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October 2, 2020

More than a trend? Why stakeholder capitalism may have staying power

The opinions are those of the author(s) and subject to change.
Companies once judged mainly on profits are increasingly being challenged to show that their operations can help elevate society in addition to share price. It's an economic shift towards "stakeholder capitalism," encouraging companies to consider how they can potentially benefit all of their stakeholders — employees, customers and the communities they serve — in addition to their shareholders.
"Capitalism and free markets have brought significant economic benefits to the world, but often with unequal consequences," says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. "Stakeholder capitalism addresses that imbalance," adds Hyzy, co-author of a new report from the Chief Investment Office (CIO), The Great Shift: Shareholder to Stakeholder Capitalism (PDF).
Companies that embrace more climate-friendly business models and operations have the potential to position themselves for sustained growth over the long term.
— Jonathan Kozy,
Senior Macro Strategy Analyst in the Chief
Investment Office for Merrill and Bank of America Private Bank
This shift can go hand in hand with the rising popularity of sustainable and impact investing — seeking benefits for society in addition to financial returns — and the development of more consistent ways to measure companies' environmental, social and governance (ESG) performance. On September 22, the World Economic Forum's International Business Council, chaired by Bank of America Chairman and CEO Brian Moynihan, released standardized "Stakeholder Capitalism Metrics" (SCM). Developed in partnership with the Big Four accounting firms — Deloitte, PricewaterhouseCoopers (PwC), Ernst & Young (EY) and Klynveld Peat Marwick Goerdeler (KPMG) — the SCMs look beyond traditional financial results at how companies treat their workers, affect the environment and impact the communities where they operate. With this consistent, comparable and measurable information, capital can then be directed towards companies whose goal it is to effectively deliver across stakeholders.

Can sustainable companies also be stronger companies?

"Qualities previously seen as 'nonfinancial' are increasingly recognized as critically important to financial areas such as revenue growth, operating margins and cost of capital," says Jackie VanderBrug, Head of Sustainable & Impact Investment Strategy for the CIO. VanderBrug co-authored "The Great Shift" with Hyzy and Jonathan Kozy, Senior Macro Strategy Analyst for the CIO.
"Companies that embrace more climate-friendly business models and operations have the potential to position themselves for sustained growth over the long term," Kozy says. "We believe the shift to stakeholder capitalism has staying power." As such, investors who recognize this great shift may stand to benefit as well. "Portfolios in the coming years could allocate more capital to assets backed or underpinned by high sustainability, in our view," Kozy says.

Investment strategies to consider

While companies in any industry can take steps to become more sustainable, specific industries may offer special opportunities, VanderBrug notes. "We see potential opportunities in renewable energies, electrical vehicles, next-generation batteries, clean technology, energy-efficient electronics and building systems, and clean water and sanitation." Another promising area is infrastructure, especially technology infrastructure.
We see potential opportunities in renewable energies, electrical vehicles, next-generation batteries, clean technology, energy-efficient electronics and building systems, and clean water and sanitation.
— Jackie VanderBrug,
Head of Sustainable & Impact Investment Strategy in
the Chief Investment Office for Merrill and Bank of America Private Bank
As important as ESG considerations may be, Hyzy stresses the importance of making investment decisions within the context of your overall financial goals and broad market trends. "We currently prefer stocks over bonds and large, U.S.-based companies," he says.
For a closer look at how ESG concerns are altering the landscape for businesses and investors, read The Great Shift: Shareholder to Stakeholder Capitalism (PDF).
Information is as of 10/02/2020.

Opinions are those of the author(s), as of the date of this document and are subject to change.

Investing involves risk including the possible loss of principal.

Past performance is no guarantee of future results.

The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., ("Bank of America") and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S" or "Merrill"), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").
Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Bonds are subject to interest rate, inflation and credit risks.

Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.
Investments focused in a certain industry may pose additional risks due to lack of diversification, industry volatility, economic turmoil, susceptibility to economic, political or regulatory risks and other sector concentration risks.
September 21, 2020

The great rebalancing act: Portfolio strategies for a post-pandemic economy

The opinions are those of the author(s) and subject to change.
As the pandemic reshapes everything from work and play to the U.S. industrial landscape, people will also need to rethink how they build and maintain their investment portfolios, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. "The post-pandemic period will create new opportunities and risks," he notes. "We believe investors will need a higher level of diversification, more frequent portfolio rebalancing and exposure to newly developing themes."
"The Great Rebalance," a new report from the Chief Investment Office (CIO), highlights several key factors that may cause investors to begin to think differently about the markets and their investments. For one, there's the current high level of government debt. Realizing how critical stimulus for families and businesses is to the economy, many investors may become less skittish about it. As low interest rates continue to suppress bond yields, they are likely to gravitate to high-quality U.S. stocks. "And with a greater focus on managing risks as periodic volatility continues, some may favor active rather than passive management for their investments," says Niladri Mukherjee, head of CIO Portfolio Strategy, Chief Investment Office, Merrill and Bank of America Private Bank.
Hyzy and Mukherjee, co-authors of "The Great Rebalance," offer the following ideas for managing your portfolio, moving forward. For more ideas and insights, read the full report, "The Great Rebalance (PDF)."
We believe investors will need a higher level of diversification, more frequent portfolio rebalancing and exposure to newly developing themes.
— Chris Hyzy,
Chief Investment Officer for Merrill
and Bank of America Private Bank

First, review your investments more frequently

Economic recovery from the pandemic is already underway, Hyzy notes, but full recovery will take a while and is likely to include periodic setbacks and volatility. "Investors should review their portfolios more frequently to make sure their strategic allocations haven't inadvertently shifted and rebalance where necessary," he says. Rebalancing may also include capitalizing on new investment opportunities as they emerge.

