities), about

twenty percentage points overweight compared

to the standard index.

Investors may be better served in considering a

lower volatility approach that considers

valuation, illustrated in Figure 8. Such an

approach would look first a set of attractive

investment opportunities. Minimum variance

optimisation would then be applied to lower

portfolio volatility by combining low volatility

names with higher volatility diversifiers. This

methodology creates a portfolio of attractive

investments and lower volatility, helping to

avoid crowded trades, sector overconcentration

and potentially interest rate sensitivity.

Figure 7

Profitability-Valuation of MSCI ACWI

Minimum Volatility index

(Return on Equity, Price-to-Book)

Quarterly data, Sep 2012 – Dec 2016

Source: HSBC Global Asset Management, Bloomberg as of 31 December 2016.

For illustrative purposes. Any performance information shown refers to the past

and should not be seen as an indication of future returns.

2.0

2.2

2.4

2.6

2.8

3.0

12 14 16 18 20

Price-t

o-B

ook (

x)

Return on Equity (%)

Dec 2016

0%

25%

50%

75%

100%

0 5 10 15 20 25

Holdings Universe

Dots represent individual stocks within the MSCI ACWI universe.

Representative overview of the investment process, which may differ

by product, client mandate or market conditions.


For illustrative purposes. Any performance information shown

refers to the past and should not be seen as an indication of

future returns.

More

attractive

Less

attractive

Lower HigherStock volatility (%)

Investm

ent

att

ractiveness

25%

20%

15%

10%

5%

0%

Figure 8

Portfolio construction focus on investment

attractiveness

Smart Beta: Lower Volatility

Jun 2016




9

Active managers aim to invest in a broadly

diversified set of high conviction opportunities.

We see a clear opportunity for active managers

to add value in stock selection.

The global equity universe offers active

managers access to a greater number of

potential investments, and the opportunity to

select the best investment ideas (Figure 9).

Geographic boundaries can pose artificial

constraints around investment decision-making

and implementation.

A global perspective prioritises company

fundamentals over domicile. For example,

Samsonite, a luggage manufacturer and retailer,

is listed in Hong Kong, as is Prada, the Italian

luxury goods company. Pacific Rubiales, an oil

exploration and production company, is listed in

Canada yet its operations are primarily in

Colombia.

The breadth of investment opportunities across

sectors, countries and themes allows managers

to reflect relative preferences.

Return dispersion confirms active

opportunity

Fundamentally, the complex interrelationships

and changes within the global economy and the

competitive dynamics of industries can lead to

differing views over the future outlook of

individual companies. This controversy can lead

to security mispricing and a potential investment

opportunity that can be confirmed by

fundamental research.

Ex-post, the dispersion of one-year returns

confirms that stock selection has the potential to

add value (Figure 10).

Active management opportunity

Figure 9

Stock selection opportunity

-100

0

100

200

300

400

500

Figure 10

Dispersion in global equity returns

(Individual stock one-year return, %)

Source: HSBC Global Asset Management, Bloomberg as of 31

December 2016.

Data shown is gross and the effects of commission, fees and other

charges will reduce the overall return.



future returns.

Global World

Stocks 2486 1654

Countries 46 23

Sectors 11 11

Source: HSBC Global Asset Management,, MSCI as at 30 December 2016.



10

Market structure supports stock selection

The global universe facilitates relative choice;

the universe contains businesses operating

within a breadth of sectors and sub-sectors and

across a number of countries. This matrix

provides a framework from which preferences

can be expressed. This does not exclude the

possibility that the best investment ideas could

come from the confines of a single region or

country, but it follows logically that investors

would be better placed if offered a larger choice

set, provided they have the framework, process,

tools and resources to evaluate the larger

universe.

Today, we see dispersion in the relationship

between Profitability and Valuation (Figures 11

and 12), indicating a potential investment

opportunity that could be confirmed through

proprietary fundamental research..

Inherent evolution of portfolio exposures

Importantly, global equity portfolio sector and

regional exposures can evolve over time as

investment opportunity and conviction change.

The active manager can use stock selection to

drive strategic and tactical allocation, versus

using a top-down perspective. For example, if

consumer staples or German equities become

overvalued, an active strategy could decrease

portfolio weight in those areas in favour of other

more attractive areas of the market.

0%

10%

20%

30%

0 10 20 30 40 50

EB

IT/E

nte

rprise v

alu

e

Return on Invested Capital (%)

Source: HSBC Global Asset Management as of 31 December 2016.



future returns.

Figure 12

Dispersion in Profitability-Valuation

(Return on Invested Capital and EBIT Yield)

0

2

4

6

8

0 10 20 30 40 50

Price-t

o-B

ook (

x)



For illustrative purposes. Any performance information shown refers to the past

and should not be seen as an indication of future returns.

