UOB Asset Management embraces innovation that is redefining industry

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Looking beyond current investment climate, award-winning regional asset manager focuses on sustainable investing and enabling technology at start of new decade.

UOB Asset Management (UOBAM) kicked off the year’s investing journey with its annual Investment Outlook Seminar where participants gathered to take the pulse of markets and explore trends and big ideas in investment management.

As an opener to a new decade, the Seminar took on a future-forward direction with discussions on several key themes that are redefining the industry such as impact investing and technology.

"Embracing innovation, be it in the use of technology or artificial intelligence, and understanding how it is disrupting industries is one area of opportunity," said UOBAM's Chief Executive Officer, Mr Thio Boon Kiat in his opening address.

"We also increasingly believe that sustainable investing is a key thrust of how we exercise our fiduciary duties to you, our investors.

“As we invest for the future, it is imperative to address the social and environmental issues we face in the world today,” Mr Thio added.

Held at the Jubilee Ballroom of the Raffles Hotel Singapore on 16 January 2020, the Seminar drew more than 200 clients and partners from both its local and overseas offices across the region.

For the first time, the Seminar also featured two post-seminar masterclasses as part of investor education, where experts helped investors to make sense of artificial intelligence (AI) as well as blockchain and cryptocurrency.

Outlook for 2020

Taking investors through his assessment of the economic and market conditions, UOBAM’s Senior Director and Head of Multi-Asset Strategy, Mr Anthony Raza, showed how 2019 was a close call where the economy almost tipped into recession.

However, weak business conditions as seen by sharp declines in industrial production, investment, manufacturing and trade did not translate into massive layoffs. The US Federal Reserve’s about-turn in interest rate direction with three rate cuts for a total of 75 basis points managed to cushion the impact.

With employment remaining stable, consumers which make up 70 per cent of developed market economies, continued to keep the economic engine humming.

By the end of 2019, leading indicators appeared to be stabilising and recovering with the economic expansion likely to continue after an unprecedented 11 years.

Geopolitical risks, such as a resurgence of Middle East conflicts, North Korea’s refusal to de-nuclearise, the shape of European politics after Brexit and the potential flare-up of trade tensions were all event risks that could haunt markets.

Add to that, uncertainty in the lead-up to the US presidential election in November this year. However, Mr Raza thought there was no need to over-react to geopolitics. Markets tend to vacillate about these issues but rarely do they have a lasting material impact.

Overall, his expectations were for muted growth amid improving economic conditions, though most asset classes were unlikely to replicate 2019’s strong performance. Hence he advocated that investors adopt a risk-based balanced income strategy to preserve and grow capital through bond yields and stock dividends.

The Seminar was held before the outbreak of the novel coronavirus that has since seen cases in other parts of the world and caused markets to fluctuate.

UOBAM’s current assessment of the situation is that the risk to economic fundamentals may be significant though markets will likely treat the weakness as transitory once the number of new cases peaks and starts to decline.

Psychologically, investors’ fear of a potential pandemic has caused knee-jerk selling but as in previous outbreaks, markets are expected to fully recover their losses once the outbreak is on a downtrend. Hence UOBAM retains its asset allocation recommendation to stay neutral in equities with a slight overweight in fixed income.

Doing well while doing good

Looking beyond the near-term outlook on investment markets, UOBAM’s Senior Director and Head of Asia ex-Japan ESG, Mr Victor Wong, turned the spotlight on sustainable investing, where investors are increasingly striving for purpose along with profit.

Starting a carbon counter as he began his presentation, Mr Wong showed in concrete terms how much carbon dioxide was being emitted globally as he detailed the destruction wrought by climate change – from the floods in Jakarta to wildfires in Australia and California.

At the end of his speech, he showed that in the span of 45 minutes, the world would have emitted more than three million tons of carbon dioxide – equivalent to what 100 million trees absorb in a year, given that each tree takes in about 25 kg of carbon dioxide a year.

Environmental, social and governance (ESG) considerations are now one of the top three priorities¹ ranked by both retail and institutional investors when considering companies to invest in, said Mr Wong, highlighting the growing emphasis given to this area.

Global sustainable investment assets have doubled in size and proportion in the recent six years, from US$13.3 trillion or 22 per cent of global assets under management (AUM) in 2012 to US$30.7 trillion or 41 per cent of global AUM in 2018².

