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Holistic investing: Do good and do well
A HOLISTIC approach to investing must pursue good financial returns, security in retirement and doing good while doing well, said Monetary Authority of Singapore (MAS) managing director Ravi Menon.
Broad trends in the financial industry indicate that achieving these goals will involve navigating private markets, wealth preservation and climate change, respectively, he said.
Mr Menon made these comments in his keynote address at the Securities Investors' Association (Singapore), or SIAS, Master Series Investment Conference earlier this month.
The conference was pitched at more sophisticated investors, such as high net worth individuals, accredited investors and family office clients.
Mr Menon described a holistic approach to investing as "wellness" - a "healthy, balanced and fulfilling investment life".
HEALTHY RETURNS FROM PRIVATE MARKETS
Such wellness begins with healthy returns, which in turn will increasingly require participation in private markets, said Mr Menon. Private market capital growth has doubled that of public capital globally in the last 20 years. In the US in particular, the value of listed companies going private last year exceeded that of private companies going public for the first time since 2006 to 2007.
"An allocation to investments in private markets is becoming more common - and necessary - for a well-diversified portfolio aiming for decent returns," said Mr Menon.
There appear to be ample opportunities in the Asia-Pacific region for investors looking for yield in private equity and venture capital.
Such assets under management have risen by a compounded annual growth rate of 22 per cent in the last five years, stopping just shy of US$0.9 trillion last year.
Similarly, private equity and venture capital investment in the Asean region was at US$24 billion in 2017, nearly tripling the previous year's sum.
Mr Menon highlighted in particular "well capitalised, innovative businesses" like Grab and Go-Jek. "Growth companies in these areas are scaling up and internationalising, which requires raising new capital - with a growing volume coming from private markets."
With its 240 global and regional private equity and venture capital managers overseeing S$220 billion in assets in 2018, "Singapore is a natural gateway to private market opportunities in Asia", he said.
Developing a vibrant private market ecosystem - a key plank in MAS' industry development agenda - will in turn facilitate Singapore's ongoing technological and digital transformation.
MAS has already undertaken a series of supporting initiatives to cultivate such an ecosystem. For example, MAS decided last November that it would allocate US$5 billion of its own portfolio's funds to private market assets.
The sum will be placed for management by global private equity and infrastructure fund managers "who are committed to deepening their existing presence or establishing a new and significant presence in Singapore", said Mr Menon.
MAS has already committed just over US$550 million of the allocation.
MAS and Enterprise Singapore also began hosting events last month matching emerging growth companies with investors seeking private market opportunities.
These "Deal Fridays" hope to deploy the US$12 billion that the angel investors, family offices and venture capitalists that MAS surveyed have said is available for direct investment in Asean from 2019 to 2021.
PRESERVING WEALTH IN AGEING ASIA
Investment wellness also requires a secure retirement.
Persons aged 65 or over outnumbered children under 5 worldwide for the first time in human history in 2018, and demographic ageing will be especially rapid in Asia.
Shrinking workforces will combine with ageing populations to create an "uphill struggle to fund longer retirements", said Mr Menon.
At one level, this means that individuals must engage in retirement planning from a young age to take advantage of compounding interest, and make full use of the increasing range of retirement solutions.
At another, an ageing Asia presents an opportunity for Singapore to strengthen its "value proposition as a centre of excellence for managing family wealth", said Mr Menon.
"Across Asia, the focus is shifting from pure wealth creation to wealth preservation and wealth bequest."
Affluent families are increasingly consolidating their wealth via trusts and family offices that optimise investment and legacy planning.
Singapore is an ideal venue for such activity, and the the number of family offices has quadrupled between 2016 and 2018, said Mr Menon. "There is political and economic stability, a clear regulatory regime, a comprehensive network of tax treaties to avoid double taxation, and a robust ecosystem of professional services."
INVESTING IN THE ENVIRONMENT
The last leg of a holistic investment strategy involves keeping climate change firmly in mind.
"A growing number of investors are looking at investment through the lens of environmental sustainability - both with a view to managing climate-related risks as well as to support efforts to reduce carbon emissions," said Mr Menon.
Climate change-induced events like floods and rising sea levels can directly impair asset values over the short and long terms.
While financial markets are no strangers to catastrophic events, the frequency and intensity of natural disasters in the Asia-Pacific increased from an annual average of 44 in the 1970s to 126 in the early 2010s, according to the United Nations.
Besides direct asset impairment, climate change will also usher in policy change and technological advances that can impact investment performance. For example, adhering to the 2015 Paris Agreement will require 70 to 85 per cent of electricity production taking the form of renewable energy by 2050, where it was only a paltry 23 per cent in 2015.
"Investors cannot ignore the implications of climate change," said Mr Menon plainly. "Beyond the cold calculation of climate-related risks and returns, many investors want to invest in a way that contributes to leaving behind for future generations a planet that is habitable, green, and pleasant."
Sustainability concerns of this sort, for example, will tack on an additional US$200 billion to the US$1.5 trillion that the Asian Development Bank has estimated that developing Asia needs to spend on infrastructure annually up to 2030, said Mr Menon.
If Singapore is to rise to these challenges and become one of the "premier global centres for sustainable investing", it will require much more than MAS' existing Green Bond Grant Scheme, he said. Singapore must enhance the disclosure of climate-related risk and opportunity, and build industry expertise.
"We need to enhance the level of knowledge in sustainable finance amongst industry professionals as well as companies that are reporting on their sustainability practices or looking to issue green bonds."
Returning to the theme of investment wellness, Mr Menon concluded: "if we can invest with a view to (a climate-conscious) future, recognising its risks and providing the incentive for positive change, with a heart for future generations, we can feel well".