Figure 11

Dispersion in Profitability-Valuation

(Return on Equity and Price-to-Book)


11

Active portfolio construction options

Investors have typically based their active

investments around Core strategies that aim to

outperform the reference cap-weighted

benchmark.

Investors now have the option to access

strategies that are constructed to meet specific

investor objectives (Figure 13). How these

objectives are delivered should be an important

consideration for investors.

Lower volatility strategies aim to deliver

improved risk-adjusted returns relative to the

reference cap-weighted benchmark. Investors

may consider such strategies as Smart Beta or

a type of active stock selection.

Dividend / Income: strategies aim to


benchmark with a higher yield than the

reference benchmark.

Smaller Companies strategies aim to

outperform the reference small cap benchmark.

Real estate equities offer liquid and relatively

efficient access to global property.

Thematic strategies aim to invest in secular,

global trends, where change drives growth

potential.

Lower

VolatilityThematicCore Income

Smaller

CompaniesReal Estate

Figure 13

Active portfolio construction options




12

Dividend / Income: strategies aim to


benchmark with a higher yield than the

reference benchmark. In a low interest rate

environment, investors may seek new avenues

beyond fixed income to fulfil their income

requirements. Regular investment income can

help meet recurring expenses. Income

generation can provide a steady cash flow

stream for the investor as opposed to producing

income from capital alone.

Currently, the MSCI ACWI High Dividend Index

appears expensive relative to the profitability

delivered, given the construction of the index

does not consider stock valuation (Figure 14).

We believe investors should focus first on

investment attractiveness, not dividend yield.

Our analysis suggests there is a trade-off

between portfolio return potential and portfolio

yield, which is an important consideration for

investors focused on total return (Figure 15). In

addition, risk exposures could increase higher

yielding names have similar factor exposures.

(Figure 16).

Portfolio managers can then utilise portfolio

construction tools to construct income portfolios

that balance total return, dividend yield and risk

factor exposures (Figure 17).

.

Figure 14

Profitability-Valuation of MSCI ACWI High

Dividend index

(Return on Equity, Price-to-Book)

Quarterly data, Sep 2012 – Dec 2016

Source: HSBC Global Asset Management, Bloomberg as of 31

December 2016. For illustrative purposes. Any performance

information shown refers to the past and should not be seen as

an indication of future returns.

1.4

1.6

1.8

2.0

2.2

2.4

12 14 16 18

Price-t

o-B

ook (

x)


Dividend

yield

Risk

exposures

Return

potential *

Figure 17

Dividend / Income portfolio construction


For illustrative purposes. Representative overview of the investment

process, which may differ by product, client mandate or market

conditions.

Dec 2016

Source: HSBC Global Asset Management, - Dec. 2016

Figure 15

Relationship between portfolio return

potential and dividend yield

Portfolio yield relative to market yieldHigherSimilar

Higher

Lower

Retu

rn p

ote

ntia

l

(Port

folio

avera

ge s

tock r

ank)

Figure 16

Relationship between portfolio risk

exposure and dividend yield

Source: HSBC Global Asset Management – Dec. 2016.


Portfolio yield relative to market yieldHigherSimilar

Higher

Lower

Active r

isk e

xposure

Dividend / Income


13

Smaller Companies strategies aim to

outperform the reference small cap benchmark.

We believe stock selection has the potential to

improve returns over passive small cap

exposure, particularly where regional

fundamental insight is evident.

Such strategies can be considered as

standalone tactical allocation or as part of a

regional fulfilment alongside traditional large

cap strategies.

Figures 18, 19 and 20 show how respective

Small-Mid Cap or Small Cap indices have

performed versus their large cap counterparts

over ten years. While volatility has generally

been higher, excess return has meant that

Smaller Company strategies have generally

delivered higher Sharpe Ratios.

Figure 18: Europe

(10 years to 30 Dec 2016)

Source: HSBC Global Asset Management, MSCI as at 30

December 2016. USD returns gross of fee. Data shown is gross

and the effects of commission, fees and other charges will reduce

the overall return. For illustrative purposes only. Any performance

information shown refers to the past and should not be seen

as an indication of future returns.

0

1

2

3

18 20 22 24

Annualis

ed r

etu

rn (

%)

Volatility (%)

Figure 19: European Union


-1

0

1

2

3

20 22 24 26

Annualis

ed r

etu

rn (

%)

Volatility (%)

Figure 20: Asia ex Japan


2

3

4

5

20 22 24 26 28

Annualis

ed r

etu

rn (

%)

Volatility (%)


December 2016. USD returns, gross index, gross of fee. Data

shown is gross and the effects of commission, fees and other

charges will reduce the overall return. For illustrative purposes only.

Any performance information shown refers to the past and

should not be seen as an indication of future returns.