Keep step with a changing world

"The pandemic has accelerated a number of major investment themes that were already underway," Mukherjee says. De-globalization, for example, means that more companies are moving their supply chains closer to home — with a potential boost for industries such as robotics, automation and 3-D printing. Remote work and social distancing are creating potential investment opportunities in e-commerce, e-health and virtual reality. Other promising themes range from the rise of smart cities to tech infrastructure and cybersecurity.

Consider precious metals — and other ways to diversify more broadly

Amid low interest rates, a weaker dollar and a rise in economic uncertainties, investors increasingly are turning to precious metals. "For those who would like to hedge against uncertainty, a small allocation to gold could make sense," Hyzy says. But keep in mind that high-quality stocks and bonds also help during market volatility, so be sure any investment in metals works in concert with your overall portfolio, he advises. "Over the long term, tangible assets such as real estate timber, and farm and ranch land may also help diversify a portfolio."
This environment can lead investors to take too much risk at market peaks — or to avoid taking any risks and thus miss opportunities.
— Niladri Mukherjee,
head of CIO Portfolio Strategy, Chief Investment Office,
Merrill and Bank of America Private Bank

Most important, take a disciplined approach

"Markets today are more fragile than in the past, and they move from relative calm to stress at much higher speeds," Mukherjee says. "This environment can lead investors to take too much risk at market peaks — or to avoid taking any risks and thus miss opportunities." Such conditions call for investors to establish long-term goals, invest carefully to help achieve them, analyze risks and stick to their strategies even when volatility rises.
For more insights from the CIO on volatility and the markets, tune in to the latest Merrill CIO Audiocast.
Information is as of 09/21/2020.

Opinions are those of the author(s), as of the date of this document and are subject to change.

Investing involves risk, including the possible loss of principal.

Past performance is no guarantee of future results.

Precious metals are considered alternative investments and can provide diversification benefits not obtained from more traditional investments, but should be carefully considered based on your investment objectives, risk tolerance and net worth. Alternative investments are often long-term, illiquid investments that are not easily valued. Note that not all assets that could be considered alternative investments are necessarily reflected in the alternative investment allocation.

The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., ("Bank of America") and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S" or "Merrill"), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").
Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Investments focused in a certain industry may pose additional risks due to lack of diversification, industry volatility, economic turmoil, susceptibility to economic, political or regulatory risks and other sector concentration risks.

Nonfinancial assets, such as closely-held businesses, real estate, oil, gas and mineral properties, and timber, farm and ranch land, are complex in nature and involve risks including total loss of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations, and lack of liquidity. Nonfinancial assets are not appropriate for all investors.
September 8, 2020

The latest market correction: Growing pains for a new bull market?

The opinions are those of the author(s) and subject to change.
After months of steady gains, the Dow Jones Industrial Average dropped by more than 800 points last Thursday.Footnote 1 Technology stocks, which had helped propel the markets to new heights, saw some of the biggest declines.
Yet while volatility could persist in the short term, "investors should not assume the onset of a new bear market," says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. "In fact, we view the correction as a much-needed and even healthy development in the early stages of an extended bull market."
We view the correction as a much-needed and even healthy development in the early stages of an extended bull market.
— Chris Hyzy,
Chief Investment Officer for Merrill
and Bank of America Private Bank

Here's our take on what this may mean.

The correction didn't come in response to any major headline, catalyst or policy-induced concern, Hyzy points out. Rather, the selling likely represents an "exhale" by investors worried that markets could lose momentum after the strongest month of August in about 30 years, according to the Chief Investment Office (CIO). "Today, these exhales are much quicker and sharper, given the size and high impact of machine-led algorithms and model-driven trading programs," Hyzy explains.
Despite the challenges of an ongoing pandemic marked by business disruptions and job losses, Hyzy believes the fundamentals for recovery remain strong. He points in particular to a healthy housing market, as well as technology and health care companies (current volatility notwithstanding) that could likely continue to benefit from strong demand. Hyzy expects the markets to begin to stabilize in the coming week. Looking ahead, he believes, momentum could resume through year end, driven in part by current better than expected corporate profits.

What can investors consider doing right now?

"The best guidance is to stay the course," Hyzy believes. In other words, avoid abandoning stocks, even if short-term drops feel unsettling. While bonds remain an important part of a portfolio, stocks continue to offer the best opportunity for long-term growth, he believes. Investors should focus on diversifying their holdings and rebalancing regularly after periods of volatility.
For a deeper dive on current market conditions, read the CIO's latest CIO Capital Market Outlook (PDF) and tune in to the latest Merrill CIO Audiocast.
Footnote 1 "Dow Ends More Than 800 Points Lower As Tech Plunge Gives Stocks Worst Day Since June," MarketWatch, Sept. 3, 2020

Information is as of 09/08/2020.

Opinions are those of the author(s), as of the date of this document and are subject to change.

Investing involves risk, including the possible loss of principal.

Past performance is no guarantee of future results.

The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., ("Bank of America") and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S" or "Merrill"), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").
Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Bonds are subject to interest rate, inflation and credit risks.

Investments focused in a certain industry may pose additional risks due to lack of diversification, industry volatility, economic turmoil, susceptibility to economic, political or regulatory risks and other sector concentration risks.

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