The institutional path
SAM was founded in 1995 as Sustainable Asset Management. In the wake of the current financial crisis and the appointment of Sander van Eijkern as CEO in January, new ventures are on the horizon for the Swiss-based investment manager.
The firm’s corporate strategy is driven by the belief that responsible investment (RI) will become mainstream over the next few years. Robeco, SAM’s owner, published a report with consultancy Booz & Company in late 2008, predicting 2015 as the year by which RI will become mainstream. It defined this as accounting for 15-20% of global assets under management or $25trn (€19.4trn). Van Eijkern admits that the outright numbers are no longer valid following the market correction but believes the trend and the long-term drivers behind it - such as public and economic pressure, regulations, energy security, resource scarcity and climate change - are still true.
The company has not changed its strategy in the wake of the crisis. “As we invest for the long term it would be silly to change it,” says Van Eijkern. “But it is important to be fully transparent and explain to investors that there is a small cap effect, for instance - in other words that the stock prices of small companies, which make up the majority of our themed funds, are hit harder by market downturns than others - so that they know how their product behaves under various market conditions before entering the product. As long as you do that, investors will remain loyal even in difficult market circumstances, which has been demonstrated in the overall net inflows into our offering in 2008.”
Van Eijkern also believes that sustainable investing may actually be able to benefit from the financial crisis. “The origins of the crisis lie in the neglect of at least the ‘G’ in the ESG [environment, social and governance] factors because the banking sector clearly lacked a lot of essential checks and balances,” he says. “And that could spur more investors to pay attention to ESG.”
SAM’s asset management offering is split between the core, which is managed against well-established benchmarks like the MSCI World or MSCI Europe, and themed funds.
“The root of our strategies is the assessment of our research team on how companies are equipped to deal with long-term sustainability trends,” says Van Eijkern. “Based on those insights we build core and theme portfolios and, together with Dow Jones, a family of sustainable indices.”
SAM’s biggest themed fund is a water fund, followed by an energy fund. “However, at the moment interest is picking up, especially for the climate fund,” says Van Eijkern.
“There is also an increasing recognition that taking into account sustainability helps to improve the risk-return profile of the portfolio over time, either because investors select companies with better risk management or discover new business opportunities.”
But Van Eijkern stresses that it is important to differentiate between the different flavours of responsible investing, such as negative screening, engagement/voting, positive screening and integration. “It is our firm belief that only the latter can add value and deliver alpha but only on the condition that it is based on proprietary research,” he says.
“To us, sustainability investing is about truly integrating ESG factors into the investment decision-making process,” continues van Eijkern. “In other words, we try to translate the ESG factors into what they mean for the risk profile of a company and what ESG factors mean for the free cashflow a company generates. Then we apply the traditional financial analysis through a dividend discount model and come up with the fair value of the company - including sustainability factors - upon which we build our portfolios.”
SAM’s core offering mainly attracts institutional investors, while its thematic offering is targeted at retail investors through wholesale distributors. It also offers some fixed income and balanced strategies. Van Eijkern’s mission is to build up a bigger book of institutional business. “Given the increasing interest of institutional investors in sustainability investing, we will need to fully institutionalise SAM,” he says.
Van Eijkern can draw from experience, having previously institutionalised Robeco’s fixed income offering in 1992. “Back then, Robeco’s clients were predominantly retail investors investing in our mutual funds,” he says. “My task was to make Robeco’s fixed income business more consultant-proof in order to attract more institutional investors.
“I want to make sure that the current imbalance between institutional and retail investors of around one third/two thirds turns into a 50/50 split. To do that we have to become more flexible. We either have to increase the tracking error for more concentrated portfolios or, if the client wants to get closer to the benchmark, reduce the risk profile. We also want to contact the institutional signatories to the UN Principles of Responsible Investment (PRI) that struggle with their implementation.”
But with investors still being risk averse, it is the money market and fixed income products that attract attention rather than equities. “That is one of the reasons we are doing research into integrating fixed income into SAM’s product offering in the not too distant future, both on the passive and the active side,” says Van Eijkern. “However, over time, risk appetite will also have to increase again because, otherwise, institutional investors cannot generate the returns they need to meet their liabilities.”
Van Eijkern also plans to expand SAM’s offering in private equity. “Part of that will involve moving Robeco’s €410m clean tech and sustainable private equity team from Rotterdam to Zurich this summer because of the synergies between SAM’s research in the listed equity and Robeco’s research in the non-listed equity field,” he says.
SAM also wants to deepen its product range, including its water offering. “We recently launched a Shariah-compliant water-focused investment strategy,” says Van Eijkern.
“Later this year we will launch a second water fund, consisting of companies with an even higher exposure to the theme than the current one.” The current water fund includes companies that, combined, generate on average 50% of the portfolio’s turnover from water-related activities, while in the new offering this will rise to 80%.
“To achieve this high concentration, we will have to move down in capitalisation and towards emerging markets,” says Van Eijkern. After the launch of an Asia-Pacific sustainable index earlier this year, Van Eijkern deems SAM’s equity index family as fairly complete.
“Nevertheless, we would like to expand our emerging market indices offering but this would have to be based on proprietary research to make sense for us. And it is much more difficult to obtain the necessary data in emerging markets.”