December 2016. EUR returns gross of fee. Data shown is gross


the overall return. For illustrative purposes only. Any performance

information shown refers to the past and should not be seen

as an indication of future returns.

Europe

Europe SMID

EMU

EMU Small

Asia ex JapanAsia ex Japan

Small

Smaller Companies


14

0.0

0.2

0.4

0.6

0.8

1.0

0 9

18

27

36

45

54

63

72

81

90

99

108

117

Corr

ela

tio

n

Holding period (months)

UK property

equities versus

UK equities

UK property equities versus

UK direct property

Source: FTSE EPRA/NAREIT, IPD, HSBC Global Asset

Management. FTSE All Share, GPR UK TR Index (Dec 1989 – 30

November 2016). Any performance information shown refers to

the past and should not be seen as an indication of future

returns.

Figure 21

Real estate diversification potential

Source: HSBC Global Asset Management, Bloomberg as at 31



the overall return. Any performance information shown refers to


returns.

Figure 22

Annualised return difference

(FTSE EPRA/NAREIT Developed less MSCI ACWI)

Figure 23

Dividend yield difference

(%, FTSE EPRA/NAREIT Developed less MSCI ACWI)

(15%)

(10%)

(5%)

0%

5%

10%

15%

20%

25%

Dec-0

1

Dec-0

3

Dec-0

5

Dec-0

7

Dec-0

9

Dec-1

1

Dec-1

3

Dec-1

5Three-year Five-year

0

1

2

3

4

5

Mar-05 Mar-07 Mar-09 Mar-11 Mar-13 Mar-15






returns. The level of yields is not guaranteed and may rise or fall in

the future.

Real estate equities offer liquid and relatively

efficient access to global property, including

companies operating in clusters such as office,

industrial, residential, shopping centres, health

care, self storage and data storage.

Over long-term holding periods, listed real

estate equities may be more strongly correlated

with direct property and weakly correlated to

overall equities, so they can be a diversifying

build block for asset allocation and multi-asset

fulfilment (Figure 21).

Recently, Real Estate has been classified as an

eleventh sector in the Global Industry

Classification Standard (GICS) categorisation,

upgrading the universe from a sub-sector within

the Financials sector.

Real estate equities, as represented by the

FTSE EPRA/NAREIT Developed index, offer

the prospect of income growth and capital

appreciation over the long term (Figure 22) and

historically have offered a yield that has been

higher than general equities (Figure 23).

Real Estate strategies aim to access the long

term performance characteristics of income-

producing real estate through listed equities.

About 60% of the universe by market

capitalisation is comprised of companies with

higher liquidity, a larger proportion of recurring

income and relatively low leverage (Figure 24)

Figure 24

Income-generating properties

(% of universe by market capitalization)






returns.

0%

20%

40%

60%

80%

100%

• Liquidity and scale:

top 40% by

market cap

• Recurring income: EBITDA

margin >50% on 1-year or 3-

year basis

• Leverage: Debt-to-enterprise

value <50%

Other

Real Estate


15

Source: FTSE Russell, FTSE LCE Project, December 2015. For illustrative purposes only. Any forecast, projection or target where provided

is indicative only and is not guaranteed in any way.

Figure 25

Transition to a low carbon economy

Thematic strategies aim to invest in secular,

global trends, where change drives growth

potential. As an example, climate change is a

theme that has significant investment

implications. The global commitment to

managing global temperature increase may

bring an industrial transition to a low carbon

economy (Figure 25) that could impact

companies across all sectors, creating

opportunities and risks as well as winners and

losers (Figure 26). Companies that consider this

transition within their corporate strategy should

be better placed to maintain or enhance their

competitive position, with the potential to deliver

sustained or improving profitability in the future.

The decision of United States and China to

formally ratify the Paris climate change

agreement underscores strong institutional

support for this transition.

Over 70 countries have ratified the agreement,

accounting for over 55% of emissions. The

agreement enters into force in early November

2016.

This transition to a low carbon economy could

entail new technologies and services, and it

could also lead to new regulations on carbon

emissions (Figure 27). Since carbon exposure

may have the potential to determine winners

and losers within industries, investors are also

increasingly concerned with a company’s

carbon emissions (CO2 equivalents) and

carbon intensity (emissions per unit of revenue),

given the opportunities and risks posed by this

transition.

As asset managers sign the Montreal Carbon

Pledge, committing to report investment

portfolio carbon exposure, carbon could begin to

influence investment attractiveness.

Thematic


Figure 26

Opportunities and risks

Opportunities Risks

• Consumer

demand

• Technology

innovation

• Government

policy

• Changes in

demand

• Government

policy

• Litigation risk

• Physical risk

Source: London School of Economics, Goldman Sachs

Investment Research, 30 November 2015.

Figure 27

Number of national laws and regulations

related to CO2 emissions


16

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