The top trends in asset management right now

Yahoo Finance’s Brian Sozzi, Julie Hyman, and Brian Cheung speak with Russell Investments Global CIO Kate-El Hillow about ESG investing, the OCIO trend, and much more.

Video transcript

KATE-EL HILLOW: Well, let's get back on the markets where we continue our dive into the rising importance of ESG investment strategies. Kate-El Hillow is the Global Chief investment officer at Russell Investments and is here with us now. Kate, good to see you here.

Look, there are a lot of concerns right now on the plate of investors, debt ceiling drama, the rise in yields, every brand, you name it. How could investors stay focused on their ESG investing strategies when they have a lot coming at them?

BRIAN SOZZI: Yeah, Brian. First, thanks for having me. And the ESG is getting more and more complex and I'd say with any investment process focusing on the data and the research is going to be critical to that.

But I think as you look at how you balance out the near-term risks in some of the price action that we're seeing with structural shifts that we think will continue to characterize the market, you're staying focused on how you approach ESG. You're both aligning with your kind of values and principles but also focused on the financial impact is going to be more and more important.

And I'd say just pause there for a second or just focus on that point in terms of impact because that's an area where as we think through ESG and how we're kind of thinking through how to position client portfolios, you're really trying to measure that impact and really understanding the follow through that you're seeing to the portfolio, is going to be more and more of the focus now that more clients have gotten their kind of head around what's the policy and what's the framework that they want to apply.

Now I think a big focus is going to start to shift to am I having the type of impact that I think and what type of kind of risk am I adding to the portfolio by making some of these adjustments.

JULIE HYMAN: Well, and Kate on the flip side, it's Julie here, is there an argument to be made that investors will actually be making their portfolio more resilient by trying to screen for companies that actually have stronger ESG practices?

KATE-EL HILLOW: Yeah, I think that's certainly part of the argument for why you want to do this. And if you, just like you would any kind of structure or kind of strategic shift that a company is making, really understanding how they're doing it and knowing that they're focused not just on the next quarterly earnings but also longer term about where the market is going and where market pricing is going to start to reflect.

Whether that stranded assets or other types of demand that comes from consumers that's going to drive more of the activity going forward. I think it's definitely part of the rationale as to why you want to start doing it now, I think the challenge would be the time horizon in which that plays out.

And so I think with anything, when you start adding in kind of new risks or exposures into the portfolio, sizing that appropriately and really looking to see how much risk it's contributing to the portfolio as well as hopefully driving return in the right direction, is going to be important.

BRIAN CHEUNG: Kate, Brian Cheung here. How important to the long term picture is regulation because we know that the SEC, Gary Gensler has expressed interest in trying to increase the amount of corporate disclosures with regard to ESG.

The idea being there should be some standardization of how these companies are reporting their exposure. How important do you think that's going to be to the broad space in the next say, even 10 years?

KATE-EL HILLOW: Yeah, it's hugely important. And Europe is taking the lead in trying to get financial reporting to the level that you have the information, to really understand how different companies are positioning themselves and how they're having impact there.

I think between the regulation, whether it's more transparency as you mentioned, or some of the policy support that might come in the way of funding, is really another strong argument as to why you want to start now and thinking about the best way to attack this from a portfolio perspective.

And you, really, you do see it too in terms of the lack of transparency that you get. Sometimes it's just some of these smaller companies that might very well be trying to reposition for the future, they don't necessarily have the same just resources to do this in a way that allows you to make a decision as an investor.

So staying close to the management teams and staying close to what they're actually doing is important as we try to get some of the disclosure online so we have more systematic way to really compare companies within the same sectors or across different sectors.

JULIE HYMAN: Kate, one of the things that you guys do a lot of at Russell is outsourced chief investment office, so that you are making strategic decisions for all kinds of other investment professionals and funds. What's the risk of crowding in that case if a lot of different organizations are outsourcing to you?

KATE-EL HILLOW: Yeah. Well, I think the thing I would add to that, and so the outsourced CIO is anything from the pensions to endowments and foundations to hospital systems that are outsourcing, and each of them have different objectives. And so one of the things that we pride ourselves on is around the customization that we have for different client portfolios and a platform that allows us to do that.

While we might have consistent views on where we are with the cycle and how we should position relative to that, when you go down to the next level, if your taking ESG as the example, there's definitely different principles and values that different clients are trying to achieve.

And if you have the flexibility to do it in different ways for different clients, I think that concern on crowding is less of a focus. The other asset allocations are different, how they're actually accessing the market's quite different. And so ESG is a big component of that, particularly in Europe and growing in the US.

But I think that that level of customization that you have with clients will mitigate some of that crowding concern that you have as more clients look to leverage out outsourced providers to just navigate the dynamic kind of market environment, but at the same time stay focused on their long term objectives and orient their portfolios that way.

So I think you get diversification through the fact that every company is at a different part of their life cycle, every endowment has a different value that they're trying to focus on and trying to do it. And the same for everybody isn't really a good solution, so we try to focus on trying to customize it for them.

BRIAN SOZZI: Kate-El Hillow, Global Chief investment officer at Russell Investments, good to see you this morning.