Debunking the notion that financial returns will need to be sacrificed, Mr Wong showed that sustainable investing in fact enhances returns. The MSCI Emerging Markets (EM) ESG Leaders index consistently outperformed the broader MSCI EM index since the global financial crisis in September 2007³. Its Asia Pacific equivalent showed similar results.

As one of the first regional asset management firms in Singapore to sign on to the United Nations-supported Principles for Responsible Investment (PRI) on 2 January 2020, UOBAM is part of an international network of investors who work to incorporate ESG considerations into its investment decisions. Mr Wong took investors through the various strategies that UOBAM offers to enable investors to do good while doing well financially.

Global property on cusp of rebound

Turning to bricks and mortar, UOBAM partner Wellington Management’s Managing Director and Global Industry Analyst, Ms Sara Carpi, made a strong case for investing in global properties and real estate investment trusts (REITs) now, detailing the fundamental and valuation reasons for it.

Given global REITs’ attractive risk-return profile and relatively low correlation with stocks and bonds, the addition of REITs into portfolios have been shown to improve returns over a 20-year period⁴. In fact, over the last 40 years, there have only been seven years when REITs registered negative returns, as measured by the FTSE NAREIT Equity REITs index⁵.

Notably, global REITs have outperformed the broad equity index in the last 30 years, while they have lagged in the last three years⁶. This is a good set-up for outperformance of REITs henceforth as studies⁷ have shown that when REITs underperformed the broad equity market in the past three years, they tended to turn around and outperform for the next three years, according to Ms Carpi.

The fundamentals such as REIT asset values remaining supported by a robust private market and aging demographics and accommodative central bank policies that will likely cap interest rates in the medium term also supported such a re-rating. Valuations of REITs were at moderate levels relative to history and the broad equities market. REITs’ dividend yields are also attractive relative to bonds with the current low interest rate environment expected to persist.

Digital disruption holds lessons

Amid the clamour to get into digital banking with Singapore regulators having received 21 applicants for up to five digital banking licences, UOB’s TMRW Digital Group Managing Director and Regional Head, Dr Dennis Khoo, gave investors a peek into his fascinating journey of setting up a digital bank from scratch.

UOB’s digital bank, TMRW (pronounced “tomorrow”), was launched in Thailand in March 2019. The kingdom was chosen as a beachhead for the bank’s digital foray due to its big and youthful addressable market with high mobile penetration and usage rate.

Claiming that not having much prior knowledge about the Thai market was a “blessing”, Dr Khoo said: “It forced the team to understand the customer.”

If it had been a familiar home market, they would have zoomed straight into offering products and cross-selling from a product-first approach – a common strategy of traditional banks.

The lessons learned from transforming retail banking for the future, such as creating a new business model focused on customer engagement instead of pushing products, to making banking simple, engaging and transparent could potentially also apply to asset management.

Artificial Intelligence and Blockchain technology

At the first post-seminar masterclasses, UOB’s Executive Director and Head of Group Enterprise AI, data management office, Mr Johnson Poh, gave participants an in-depth look at the use of AI, machine learning (ML) and data science, and how they can be applied to investment management.

Elucidating the issues relating to this area of computer science Mr Poh quipped that the “ability to write AI programmes is like magic… but instead of spells, you use code, libraries and functions”.

Professor David Lee of the Singapore University of Social Sciences next took participants on a deep dive into blockchain and cryptocurrency.

Showing how the distributed ledger technology that formed the basis of blockchain could decentralise the monetary system, Dr Lee pointed to how it has the potential to democratise finance and do good, akin to impact investing.

¹ Source: PWC, 2019
² Source: Global Sustainable Investment Alliance, Global Sustainable Investment Review 2018, 2016 and 2014, BCG for Global AUM data
³ UOBAM, Bloomberg, total return for the period from 30th Sep 2007 to 30 Dec 2019. Both MSCI EM ESG and MSCI Asia Pacific ESG indices are capitalisation-weighted indices that provide exposure to companies with high Environmental, Social and Governance (ESG) performance relative to their sector peers.
⁴ Wellington Management MSCI, FTSE, Bloomberg Barclays for period December 1998 – March 2019
⁵ Wellington Management FTSE NAREIT Equity REITs Index calendar year returns from 1980 through 2019. Seven years with negative returns were in 1987, 1990, 1998, 1999, 2007, 2008 and 2018.
⁶ FTSE, MSCI, Factset, Wellington Management, Data from January 1990 – November 2019.
⁷ Wellington Management